FX Kicks Off with Big Losses, Fear Trade to Spread

Between the Federal Reserve and Bank of England's monetary policy announcements, investors had been bracing for big week in the financial markets. However nothing matters more right now than the Wuhan virus. Currencies and equities sold off hard as investors worry about the mounting deaths in China, growing cases abroad and the impact on the Chinese economy. Here in the US, travel stocks have been hit particularly hard but few asset classes have been spared as investors liquidate in fear of more losses. Panic and fear are powerful drivers of market flows and typically when the sell-off begins it can be faster and deeper than most can anticipate. Today's decline in US equities was the strongest in 4 months and without a positive turn in China's health crisis or an attempt by President Trump to drive up stocks through promises of another tax cut or further tariff relief for China, additional losses in currencies and equities are are expected.

Asia is ground zero for the coronavirus, so it should be no surprise that the Australian and New Zealand dollars were hit the hardest today. AUD/USD and NZD/USD lost nearly a percent of their value as they dropped to their weakest level in 7 weeks. If the virus isn't contained quickly and economic activity in China grinds to a halt, it could lead to another rate cut by the Reserve Banks. New Zealand data has taken a turn for the worse and it should only be a matter of time for Australian data to follow suit. Business confidence numbers are scheduled for release this evening and there's a very good chance that sentiment deteriorated, adding pressure on A$. By comparison, the losses in the Canadian dollar were modest despite the continued decline in oil prices. Unfortunately, with oil demand and oil prices expected to fall further, the loonie is vulnerable to additional losses.

USD/JPY dropped to a low of 108.73 at the US open before rebounding back to 109. New home sales declined for the third month in a row but FOMC and Q4 GDP will be the main focus this week. These are 2 of the most important economic reports on this week's calendar and despite market jitters, the Federal Reserve is widely expected to maintain their outlook for steady policy. Trade tensions have eased and the limited cases of coronavirus in the US (thus far) will encourage the central bank to maintain their current outlook. With that said, there's no doubt that they are carefully watching risk appetite and the sell-off in stocks.

The other big events on this week's calendar are Chinese PMIs, the Bank of England's monetary policy announcement, Australian inflation data and the Eurozone's Q4 GDP report. Chinese PMIs are expected to slow but they won't show the extent of the Wuhan virus. Australian inflationary pressures are expected to rise given the uptick in consumer inflation expectations but any increase isn't expected to lend much support to the currency. The BoE's rate decision will be one if not the most impactful events on this week's calendar. When the central bank last met, 2 members voted in favor of lower interest rates. There's a very good chance that more will follow in January with Governor Carney reinforcing their dovish bias. Rate cuts are on the table and despite better PMIs, we expect GBP/USD to fall below 1.30 before the rate decision.

Lastly, EUR/USD is hovering just above 1.10 after an unexpected decline in German business confidence. For the better part of this month, Eurozone data has been strong but the cracks are showing with business confidence weakening. With more cases of coronavirus expected and further losses in stocks likely, we don't expect any immediate improvements. With that said, Eurozone Q4 GDP could still surprise to the upside because the region's economy stabilized towards the end of the year.