FX Update: Risk-on boosted further on possible coronavirus treatment

Breaking news this morning from China on a possible treatment option for the coronavirus came in about halfway through the composition of this morning’s update and has boosted risk-correlated assets and currencies strongly – we’ll refrain from going all in with the kneejerk reaction, but certainly there is further space within the bond yield-sensitive currencies (JPY and CHF) as well as risk- and commodity-correlated G10 small and EM currencies to rally here on this news if the facts on the ground soon confirm that we are getting past peak coronavirus concerns. We remain cautious.

A zany day yesterday for risk on, especially for equity markets, but with more participation this time from commodities and currencies, as EM bounced strongly – USDMXN closing close to cycle lows, for example – and on the flip-side, the JPY sent reeling after its recent surge as bond markets consolidated lower. We’re having a hard time pulling together the kind of confidence that equity markets seem to be trying to express here, preferring to keep an eye on long US treasuries, where the rise in yields has so far proven very modest and the still-flat US yield curve suggests the Fed remains behind the curve, its ongoing operations notwithstanding. Yesterday saw a $30 billion two-week repo heavily oversubscribed by almost another $30 billion – suggesting USD liquidity concerns are ongoing.

The Swedish krona has bounced the most among the G10 smalls after EURSEK extended above the important 10.60+ since last Friday – besides the comeback in risk appetite, we have a head turning couple of PMI’s from the country this week that are suddenly changing the narrative a bit for the currency, first with the surge to 51.5 in the January Manufacturing PMI and this morning with the Services PMI likewise with a print of 52.5 vs. 48.7 in December. EURSEK has tumbled back well below 10.60 and a  further thaw in coronavirus fears could see it push well back into the former range toward 10.41, even if we doubt much potential for the  currency until a more determined fiscal stimulus expectations arrive for Sweden and the EU.

No real takeaways yet from the partial (71%) results from the botched Iowa caucuses in the US – always a weird primary relative to the other states’ and possibly history for future elections. Pete Buttigieg looks to have beat Sanders by a small margin for the win, but he is polling at a fraction of his levels in Iowa in most other states and the race still looks a contest between Biden and Sanders. More soon.

Chart: NZDUSD
The kiwi has been on its back foot a bit in the crosses after the employment and wages data disappointed overnight, with the  QoQ employment change a 0.0% and the  average hourly earnings rising only +0.1% QoQ as well. The coronavirus treatment news has boosted the NZDUSD off the lows this morning, but we will continue to watch this pair for the risk of a full breakdown toward the sub-0.6250 cycle lows if it re-approaches and breaks back below 0.6450 – a neckline-like area on the way up.