How Worried Is The Fed About Coronavirus?

The release of the January FOMC meeting minutes last night helped keep the current Dollar rally on course with policymakers noting that they expected a continued moderate economic expansion. Inline with this view, the minutes noted that the current monetary policy stance will likely remain appropriate “for a time”.

Key Quotes from The Minutes

  • “Policymakers expected economic growth to continue at a moderate pace.”
  • “Policymakers cited easing of trade tensions, receding risks from Brexit and stabilizing global growth as reducing downside risks but also generally expected trade uncertainty to remain somewhat elevated.”
  • “Participants agreed threat of coronavirus warranted close watching.”
  • “Concerns about the spread of the coronavirus and uncertainty about its potential economic effect weighed negatively on investor sentiment
  • “Participants expected payroll employment to expand at a healthy pace this year; consumption spending would likely remain on a firm footing.”
  • “Once reserves reach ample levels regular open market operations would be required over time to accommodate trend growth in Fed’s liabilities and maintain ample reserves.”
  • “Several participants suggested committee resume ‘before long’ discussion of possibly creating a standing repo facility.”
  • “Most participants expressed concern that introducing a symmetric inflation range could be misperceived.”

Reading Between the Lines

As you can see, the minutes were indeed mostly positive. However, it is the comments around the coronavirus outbreak which I find most interesting.

Over recent weeks, markets have mostly downplayed the risks around coronavirus given that the vast majority of deaths have occurred in China alone. However, while the global risk-to-life from the virus might have reduced, the economic threat certainly has not.

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Over half of China’s 760 million strong population is currently on lockdown as a result of the virus and the loss of economic activity consequently, is expected to be huge. Already this week we have started to get a glimpse of the cost of the virus with HSBC reporting a more than 50% drop in profits and Apple warning that it will undershoot its Q1 2020 revenue guidance.

Economic releases out of China over the coming months will be crucial in assessing the damage from coronavirus. Given that the economy was already fragile on the back of a two-year trade war with the US (January CASS Freight Shipping Index down 9.4% in Jan, largest decline since 2009), there is a high -risk level.

A severe slowdown in China would have heavy implications globally and the US would not be exempt. In this light, the Fed’s early warning around coronavirus warrant consideration. With this in mind, it seems more that the Fed’s message here is, it will be monitoring the progress of coronavirus and incoming data with room to ease more if necessary.

Technical View

USDCNH (Bullish above .69500)

From a technical viewpoint. USDCNH is continuing to rally here with price now back above VWAP. The next hurdle for the market will be the monthly R1 and bearish trend line from 2019 highs at 7.0565. If price moves above here, the yearly R1 at 7.2171 is the next target. Any retracement lower should find support into the monthly/yearly pivot cluster at 6.9500.

How Worried Is The Fed About Coronavirus?

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

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