Summary: The US Federal Reserve cut interest rates by 0.5% to a target range for the Fed Funds rate of 1.00% to 1.25% (from 1.75%). The emergency move was designed to protect the world’s largest economy from the impact of COVID-19. Shortly before, the Group of Seven (G7) finance officials said that they would use all appropriate policy tools to “achieve strong, sustainable global growth and safeguard against downside risks posed by the fast spreading coronavirus. The Dollar Index (USD/DXY), a favoured gauge of the Greenback’s strength against a basket of 6 currencies slumped to a six-week low at 96.979 before paring loses to close at 97.139. Against the haven sought Japanese Yen, the US Dollar plunged to 106.935, steadying to settle at 107.22, down 1.14%. Earlier in the day, the RBA trimmed its Overnight Cash Rate by 0.25% to an all-time low of 0.5%. The Australian Dollar immediately jumped to 0.6565 as the move was largely expected. The Fed’s move boosted the Aussie further to 0.66454 before easing to settle at 0.6597. Sterling added 0.33% to 1.2800 (1.2775) in a muted response to the broad-based US Dollar drop as Brexit fears and an anticipated Bank of England rate cut stunted the British currency’s advance. The Euro extended its rally against the Greenback, trading to 1.12133 before easing to close 0.3% higher at 1.1182 in NY.
The US 10-year bond yield plummeted to a new low at 0.936%, the first time the benchmark rate has fallen below 1%. The key yield rallied at the close to finish at 1.02%, a loss of 13 basis points.
Wall Street stocks initially spiked but ended poorly with investors worried that the emergency cut won’t be enough to battle the economic impact of the coronavirus. The DOW dropped 2.57% to 25,866 (26,000) while the S&P 500 lost 2.5% to 2,996 (3,010).
On the Lookout: While other global central banks are expected to follow, some have already slashed rates to record lows and may be hesitant to reduce them further. The US has room to reduce rates further. This is likely to weigh on the US Dollar, boosting the currencies of other countries.
Data released today see Australia’s Q4 GDP and China’s Caixin Services PMI data in Asia. Euro area (Germany, Italy, France, Spain) and the Eurozone report their Services PMI’s. Switzerland releases its February CPI. The UK follows with its Services PMI report. US releases include ADP Private Non-Farm Employment Change (February) and ISM Non-Manufacturing PMI.
The Bank of Canada is expected to cut its Overnight Rate to 1.25% from 1.75%.
Trading Perspective: The US Dollar has room to move lower with market positioning long of the Greenback against 4 of the major IMM currencies. The yield differential between US and rival global yields will narrow further, pushing the currencies of other countries higher.
The effect of the coronavirus spread in the US has yet to be fully realised and the Fed may be forced to act again soon.