The US equity markets experienced their worst day since the Great Recession of 2008, as the DOW fell over 2,000 points yesterday. After opening negative once again overnight, DOW Futures turned positive after President Trump discussed the possibility of “a payroll tax cut or relief” to offset the negative impact of the Coronavirus. Early this morning DOW Futures were up over 640 points, which would indicate a positive opening of close to 700 points later today. As traders expect a rebound in the equity markets, US Treasury yields have moved higher as well, with the 10-year note trading higher at .6771%, after falling to a record low of .318% on Monday. The 30-year bond was also trading higher at 1.1303%. The USD has also rebounded overnight against the EUR, GBP, and JPY. Traders seem cautious as to whether the USD has finally bottomed out or if this rebound is just a profit-taking move.
As traders moved towards the USD, the EUR has moved lower and is trading near overnight lows. The EUR had reached levels not seen since September of 2018. The European Central Bank (ECB) meets this Thursday and traders expect the bank to follow the moves by other central banks and cut rates. According to traders, Eurozone money markets are now pricing in two rate cuts by June. Last week they had only priced in one cut. The current rate stands at -0.50%. The Coronavirus outbreak has continued to rise in Europe. Italy has the entire country on lockdown, as the amount of cases now stands at 9,172 which is up 24% from a day ago, and the number of deaths increased by 97 to 463. According to PM Conte, the whole country is locked down until April 3, with citizens only allowed to travel for work, medical reasons or emergencies. Schools and universities are closed as well. The number of cases in Europe is growing in all European countries, as cases in France and Spain and Germany have grown above 1,200 cases.
GBP/USD has followed the other currencies and moved lower against the USD. Adding to the move lower for the pound as concerns over Brexit, as EU diplomats are now concerned that the December 2020 deadline may not see an agreement. The post-Brexit budget is due to be released on Wednesday and this could give sterling a bit of a bounce. GBP/USD currently trading near overnight lows and a move lower could see some stop-loss selling. As with the other currencies, GBP/USD remains in an overbought situation, which could see sellers emerge.
USD/JPY has moved over 200 points higher overnight as the market reacts to the President’s announcement and rebound in equity markets. As the USD/JPY market is seen in an oversold position this correction could extend further as traders look to unwind safe-haven trades. Bank of Japan Governor Kuroda spoke to Parliament overnight saying, “there’s uncertainty on when the virus will be contained, and this allows markets to make unstable moves”. He also said the BOJ is keeping an eye on how the virus could affect the Japanese economy and will act appropriately without hesitation. Expect a move higher in USD/JPY later today if the US equity rebound shows some follow-through.
USD/CAD is trading higher as the Canadian economy is getting closer to falling into a recession for the first quarter of 2020. GDP forecast for 2020 has been lowered to +0.2% from +0.7%. The collapse of oil prices is one of the main reasons for the lowering of forecasts, and traders are now expecting the Bank of Canada (BOC) to cut rates by 100 bps, which would bring rates back to their 2009-10 low of 0.25%. Oil prices moved higher in Asia overnight after falling over 20% on Monday. Brent Crude rose to $36.81 per barrel, and US West Texas Intermediate rose to $33.17 per barrel. The reversal in oil has not had the expected effect on the Canadian Dollar.
The outbreak of the Coronavirus has continued to stabilize in China was only 10 new cases were reported yesterday. This brings the total cases in China to 80,754, with deaths reported at 3,136. Mainland Chinese stocks moved higher overnight, with Shanghai and Hong Kong indexes showing gains. Traders remain optimistic as virus cases ease in China but the rest of the world still has a long way to go.