Panic Selling Could Drive These Currencies to Fresh Lows

Panic selling continued to hit the financial markets on Tuesday as investors head for the exit.  The Dow Jones Industrial Average lost another 800 points which is approximately 3%.  Germany confirmed another case of coronavirus, this time from a patient who visited Milan while Switzerland reported its first case also from Italy. Europe's open borders is becoming a serious problem for virus containment and according to the US' Center of Disease Control, a pandemic is inevitable. They expect the virus to spread in the US and warned that it could take 12 to 18 months before a vaccine is developed, though human trials could begin as quickly as 6 weeks.  Markets are selling off because investors realize that the more widespread the virus, the longer it will take for economic activity to return to normal.  We have been warning about this for some time and markets are finally responding.

Unless governments step up with fiscal or monetary stimulus (which isn't necessary at this stage), more weakness is likely. USD/JPY has been hit the hardest by risk aversion but it may not find support until 108. The 110 level is holding for the time being but between the continued decline in Treasury yields and US stocks, it will only be a matter of time before it breaks in a meaningful way. The selling pressure on this pair accelerated today following weaker than expected consumer confidence numbers.  Considering that stocks hit record highs during the measuring period, when the next report is released, an even steeper fall is expected. A trend of weakening global data is one of the main reasons why we see the current sell-off lasting until a breaking news or external force (central banks) stop it.

 In contrast, at some point the recovery in the euro will hit a brick wall.  The single currency rose for the third day in a row on the back of US dollar weakness but Europe is the new hot spot for the virus and unfortunately we expect the number of cases and the general sense of anxiety in the region to grow. This will put a dent into economic activity and raise red flags for the European Central Bank. EUR/USD could hit the 20-day SMA at 1.0917 but after that we expect gains to turn into losses.

Although we did not see fresh lows in the commodity currencies today, the Australian and New Zealand dollars remain vulnerable to further weakness.  So far data has not reflected the impact of the virus but it won't be long before the February numbers are released. With economic activity in China still at a standstill we expect the Reserve Bank of Australia to lower interest rates in the next few months.  It may also be difficult for the Canadian dollar to extend its gains with oil prices heading back to its lows.  New Zealand trade numbers are due tomorrow and this report could provide a reprieve for the currency as manufacturing and service sector activity in January ticked higher.