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Oil Price Collapse Causes Currency Meltdown

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Australia

Australia’s Central Bank cut rates by 25 basis points to 0.50% as widely expected last week. With references made to Bushfires, phase one trade deal and the impact of coronavirus to the economy high on the agenda. The RBA are prepared to cut rates further if necessary as the economy responds to the global coronavirus outbreak. The government saying the coronavirus has “clouded the near-term outlook.” Other Australian data released over the week was poor with Building Approvals and Current Account both coming in below expectations. The Aussie Dollar though has been held up by general weakness in the US Dollar although yesterday’s “flash crash” has changed the game somewhat with the currency reaching 0.6315 momentarily (a massive sell off) before recovering around 0.6600.

New Zealand

Local attention has focused on Coronavirus over recent weeks especially with a lack of data publishing. New Zealand reported its 5th case of the virus with travel bans becoming more common. Consumer and business confidence is taking a hit, this week’s ANZ business confidence survey should confirm this.  This disruption to the local economy is expected to be only short term with no long period forecast for worsening GDP. March quarter is expected to show negative growth with the forecast for 2020 expected to be around 1.9% from a pre coronavirus 2.7%. The housing market should also grind to a halt through to mid this year as a result of job losses resulting in a slump in household incomes. The recovery according to the NZ govt should resume in the second half of this year. Later in March the RBNZ will drop the cash rate to 0.75% and possibly again in May. Word is Ore speaks today and could hint at dropping the cash rate before then.

United States

The US Dollar fell sharply against some of its major rival currencies in volatile trade. Yields fell affecting the Dollar’s buying power even after better than expected NFP figures came in better than expected failing to spark big Dollar buying. Non-Farm Payroll posted 275,000 new employed people from the anticipated 175,000 and the Unemployment Rate dropped to 3.5% from 3.6%.  The Federal Reserve cut rates by 0.50 points to 1.25% Wednesday during their emergency policy meeting and it looks like they will now cut again by 0.50% this month on the 19th. This should reduce the attractiveness of investors buying USD in the long term and should depreciate the USD further. CPI is this week’s focus.

Europe

The Euro has started a new period recently matching the Japanese Yen as the new safe haven currency investors want to hold. In the month of March the Euro has been the strongest currency along with the Yen. Against the US Dollar the single currency has risen from depths of 107.50 to 1.1350 – a massive shift in sentiment.  Analysts are expecting the pair to rise to 1.40 levels. With Europe being a big lender to the rest of the world at cheap near zero borrowing rates it has become the currency of choice as a liability. The Euro has become the global provider of liquidity and behaves like a “carry trade” i.e. borrowing at low cost and investing this asset in a higher rate of return. The ECB meets later in the week to discuss policy and coronavirus fighting measures. If we see price in the EURUSD push higher than 1.15-1.20 levels this week a cut will be substantiated.

Coronavirus continues to spread through Italy with deaths increasing to 133 to a total of 463. The number of infections has increased by nearly 50% to 9,172. Italy has enforced incredible measures in attempts to contain the virus by locking down 16 Million people in Lombardy and 14 other provinces. The restrictions will stay in place until the 3rd of April.

United Kingdom

The British Pound has outperformed amid coronavirus related market fears. The Bank of England monetary response to coronavirus recently was one of calmness. Mark Carney, the outgoing Governor and his successor said they were ready to intervene but seemed to be in no hurry to cut rates as other central banks have done. Further rises in the Pound across the pairs could be capped by Brexit activity in the background. Talks in Brussels have been encouraging recently but turned a tad sour over the weekend when chief EU negotiator Barnier said they may find it difficult to reach an agreement by year end.  Monthly GDP for January prints Wednesday with expectations of 0.2% growth down from 0.3% in December 2019

Japan

Black Monday. A “flash crash” in the Japanese Yen cross currencies took the Yen down between 5-8% in minutes with commodity risk currencies particularly hit hard. Some say the stars were aligned the second markets opened Monday morning in what turned out to be the perfect storm. Coronavirus caused widespread panic as the prospects of obtaining a cure, or any good news over the next couple of months looked slim. It became apparent that anyone holding risk assets was not going to get any return so they got out, cut losses and escaped any further pain down the track – and fast.  The Japanese economy also took bad news to the markets Monday with lower than estimated December 2019 growth figures surprising investors shrinking an annualised 7.0% compared to the 6.3% estimate. Bank of Japan’s Iwahara expects the Japanese economy to fall 0.6% this year based on coronavirus supply chain and tourist numbers.

Canada

Oil prices have suffered huge weekend losses. Opening Monday around $33.00 from Friday’s close at $41.55 per barrel this is a decline of over 21% the biggest price move in recent history. Russia has refused to lower production and Saudi Arabia announced drastic price cuts in somewhat a declaration of war on price after OPEC fell apart on Russia’s refusing to lower production. They have also made comments that they will increase oil production by 2 million barrels per day. The news has in turn had a massive effect on the Canadian Dollar – all crosses against the Loonie (CAD) have depreciated large.

Major Announcements last week:

  • Crude Oil drops over 20%
  • RBA cuts the cash rate to 0.50%
  • Federal Reserve Bank cuts rates 50 points to 1.25%
  • Bank of Canada cut rates 50 points to 1.25%
  • US Non Farm Payrol figures increase by 273,000
  • US Unemployment drops to 3.5%
  • Coronavirus cases increase to over 110,000

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