The Federal Reserve surprised the market yesterday morning, cutting rates by 50 bps, two weeks before the scheduled FOMC meeting. The Fed funds rate now is at 1.00-1.25%. According to the statement after the rate cut, “the coronavirus poses evolving risks to economic activity and in light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate.” Initially, the reaction by the market was positive as the Dow moved higher but then reversed form and ended almost 800 points lower. As investors moved into US Treasury’s, yields moved much lower with the 10-year note falling below 1% for the first time. The USD was lower against the EUR and JPY while trading a bit higher against the GBP and CAD. US Treasury yields this morning are trading lower as the 10-year note is trading around .9666%, while the 30-year bond was trading at 1.6007%. Dow Futures are higher this morning, expected to open around 500 points. Traders will also keep an eye on the Fed’s Beige Book report, due out later this afternoon.
EUR/USD is trading this morning in the middle of its overnight range and the single currency gained traction as US yields dropped following the Fed rate cut. Traders expect the EUR to remain bid and once again test overnight highs later in the trading day. The fall in US yields has narrowed the gap between US Treasuries and German bunds. Analysts now look to the European Central Bank to see if they will follow suit and lower rates at their April meeting, or will the make an emergency move like the Fed did yesterday. Either way, the central bank is only expected to lower rates by 10 bps.
GBP/USD is trading lower as there is speculation that the Bank of England will follow the Fed and announce a rate cut due to the Coronavirus. Final UK Services PMI came in as expected at 53.2. The Bank of England currently has rates at 0.75%, so there is not much room for a meaningful rate cut, but a move of 25 bps is expected. The economy is expected to come under pressure moving forward as the virus disrupts events as the number of cases in the UK are rising. Brexit talks continue without much expectation of success and this is also weighing on the pound.
USD/JPY fell to its lowest level in almost 5 months overnight but has bounced off that low as we approach the North American trading day. The Fed rate cut and G7 meeting did not support the USD and with Treasury yields so low, traders are moving towards the JPY as a safe-haven alternative. While the USD/JPY did bounce off lows, another move lower towards new support levels are expected.
The Bank of Canada will meet today and is expected to cut rates, following the Fed’s lead in response to the Coronavirus crisis. Traders have already priced in an expected rate cut and this may benefit the Canadian Dollar which is currently trading near overnight lows. This rate cut was previewed back in January when the BOC released a dovish statement due to unimpressive economic growth. Aiding the loonie were higher oil prices as OPEC recommended cutting oil output by 1 million barrels per day.
China Caixin PMI Services dropped to 26.5 in February, down from the previous release of 51.8, and well below the expected 48.0. The decline in activity was due to travel restrictions and company closures. Economists in China are stating the virus has impacted China’s economy. Global cases rose to over 93,000 and deaths are above 3,200. Cases in China are somewhat receding, but cases in South Korea, Italy, and Iran continue to rise, and cases in the US are higher as well. The World Health Organization said that globally the fatality rate is around 3.4%, which is much more serious than the seasonal flu which usually has less than a 1% fatality rate.