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Timothy Fox - Head of Research & Chief Economist
Mohammed Al Tajir - Manager, FX Analytics and Product Development
Published Date: 09 February 2020
Coronavirus continues to dominate the headlines as well as market concerns, with the death toll from the virus already surpassing that of the SARS outbreak in 2003. Given that there is little evidence of an end in sight to the crisis, it is understandable that the markets are favouring the safety of bonds over other asset classes, which means in the FX universe it is the USD that is the main beneficiary. Even strong U.S. January jobs data on Friday failed to arrest the gains in the bond market, and the USD also continued to outperform.
Economic data throughout last week in fact provided something of a contrast to the health concerns coming from Asia, with PMI reports all providing a level of optimism that a corner might be being turned. The U.S. ISM manufacturing and non-manufacturing indices both reached six-month highs in January, while UK and Eurozone PMI’s also performed better. The main release of the week, the January U.S. jobs report, did not disappoint either, with nonfarm payrolls increasing 225k, twice expectations, after December and November were revised up as well. Wages rose by 0.2% m/m taking the y/y rate to 3.1% and the unemployment rate also edged up to 3.6% on account of increasing participation in the work force. Despite this improvement, the quarantines in China, travel restrictions, firm closures, and the supply chain disruptions were still able to dominate sentiment, as markets ended the week preferring risk-off approach going into the weekend.
The Fed chair Jerome Powell delivers his semi-annual testimony on monetary policy to Congress on Wednesday, which will provide a timely insight into Fed thinking on the Coronavirus issue. The Fed’s February Monetary Policy Report released on Friday said that coronavirus ‘could lead to disruptions in China that spill over to the rest of the global economy’ suggesting that Powell will highlight downside risks to growth in his testimony, and by extension to interest rates. So far, the USDCNY exchange rate has been stable around the 7.00 level, but capital flight is a risk in a situation where monetary policy continues to be lent on, with the PBOC signaling its readiness to continue easing. China has a corporate debt problem, rising corporate defaults and a fragile banking sector, so the authorities will have to tread carefully in responding to the crisis for fear of sparking an increase in volatility that could put pressure on its and the broader financial system.
Source: Bloomberg, Emirates NBD Research
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