Currency Update - Friday 28th February 2020

AUD

Risk assets took another hammering overnight as more Covid-19
led volatility continued across global financial markets. US equities were
roughed up in the early hours of US trade with the S&P500 dropping 3.5%
before paring losses to close down 2.5% for the day.  There were mixed
results for the Australian Dollar which largely continued to be sold off across
the majors though there was some recovery against the USD stemming from USD
weakness. The situation for importers wasn’t helped by a big miss by Private
Capital Expenditure which came in yesterday with a -2.8% reading, wildly
missing expectations of a 0.5% gain.
With new infections and spread of Covid-19 continuing to evolve it seems likely
that the impact on sentiment and heightened volatility will continue for at
least the near future. With significant caps on AUD upside there is growing
pressure for clients dealing with their FX to review budget rates and protect
themselves from further downside risk.

USD

Further USD weakness continues to flare up with the overnight
session featuring a softer USD Index, dropping 0.6%. It was a good showing for
the whipped AUD which managed to recapture some of the losses sustained this
week to trade at 0.6571 at time of writing. US Yields also sustained losses
drifting to new record lows with the 10 year bond yielding a mere 1.28% while
oil continued its one way slide to fall a further 4% as fears over a global
slowdown abound. In early NY trade a WSJ article from former Fed member Kevin
Warsh was getting some attention as he called for the FPMC to cut rates by
25bps as part of a coordinated global Central Bank response to coronavirus
which whipped up some of the weakness that pushed DXY lower. On the data front,
US Q4 GDP was released and was unchanged from earlier readings at an annualised
rate of 2.1%. Released at the same time durable goods orders shrank by 0.2% in
January, but beating the forecast of -1.4%. And finally weekly jobless claims
came in at 219k. US pending home sales grew by 5.2%, beating the forecast of 3%
for January. Little reaction from the data as risk sentiment takes over market
movements.

EUR

The Euro continues to strengthen, pushing the AUD below 0.60 for
the first time since August 2019. The Eurozone’s Economic Confidence Index,
surprisingly rose to 103.5 in February ahead of estimates of 102.8, suggesting
that Eurozone consumer confidence is sofar unaffected by the Covid-19 epidemic.
European equities weren’t helped by the news which continued to be heavily sold
off closing the day down 2%. We still have German Prelim CPI yet to come to
finish up the week and with a German economy struggling to keep its head above
a technical recession there is still some opportunity for the AUD to regain the
0.60 handle. With that said, one of the side effects of the Covid-19 outbreak
is that financial markets have stopped paying as much attention to data
releases.

GBP

Pound weakness has returned to markets predictably led by fears
over UK/EU trade. The AUD managed to recapture lost ground above the 0.51
handle before markets corrected and the AUD now trades just below 0.51 at time
of writing. In the European morning the UK government published its Brexit
negotiating mandate with the EU. The mandate suggests that the UK would be
willing to trade on a no deal basis with the EU if talks fail and the UK will
start no deal preparations if a pact is not clear by June. With the prospects
of no deal risk seemingly brought forward to June the Pound quickly found
itself heavily sold against the majors.

NZD

The AUD has bounced back from recent losses to put together the
largest gain against the NZD for the week with markets trading the pair at
1.0410 at time of writing. Yesterday the ANZ Business Confidence survey came
out with a poor reading showing further deterioration of business confidence in
NZ that helped lift the AUD. No other data to report.