By Kathy Lien, Managing Director Of FX Strategy For BK Asset Management
The Dow Jones Industrial Averages is heading back to record highs as the World Health Organization confirmed 3,100 new cases in China over the last 24 hours. There are also two cruise ships quarantined in Asia, which is stranding more than 5,000 passengers. One would assume reports like these would drive equities and currencies lower but overnight, a Chinese media outlet reported that a research team had found an effective drug to treat people with the virus. Although the World Health Organization came out within hours to refute the existence of effective therapeutics, investors shrugged their warning off in favor of optimism. Eventually the virus will peak and with the world racing to develop a treatment for coronavirus, progress could be announced sooner than later. But we are not at that stage so the rally is tenuous at best.
With that said, U.S. assets and the U.S. dollar in particular benefitted from stronger data.Service-sector activity accelerated at the start of the year with the non-manufacturing ISM index rising to 55.5 from 54.9. ADP (NASDAQ:ADP) also reported the biggest month for private-sector job growth in more than 4 years. However, according to the details of non-manufacturing ISM, job growth slowed and the trade deficit widened. Going into Friday's nonfarm payrolls report, this tells us that the odds favor a good but not great report. At the end of the day, the real question is how much it matters. This month's report won't include the impact of coronavirus and it will certainly not affect the central bank's near-term policy plans. Risk is back on and the only question is whether Friday's report supports or eases risk-on flows. For the time being, a move above 110 is in sight.
The best-performing currency today was hands-down the USD. The worst was the euro, which closed below 1.10 for the first time in nearly 4 months. Eurozone data was mixed. While service-sector and composite PMIs were revised higher, retail sales fell sharply in December. This wasn't a huge surprise considering the weakness previously reported in German and French demand. At the same time, the comments from ECB President Lagarde were not encouraging. She said climate change will affect monetary policy and coronavirus adds a new layer of uncertainty. Considering that the market interpreted the last ECB meeting as more dovish, these worries only adds to her concerns. With 1.10 broken, the next stop for EUR/USD could be 1.0925. sterling also moved lower despite strong PMIs but unlike EUR/USD, GBP/USD is still trading in a range.
The Canadian and Australian dollars ended the day unchanged. The loonie should have benefitted from Canada's narrower trade deficit and higher oil prices but the gains in the greenback prevented it from moving higher. Bank of Canada Deputy Governor Wilkins also said the country escaped secular stagnation but the data may not be capturing all of the changes in technology investment and the coronavirus could hurt Canada through oil prices and travel. While it appears that USD/CAD is nearing a top at 1.33, we may not see a meaningful move until Friday's Canadian and U.S. employment reports.
As for the Australian dollar, Reserve Bank of Australia Governor Lowe spoke last night and he effectively said a rate cut is on the table this year. He explained that existing stimulus and long lags prompted their decision to keep interest rates on hold and he felt that 2020 GDP will be largely unaffected by the wildfires but coronavirus is a new uncertainty. While it's too early to know the impact, the spillover could be bigger than SARS. He sees a case for further easing but also warned about the risks of low rates. Meanwhile, the New Zealand dollar ended the day lower amidst mixed labor data. While the unemployment rate improved significantly, employment change, hourly earnings and the participation rate weakened in the fourth quarter. NZD underperformed AUD as a result, driving the pair well above 1.04.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed. Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website. Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.