In an unprecedented emergency move late Sunday afternoon, the Federal Reserve announced it is dropping its interest rate to zero and launching a new round of quantitative easing. The QE program will entail $500 billion worth of Treasury securities and $200 billion worth of mortgage-backed securities. The Federal Reserve, stated, “the coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States.” The new Fed funds rate, used as a benchmark both for short-term lending for financial institutions, will now be targeted at 0%-0.25%. The Fed also cut reserve requirement ratios for thousands of banks to zero. The USD is trading somewhat mixed as we get ready for the North American trading day- slightly weaker against the EUR and JPY from overnight trading but stronger against the GBP and CAD. US equity futures collapsed overnight after the Fed move, hitting limit-down as futures fell over 1,000 points. After Friday’s rise, the US equity markets are set to fall once again this morning. Investors want to see the virus peaking and falling in the US before getting back into the market. US Treasury markets are lower this morning, with the 10-year note trading at .6968% and the 30-year bond trading at 1.2893%. Confirmed cases of Coronavirus in the US no stand at 3,774, with 69 deaths reported. NYC has closed restaurants and bars, allowing only takeout and delivery services and schools across the country are closing.
After initially falling after the Fed move, the EUR/USD is now trading mid-range and has broken through technical levels on the upside, but traders are not following through during the European trading day. The Coronavirus is spreading through Europe as Spain announced a state of emergency, limiting movement and shutting down non-essential economic activity. Cases in Spain rose to 288. France also announced restrictions, closing cafes and schools. Italy, the worst-hit country in Europe, has confirmed a death toll above 1,800 and their country-wide lockdown continues. Airlines are grounding flights and several corporations are slowing production. European Union finance ministers will be meeting today, via teleconference, to discuss possible border closures as well as their fiscal response to the epidemic.
GBP/USD continues to be under pressure as the week begins. There is a report that the UK government is considering implementing that people in the country over 70 to remain at home. As most other countries are taking an aggressive stance towards the virus, the UK government has taken a more cautious wait and see approach and this is not sitting well with the public. As of late Sunday, there have been 1,395 cases reported in the UK, with 35 deaths. Schools, restaurants, and museums remain open, and the British public is now asking the government to follow other countries and shut down public life. A meeting later today, including PM Boris Johnson is set to coordinate government response. UK stocks are lower, and GBP is expected to test support levels later his morning, as it currently trades just above overnight lows.
After initially testing overnight highs, the USD/JPY is now testing overnight support, and it appears to be headed lower this morning. Earlier, during the Asian trading day, the Bank of Japan announced further monetary easing as the Coronavirus is impacting economic activity. ETF and J-REIT purchases have doubled, and the BOJ introduced “The Special Funds-Supplying Operations to Facilitate Corporate Financing” group to provide loans at 0% against corporate debt with a maturity of up to 1 year. The BOJ kept its short-term interest rate at -0.10% and will continue to purchase JGBs to keep the 10-year yield near 0%. As traders continued to be concerned over the state of the markets, safe-haven purchasing will likely move the USD/JPY lower.
USD/CAD trading near overnight highs as oil prices continue to fall. The move lower in oil is being blamed on potential falling demand, as well as the on-going price war between Saudi Arabia and Russia. Brent crude is lower, falling $1.13 to $32.72 per barrel. Brent crude fell 25%, the largest drop since 2008. US crude also fell, down $0.72 to $31.01. This happened despite President Trump’s pledge to fill strategic oil reserves. As oil prices fall, commodity currencies continue to bear the brunt of the damage. The Bank of Canada has cut interest rates 100 points in less than 10 days to help fight against the virus pandemic, and it expected that the Canadian Finance Minister will announce a substantial fiscal stimulus package later this week.
Economic data released from China for February is as expected, overwhelmingly poor. Retail sales dropped -20.5% year-on-year, versus an expected -4.0%. Industrial production also dropped -13.5% year-on-year against the expected -3.0%. The National Bureau of Statistics said in its statement that while the economy has had bog shocks in economic activity, the impacts are largely short-term and controllable. According to reports, around 5 million people in China have lost their jobs due to the Coronavirus. This number could rise as high as 9 million according to analysts as a result of the virus impact.