Dollar falls with equities as market looks for rate cuts

Dollar falls with equities as market looks for rate cuts

The US dollar slumped on Thursday as the stock market melted down on coronavirus fears. Forex traders are increasingly betting on a rate cut by the US Federal Reserve at the 18 March FOMC meeting to cushion the impact.

The implied probability for a March cut, according to CME’s FedWatch tool, has surged to 96% from 33.2% a day ago. The market also expects more rate cuts down the road this year as uncertainty remains high in terms of the impact of the virus on consumer behaviour.

Covid-19 infections have been found in many countries, spreading across all continents except Antarctica. It has escalated to become a global issue, rather than a China or Asia problem. We are still at the early stage of a global outbreak and the number of infections could rise sharply in the weeks to come if no proper measures are taken to contain the spread.

The S&P 500 index has fallen over 12% from its recent peak to 2,978 points, breaking down a key support level of 3,000, with strong downward momentum. This unusual sell-off was not attributed to Covid-19 alone, but also due to its high valuation that rendered a technical correction inevitable. Technically, the S&P 500 was severely oversold this week, according to the RSI, DMI and MACD indicators. It suggests that the market is due for a technical rebound soon.

Crude oil prices slumped for a sixth day to reach $51.4 (a 200% Fibonacci extension), which is a key support level for Brent. This is its lowest level observed since December 2018, when the global demand outlook was dampened by the US-China trade war. This round, Opec+ perhaps need to take decisive actions to cut, in order to shore up confidence in the oil market.

In Asia, markets are more resilient, as they already absorbed an initial shockwave 4 weeks ago, and the relatively lower valuation provided an extra layer of protection. The Shenzhen stock market has registered a 9% year-to-date gain, making it one of the best performing stock markets in the world this year.

Probability of March US rate-cut surges to 96% - FedWatch