EUR/USD Falls to Fresh Multi-Year Lows Amid Weak Eurozone Data, Coronavirus Fears

The euro fell to its lowest levels against the dollar since April of 2017 in early trading on Friday. The European single currency has been pressured by lackluster eurozone economic data while the US dollar has been lifted by its safe haven appeal as fears over the coronavirus persist.

On Friday, authorities in China reported 5,090 new coronavirus cases and 121 new deaths in the previous 24 hours. The latest official data indicates that in China over 63,000 people have been infected and at least 1,380 people have died. Meanwhile, a senior administration official told CNBC that the US does “not have high confidence in the information coming out of China” on the figures relating to coronavirus cases. Both the US dollar and Japanese yen were boosted by their safe haven status.

At the same time, weakness in eurozone data weighed on the euro this week. Figures released on Wednesday showed that euro-area industrial production fell by 2.1%, the most in almost 4 years. In addition, German GDP came in weaker than expected on Friday and reflected that the German economy stagnated at the end of 2019.

The disappointing eurozone figures contrast with recent positive US data. The US employment report last week showed that 225K new jobs were created and that the unemployment rate ticked up slightly to 3.6%. The New York Federal Reserve announced on Thursday that it will cut back the repo support it is providing in the overnight lending markets. Investors now turn their attention to today’s US retail sales report.

Looking at the EUR/USD monthly chart we can see that price has been in a steady downtrend since 2008 and that a major long term downward channel has formed. Bears begin to eye the prior low of 104.58, representing a potential major level of support.

Risk-Sensitive Currencies Dive, Safe Havens Soar Amid Coronavirus Fears

The Wuhan coronavirus continued to send shockwaves through the financial markets on Monday. Risk-sensitive currencies such as the Australian dollar fell to fresh lows while safe havens such as the Japanese yen and gold rallied sharply. 

China’s National Health Commission warned on Sunday that the ability of the coronavirus to spread is getting stronger and that the number of cases of infections may rise. In China, the death toll from the coronavirus has risen to 81 and almost 3,000 cases have been confirmed. The virus has also been detected in the United States, Singapore, South Korea, Australia, Canada, France, Japan, Malaysia and Vietnam.

In an effort to contain the epidemic, China’s State Council announced on Monday that the Lunar New Year/Spring Festival holiday will be extended to February 2nd across the country. On Sunday, Hong Kong authorities prevented residents of China’s Hubei province from entering the city.

On Monday, money continued to flow into safe haven assets amid rising fears of an economic fallout from the virus. The Japanese yen and gold rallied their highest levels in two weeks against the dollar. The head of the World Health Organization (WHO) stated last week that the Coronavirus is an emergency in China but not yet an official Public Health Emergency of International Concern (PHEIC).

Meanwhile, risk-sensitive currencies such as the Australian dollar and New Zealand dollar fell to their lowest levels of the year. The Australian Dollar is often treated as a proxy to the Chinese yuan, in part due to the fact that China is Australia’s largest trading partner. Expectations of a rate cut from the Reserve Bank of Australia (RBA) is another factor weighing on the Aussie.

Investors now look ahead to Wednesday’s FOMC statement and press conference. The CME Fedwatch tool currently shows an 87% chance that the federal funds target range will be kept steady at 1.50-1.75%.

EUR/USD Falls to 7-Week Lows Following Dovish ECB Signals

EUR/USD fell to its lowest level since December 2nd in Friday trading, after the European Central Bank (ECB) signaled a more dovish than expected outlook. On Thursday, the ECB reaffirmed its commitment to hold or even cut interest rates, while continuing bond purchases until euro zone inflation returns to its target level of just under 2%.

The ECB held its rate on overnight bank deposits at a record low of -0.50%. The main refinancing rate was kept unchanged at 0.00% while the rate on the marginal lending facility stayed at 0.25%.

Speaking at the conference after the meeting, ECB President Christine Lagarde cited downside risks to euro area economic growth. She stated:

“The risks surrounding the euro area growth outlook, related to geopolitical factors, rising protectionism and vulnerabilities in emerging markets, remain tilted to the downside, but have become less pronounced as some of the uncertainty surrounding international trade is receding.”

On Friday, PMI data signaled a positive start to 2020 for business activity in the German private sector. IHS Markit’s Flash Composite Purchasing Managers’ Index (PMI) indicated that growth was up to 51.1 from 50.2 in December, a 5-month high.

However, Eurozone PMI data showed that Eurozone business activity remained muted at the start of the year. The Flash Eurozone PMI Composite Output Index came in unchanged at 50.9, while the Flash Eurozone Services PMI Activity Index fell to 52.2 from 52.8 in December.

Finally, at the World Economic Forum 2020 in Davos on Friday, Christine Lagarde cited concerns over Brexit and the deadline for the trade agreement. She stated:

“Brexit is a little bit less uncertain, but we still have that possible cliff edge in December of 2020. We don’t know exactly what the trade relationship will be. And it’s a big partner for the euro area, so that’s certainly a question mark.”

Golden Cross Pattern on NZD/USD Daily Chart

A bullish golden cross pattern (50-period moving average crossing above the 200-period moving average) has formed on the NZD/USD daily chart. The pattern comes in the context of mixed news for the kiwi.

Chinese officials reported on Wednesday that the Wuhan coronavirus has now killed at least 17 people in China and caused hundreds of confirmed infections. According to data from Johns Hopkins University there were 555 confirmed cases of the virus as of Wednesday evening. Officials have confirmed that it is contagious between humans. Cases have also been reported in Japan, Thailand, Taiwan, South Korea, Macau and the United States. Risk sensitive currencies such as the Australian dollar and New Zealand dollar were pressured by the news while the Japanese yen was lifted due to its safe-haven appeal.

Meanwhile, news of the signing of the ‘Phase One’ trade deal between the US and China last week was positive for the New Zealand dollar. China is New Zealand’s largest trading partner and upbeat news for China’s economy normally underpins the kiwi. Greater clarity on Brexit is another factor helping risk sensitive currencies such as the New Zealand dollar.

The Australian dollar rallied sharply on Thursday after a blockbuster jobs report lowered expectations of an RBA rate cut in February. The Australian Bureau of Statistics reported that the country’s unemployment rate unexpectedly fell to a nine-month low of 5.1% in December and 28.9k new jobs were created, beating analyst expectations. 

Further upbeat news for the kiwi came from global ratings agency Fitch, who held New Zealand’s long-term credit rating at AA and upgraded the outlook to positive. Fitch stated that the upgrade in outlook reflected the country’s sound fiscal management and declining level of government debt as a proportion of gross domestic product (GDP).

Investors now look to New Zealand’s Consumer Price Index (CPI) data, due for release  on Friday (New Zealand time). CPI is a key measure of changes in purchasing trends and inflation. Analysts expect year-over-year CPI to come in at 1.8%, close to the Reserve Bank of New Zealand’s target of 2%.