Home Daily Commentaries US equity markets’ losses point to downside risk

US equity markets’ losses point to downside risk

Daily Currency Update

Wall Street suffer heavy losses Thursday as equity markets fell over 1 percent and the 10-year treasury yield fell nearly 2 percent, further evidence of investor’s reluctance to hold risk assets. The USD index posted modest gains, with the catalyst for the risk off environment being cautious remarks from European and British Central banks alongside disappointing macro data out of Germany. The euro sold off, pushing the greenback and JPY higher on the day.

USD/JPY traded sideways as EUR/USD fell to fresh 2-week lows of 1.1324 during European trade. However, most these losses were trimmed during the US session. GBP/USD also fell to its lowest level in three weeks to 1.2853 before rebounding.

EUR/USD supports are seen at 1.1315 before 1.1280 with resistance evident at 1.1375 and 1.1400. GBP/USD is also well supported around the 1.2880 level however moves beyond psychological resistance at 1.3000 are expected to catch resistance.

Key Movers

The Canadian dollar weakened against the greenback in Thursday's session for the fourth consecutive day. USD/CAD intraday lows of 1.3317 represent its weakest level in nearly two weeks. Low oil prices and fears of a global economic slowdown weighed on the loonie ahead of Friday’s key jobs report.

Oil prices fell 2.5 percent on the day forcing the CAD lower across the board. Bank of Canada officials highlighted that a lower CAD would help the domestic economy through a temporary economic slowdown resultant from housing market weakness and US trade policies which are constraining business investment.

The January employment report showed Canada add 66.8 thousand jobs beating estimates of only five thousand. Ironically this had negative effect on the unemployment rate which was seen to move lower from 5.7 percent to 5.6 percent yet it rose to 5.8 percent the loonie has gained against it G10 counterparts after the report.

Taking a technical approach, USD/CAD seemed relatively well supported at 1.3300 before the employment data was reported. We expect any moves through this level may catch further support on approaches to 1.3270 and 1.3240 respectively. On the topside, immediate resistance is evident at 1.3330 before 1.3360.

The Euro has continued its slow decline for the week, opening this morning at 1.1338 after some negative news from the European Commission. Adding fuel to the fire, global risk sentiments have turned with a distinct risk-off tone enveloping markets after a few reminders this week of weaker global growth. President Donald Trump and Chinese President Xi Jinping, may not be able to meet before March 1st.

The Euro was one of the currencies that added to global anxieties in overnight trading with the European Commission cutting its GDP growth forecasts. Growth this year is now expected to be 1.3 percent (down from 1.9 percent) and next year 1.6 percent (down from 1.9 percent). Almost by design, industrial production numbers in Germany were released with the result falling more than expected at -3.9 percent year-on-year for December. Spain’s industrial product came in even poorer at -6.2 percent year-on-year.

To close out the week the Euro turns to more Industrial Production numbers from France and Italy for direction.

The Great British Pound moved higher through trade on Thursday, edging toward 1.30 on renewed hopes Britain will strike an agreeable divorce deal with her European counterparts. Sterling faced early pressure and moved toward intraday and two-week lows at 1.2858 in the wake of the Bank of England’s monetary policy decision and accompanying the market statement. The Bank cuts its forecast for growth, citing the worst pace of expansion in 10 years, blaming Brexit vagaries and instabilities, affirming rates will remain on hold until a clear path to separation is complete.

Having lost half a percent in the immediate aftermath, Sterling found support as investors dove deeper into the policy decision. The BoE was largely balanced in its assessments, and while growth remains a concern, it intimated at raising rates once a deal is struck, holding onto expectations the economy will rebound once the period of uncertainty has passed. Further support came with the promise of additional stimulus should the deadline arrive, and no deal has been reached.

Attentions now turn back to ongoing Brexit discussion as Prime Minister Theresa May pleads with European Union negotiators to work with her in amending the current deal to ensure its passage through the UK parliament. EU official appears steadfast in their resolve, adamant no new deal will be negotiated and subsequently increasing the likelihood the planned vote to approve the exit strategy on February 13 will be rejected forcing UK lawmakers to consider an extension to article 50 again. We are still looking for volatility on headline news with upside gains limited to 1.31 unless a deal is struck.

The Royal Bank of Australia's perceived shift to a more neutral stance initiated a massive sell-off on Wednesday. The Australian Dollar recovered slightly and moved within a tight range of 30-pips against the Greenback on Thursday. Yesterday’s local economic data had little impact, the AiG performance of construction index recovered from a near six-year low of 42.6 in December to 43.1 in January, although it continues to sit well below 50 signaling expansion. The NAB quarterly survey showed confidence fell from 3 in the September quarter to 1 in the December quarter. There were no significant surprises in the study given the weakness in the monthly survey in December.

On the technical front, a breakthrough 0.7100, could see further moves down to 0.7076 and 0.7040. Markets remain bearish as we continue to wait on developments from US-China trade talks in Beijing next week and outside of this. The Quarterly Wage Price Index due February 20 remains the next hurdle in determining longer ranges. Prolonged US-China uncertainty and an absence of upward wage pressures could force a bearish trend to continue and prompt a break below 0.70.

Disappointing employment figures triggered a sell off yesterday morning of the the New Zealand Dollar. Dropping to two-week lows post news, the Kiwi fell 80 pips from 0.6830 to 0.6750 by mid-morning. The unemployment rate rose from 3.9 percent to 4.3 percent in the December quarter of 2018 with the number of unemployed rising by 10,000 jobs. Wage growth continued to disappoint the local economy as the labor index rose by 0.5 percent for Q4 2018 and 1.9 percent year-on-year.

The results opened the door for the RBNZ to potentially cut rates in the future if wage inflation continues to flat line and labor markets remain subdued.

The NZD/USD continued its path lower before steadying in offshore markets overnight despite recovering to 0.6770 in the North American session. With little domestically today on the macroeconomic front, the Kiwi could continue to see pressure in the current risk-off environment.

The New Zealand Dollar opens this morning at 0.6750.

Expected Ranges

  • USD/CAD: 1.3225 - 1.3329 ▼
  • EUR/USD: 1.1323 - 1.1350 ▲
  • GBP/USD: 1.2921 - 1.2976 ▲
  • AUD/USD: 0.7061 - 0.7105 ▼
  • NZD/USD: 0.6730 - 0.6766 ▲