The ISM manufacturing index declined in February to 50.1p from 50.9p a month earlier. The decrease is insignificant, but a number of indirect indicators increase the risk of a negative trend in the coming months.
New orders, export and processing were reduced, and deliveries of earlier orders made the largest positive contribution to the index. At the same time, there is an increase in the delivery time, that is, the positive contribution of this sub-index is based on a slowdown in the delivery time, which means the beginning of the destructive effect of the virus on the global chains of movement of raw materials, materials and components, and not on an increase in demand.
Given the strong correlation between ISM and Chinese PMI, which hit in February, it must be assumed that ISM will slow down at an accelerated pace in the coming months.
Hence, we can conclude that the current recovery is temporary, the markets are just making a correction after a massive collapse and we need to wait for the next wave.
NZD/USD
The New Zealand dollar, along with the Australian currency, looks the most affected. The main reason is the strong orientation of trade turnover to China, so the slowdown in China is affecting these countries more than Europe.
ANZ Bank reports that, in its opinion, the RBNZ will reduce the rate in March by 0.5% and another 0.25% in May, after which the rate will decline to 0.25%. In fact, such a scenario means a gesture of despair, since after it only the measures of direct impact will remain available to the financial authorities of New Zealand - such as tax cuts, asset buybacks and targeted incentives.
But perhaps, ANZ is making the panic worse for nothing. According to the results of Friday's CFTC report, Kiwi increased its aggregate short position, but even in this case, the estimated fair price is significantly higher than the current one. Oversold will lead to a rapprochement between the estimated and spot prices sooner or later, but so far, panic determines everything.
The high level of fair prices is explained by the fact that, despite the active stirring of the panic in the media, the sharp drop in T-bills yields, which began in January, is moving at different speeds for different countries. In particular, the spread between 10-year-old Treasures and similar securities in New Zealand is rapidly decreasing, and a decrease in the spread also means a decrease in the competitive advantage of US assets. Thus, this dynamics gives a chance to restore the kiwi.
An attempt to gain a foothold below the support level of 0.62 failed. The Kiwi is consolidating, but it should go higher to the resistance zone 0.6370 / 80 for a second attempt. The resumption of decline without correction can occur only against the background of a large-scale resumption of panic sales, which requires a new unexpected news item.
AUD/USD
The RBA, following a meeting on Tuesday morning, lowered the discount rate from 0.75% to 0.50%. The decision was expected and did not lead to an increase in the volatility of the Australian dollar. In the accompanying statement, the lion's share of the comments was on the coronavirus. According to the RBA, "the decision was made to support the economy, as it responds to a global outbreak of coronavirus." Moreover, RBA also stated that it is expected that the Australian economy will return to a trend of improvement as soon as the coronavirus is localized.
It seems that all the problems of the Australian economy are associated exclusively with the virus. But is it? AiG reports that the index of activity in the manufacturing sector in February declined to 44.3p. This is a clear slowdown, but it was at 45.4p in January, despite the fact that the virus has not yet appeared. On the other hand, inflation in February decreased by 0.1% according to TD Securities, while building permits issued in January was by 11.3% less than a month earlier, and in annual terms the dynamics of the construction market was 11.3%.
Corporate Profit in Q4 2019 -3.5%, is actively declining. What does the virus have to do with it? One gets the impression that the virus is just a very convenient reason to start stimulation and try to mask the approach of the crisis, which without any virus is actively occurring.
The estimated Aussi price is much higher than the spot price, while according to the CFTC report, the short position has been actively increasing in the last week, and, strangely enough, it is still less than in December.
Now, if we focus on the estimated price, then we must proceed from the fact that the active sale of Australian currency from last week was emotional. The AUD was oversold and corrective growth is likely. The goal is the resistance zone of 0.6660 / 80, but if the fair price decreases, then the upward correction will be low.
