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 Asian currencies found support on Wednesday from a slowdown in the spread of coronavirus, but a strong dollar and caution about the rising death toll kept gains in check, while the New Zealand dollar jumped after the central bank dropped its easing bias.

Hubei, the province at the epicenter of the outbreak, reported the lowest number of new infections since Jan. 31 on Tuesday, with 1,068 new cases. China's senior medical advisor also said the outbreak might be over by April.

The U.S. dollar, which has soaked up safe-haven flows as worries about the coronavirus coincided with data showing the U.S. economy's strength, handed back some gains.

The Australian dollar , among the most exposed globally to China's economic fortunes owing to Australia's export profile, stood a percentage point above the decade low it hit on Monday. It was 0.2% stronger at $0.6727.

The euro (EUR=), also seen as vulnerable to an economic slowdown in China, clambered from a four-month low to trade at $1.0916. The Chinese yuan sat at 6.9677 in offshore trade, just below a week-high it hit overnight.

"Markets are looking at the rate of spread, the rate of infection and thinking that maybe it is leveling out and it could be time to move on," said Sean MacLean, research strategist at Pepperstone, a brokerage in Melbourne.

"But so long as it remains contained in China, and the U.S. feels isolated, the U.S. dollar continues to perform well," he said, which would hold back further gains in Asian currencies against the dollar.

Even if the epidemic ends soon, though, its toll is high.

More than 1,100 people have died in China, about 2% of people infected. The economy has also been upended, with factory closures hitting supply chains from car makers to tech firms.

Worries about the eventual fallout have prompted a big selldown in currencies exposed to China, from the tourism-sensitive Thai baht to the oil-export driven Norwegian krone .

Both have lost more than 4% against the dollar this year and have barely recovered. The Japanese yen , a barometer of risk sentiment by virtue of its safe-haven status, remains strong against most majors and was steady at 109.86 per dollar.

"(A) bad scenario of intensification and spreading of coronavirus could cause a global supply shock," said Steve Englander, head of global G10 FX research at Standard Chartered (LON:STAN).

"Behind our views is the sense that global growth momentum is not nearly strong enough for most EM currencies to brush off the risk aversion that persistent fear of the disease would bring."

The New Zealand dollar jumped 0.7% to $0.6458 after the central bank held interest rates steady, as expected, but forecast holding rates there through the year - reducing the likelihood of future easing.

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As broader gauges of implied currency volatility remain near all-time lows, pockets of turbulence are emerging in a potential signal that the foreign-exchange market could be less stable in 2020.

Take the yuan. After rising more than 1.5 per cent in the month prior to the January 15 signing of the US-China trade agreement, the currency has relinquished those gains amid concerns that Chinese growth could stumble as the coronavirus spreads. Singapore, a key financial hub, is seeing historic price swings due to angst around the outbreak.The uncertainty has helped lift Asian currency volatility to its highest level in six months and the greenback to a two-month high, a development that could rekindle efforts by the US administration to "talk down" the dollar.

In addition to anxiety about growth, the yuan may also sway more freely due to a clause in the phase-one trade deal that reaffirms commitments to refrain from competitive devaluation, said Alan Ruskin, Deutsche Bank's chief international strategist.

China "will have a harder time in general containing volatility if the US is on the lookout for intervention, or surrogate intervention," Ruskin said by phone.

Both the Australian dollar-yen and New Zealand dollar-yen are "risk blow-up pairs" and can be used as proxies for capturing potential volatility in Asia, Ruskin said. One-year volatility in both pairs is relatively cheap compared to most other Group-of-10 peers, he said.Record low implied volatility in Europe's common currency against the US dollar may have an outsized impact on depressing broader gauges of price swings. But it doesn't mean the euro isn't subject to choppiness elsewhere. Implied volatility in euro-Swiss franc, a barometer of global risk appetite, has climbed to a premium to euro-dollar volatility. At the lowest in more than two years in the spot market, euro-franc is teetering near a key technical level, a breach of which could spark a sharp move lower by the common currency.

Meanwhile, Eastern European currencies have also seen price swings as central bank policy rates diverge. On Thursday, the Czech central bank unexpectedly raised rates 25 basis points to 2.25 per cent to tame inflation pressures.

Whether these pockets of turbulence spread to the broader market could depend on several factors. To be sure, volatility may not return to levels seen a decade ago should central banks continue to actively use their balance sheets to manage liquidity issues or regulatory barriers to capital movement arise.

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The U.S. dollar was little changed on Tuesday in Asia ahead of Federal Reserve Chairman Jerome Powell’s testimony later in the day.

The U.S. Dollar Index that tracks the greenback against other currencies last traded 98.748, up 0.03%.

Powell will testify before Congress on Tuesday on Wednesday. With the global economy bracing for a potential slowdown due to the coronavirus outbreak, traders will focus on Powell’s take on the fallout and see if he would downplay the impact of the coronavirus.

The EUR/USD pair was near flat at 1.0909. Yesterday, the euro fell to a four-month low after data showed Euro area investor confidence missed estimates. Investors are worried that the euro area economy will weaken further as the coronavirus continues to spread rapidly.

"The coronavirus and its impact on the global supply chains is seen as a much bigger issue for Germany than for the U.S., thus EUR/USD pair is under pressure," ING said.

On Monday, the World Health Organization warned that the spread of cases among people who have not been to China could be "the spark that becomes a bigger fire".

The disease has claimed 1,016 lives in China so far, Chinese health officials reported on Monday.

The USD/CNY pair was down 0.2% to 6.9694.

Meanwhile, the USD/JPY pair gained 0.2% to 109.91 as Asian stocks recovered. Hong Kong’s Hang Seng Index surged almost 2%, while South Korean stocks also rose more than 1%.

The AUD/USD pair rose 0.5% to 0.6716. Data from the Australian Bureau of Statistics showed Australia’s December home loan lending accelerated to its highest level since July 2018.

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The U.S. dollar remained in demand Tuesday, boosted by its safe haven status as the coronavirus outbreak continues to spread and also by signs of strength from the U.S. economy.

At 03:00 ET (0800 GMT), EUR/USD traded at 1.0911, marginally up on the day, after falling to a four-month low on Monday. Similarly, GBP/USD traded at 1.2909, just 0.1% lower, having touched a two-month low of $1.2870 Monday. Futures on the Dollar Index, which tracks the greenback against a basket of six other currencies, stood at 98.773, up 0.1%, having climbed as high as 98.858 on Monday, its highest level since mid-October.

The death toll from the coronavirus continues to mount, claiming over 1,000 victims in mainland China and infecting over 40,000 people.

Measures of returning workers and passenger traffic flows within China suggested the virus had "a devastating impact on China's economy in January and February," said analysts at Nomura in a research note.

Anticipation of lower Chinese demand has has kept commodity-like currencies on the defensive for the last couple of weeks, with the Aussie dollar still close to a 10-year low and the Brazilian real, Russian ruble and South African rand all falling by between 3.7% and 5.6% over the last month.

Anticipation of lower Chinese demand has has kept commodity-like currencies on the defensive for the last couple of weeks, with the Aussie dollar still close to a 10-year low and the Brazilian real, Russian ruble and South African rand all falling by between 3.7% and 5.6% over the last month.

"The coronavirus hitting has money going into the U.S. dollar," said Westpac FX analyst Imre Speizer in a Reuters report. "You've seen a good run of economic data in the U.S., that's been another support.”

On Friday, the U.S. nonfarm payrolls for December continued to show robust employment growth, while sentiment surveys have tended to surprise to the upside.

Attention now turns to the testimony from Federal Reserve Chairman Jerome Powell to Congress, on both Tuesday and Wednesday.

The Fed has made clear its intentions to keep its powder dry regarding interest rates in the near future.

Also of interest will be the release of the U.K. gross domestic product figure for the fourth quarter of 2019, at 04:30 AM ET (0930 GMT).

The U.K. economy probably narrowly avoided a contraction at the end of 2019, with the Investing.com poll forecasting no growth on the quarter, resulting in annual growth of 0.8%.

Any upside surprise could boost a weak pound, but the tricky trade negotiations with the EU are likely to leave sterling on the back foot for the foreseeable future.

Also of interest will be a speech by European Central Bank President Christine Lagarde at 09:00 AM ET (1400 GMT). The central bank is in the middle of a major strategic review, and any comments from Lagarde over whether it changes its inflation goal will be of interest. Chief economist Philip Lane and newly-appointed board member Isabel Schnabel are also due to speak in the course of the day.

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- The U.S. dollar and Japanese yen were in demand on Tuesday, along with the bonds of both countries, as worries about the spread of coronavirus had investors heading for safe harbors.

The World Health Organization said overnight that the spread of cases among people who have not been to China could be "the spark that becomes a bigger fire".

Coronavirus has killed 1,016 people in mainland China, Chinese health officials said on Monday, though they also reported a drop in the number of daily new cases.

The dollar, seen as a safe haven owing to its position as the world's reserve currency, stood by a four month high against the euro at $1.0910 (EUR=). Against a euro-heavy basket of currencies it also stood at a four month high of 98.832 (DXY).

The greenback touched a three-month high of $0.6378 per New Zealand dollar , and at $0.6686 per Aussie dollar was not far above the decade peak of $0.6657 hit on Monday .

"It's been helped out by a lot of things," said Westpac FX analyst Imre Speizer.

"The coronavirus hitting has money going into the U.S. dollar," he said. "You've seen a good run of economic data in the U.S., that's been another support ... the vulnerable ones are the commodity countries like Australia and New Zealand."

China's central bank has moved to support the economy by cutting interest rates and flushing the market with liquidity. But with the extent of spread and its impact still unknown, investors have dumped currencies exposed to China for dollars and yen.

That left the yen fairly stable against the dollar - it last sat at 109.75 yen per dollar - but gaining steadily on other Asian currencies. Trading was subdued with Japanese markets closed for a holiday.

The Australian and New Zealand dollars have dropped more than 4% on the yen this year (AUDJPY=D3) (NZDJPY=D3). The Singapore dollar has lost 3% in as many weeks (SGDJPY=R).

U.S. Treasury and Japanese government bond prices have steadily climbed this year.

"The risk of a larger downgrade in Chinese GDP growth over Q1 20 and 2020 as a whole is gaining momentum," said Richard Grace, chief currency strategist at Commonwealth Bank.

"With China's economy accounting for some 17% of world GDP, but accounting for a significant contribution to growth in the global economy, the risk of a larger downgrade to global growth is clear," he said.

"Upside in AUD/USD is limited, and downside risks continue to mount."

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The cable has dropped below 1.29, hitting the lowest levels since November amid Brexit concerns and USD strength. Speculation about EU-UK relations and coronavirus headlines are set to move the pound, according to FXStreet’s Yohay Elam.

Key quotes

“The bloc could reportedly try to move the clearing of euro contracts from London to within the EU and may also move to withdraw concessionOfficial negotiations will kick off on March 3, but press briefings and leaks suggest talks will be tough.”

“The US dollar remains underpinned by upbeat figures such as the Non-Farm Payrolls report which showed an increase of 225,000 jobs in January.”

“Coronavirus headlines are also benefitting the greenback, which benefits from safe-haven flows. The respiratory disease has taken the lives of over 900 people with over 40,000 infected, the vast majority in China.” 

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GBP/USD Exchange Rate Steady ahead of UK GDP Figures

The Pound US Dollar (GBP/USD) exchange rate is holding its ground at the start of this week’s session as markets brace for publication of the UK’s latest GDP estimate.

At the time of writing the GBP/USD exchange rate is trading at around $1.2928, virtually unchanged from today’s opening rate.

Pound (GBP) to Slump as UK Growth Stagnates?

The Pound (GBP) looks poised to slump on Tuesday as the UK publishes its latest GDP figures.

Barring a significant uptick in economic activity in December, tomorrow’s estimate of GDP is expected to show that the UK economy stalled in the last quarter of 2019.

The likely stagnation of growth comes amid heightened political uncertainty in the UK in the run up to December’s general election.

Should growth have stalled in line with expectations in the fourth quarter, it’s also likely to keep the pressure on the Bank of England (BoE) to ease it monetary policy in the near-term, potentially opening the door to an interest rate cut in March.

Coronavirus Fears to Underpin Demand for the US Dollar (USD)?

Meanwhile, the US Dollar (USD) looks likely to remain well supported this week as markets continue to panic over the coronavirus outbreak in China.

While reports of new cases are beginning to slow, the global death toll has now risen to over 900 topping that of the Sars outbreak in 2003, which was estimated to have cost the global economy over $30bn.

Economists predict that the impact of the coronavirus outbreak on global growth will be significantly more serve due to China’s greater role in global trade, but it remains unclear just how large an impact this will be.

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Stocks slipped across the Asia Pacific on Monday as investors continued trying to gauge when economic activity might rebound after the hit from the coronavirus.

Benchmarks in Hong Kong, Shanghai, Tokyo and Seoul were lower, though moves eased following a report that Apple Inc (NASDAQ:AAPL).’s main manufacturer got a green light to resume some production. That reversed declines in U.S. equity futures, which traded slightly higher as of noon in Tokyo. The Australian dollar climbed and the yuan rose past 7 per dollar offshore. Treasuries were flat, while oil traded around $50 a barrel in New York.

With cases outside of China continuing to increase, investors will be monitoring whether the rate of change kicks up a gear. Meantime, monetary authorities across emerging markets have stepped in. The People’s Bank of China moved to keep liquidity ample Monday through reverse-repurchase agreements.

“This coronavirus seems to be going on for longer, is infecting more people and the hit to growth will be longer,” Diana Mousina, an economist at AMP Capital Investors Ltd., told Bloomberg TV in Sydney. “You won’t be able to recoup all of the negative impacts in the first quarter.”

Here are some key events coming up:

• Earnings season continues with reports including: Alibaba (NYSE:BABA), Softbank, Nissan, Airbus, Nestle and AIG (NYSE:AIG).
• Federal Reserve Chairman Jerome Powell delivers his semiannual testimony in Congress on Tuesday and Wednesday.
• Thursday brings a gauge of underlying U.S. inflation, the core consumer price index. It’s expected to increase to 0.2% in January, a faster pace than in December.
• China and the U.S. on Friday lower tariffs on billions of dollars of respective imports, as part of the trade deal signed last month.

And these are the main moves in markets:

Stocks

• Japan’s Topix index dropped 0.6%. as of 12:35 p.m. in Tokyo.
• The Shanghai Composite Index slid 0.4%
• Hong Kong’s Hang Seng Index declined 0.7%.
• Futures on the S&P 500 were up 0.1%. The underlying gauge fell 0.5% on Friday.
• South Korea’s Kospi index retreated 0.6%.
• Euro Stoxx 50 futures slid 0.1%.

Currencies

• The yen was little changed at 109.80 per dollar.
• The offshore yuan ticked up 0.2% to 6.9952 per dollar.
• The euro bought $1.0951, little changed.
• The Australian dollar gained 0.4% to 66.97 U.S. cents.

Bonds

• The yield on 10-year Treasuries was steady at 1.59%.
• Australia’s 10-year yield declined two basis points to 1.02%.

Commodities

• West Texas Intermediate crude oil fell 0.2% to $50.22 a barrel.
• Gold was little changed at $1,570.41 an ounce.

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The Chinese yuan benefited from the stronger tone in the country’s equity markets Tuesday, although concerns about the widening coronavirus outbreak have kept the gains capped.

At 03:05 ET (0805 GMT), USD/CNY traded at 6.9935, down 0.4%, pushing back below the 7.0 level after breaking through that barrier Monday for the first time this year.

The country's central bank has tried to mitigate the economic damage caused by the coronavirus by trimming interest rates and injecting 1.2 trillion yuan of liquidity into the markets.

Most expect more measures ahead.

"Chinese authorities have been providing a lot of support for the financial markets. There's a level of assurance that the rout would not be allowed to go on much further than necessary," said Christy Tan, head of markets strategy for Asia at National Australia Bank in Singapore.

Still, the number of coronavirus deaths in China continued to climb, reaching 425 as of the end of Monday, from over 20,000 cases, a mortality rate of barely 2%.

Elsewhere, the US Dollar Index Futures, which tracks the greenback against a basket of other currencies, pushed up 0.2% to 97.767, helped by stronger than expected manufacturing sentiment data late Monday and weakness in sterling.

“The ISM manufacturing index has surged back into positive growth territory. The Phase One trade deal between the US and China has lifted much of the gloom hanging over the sector with businesses responding positively,” said ING, in a research note.

Sterling was weak Tuesday as Prime Minister Boris Johnson and Chief EU Negotiator Michel Barnier laid out opposing visions for the relationship between the two groups post-Brexit.

Fears still exist that the U.K. could end the transition period at the end of this year without a trade deal.

At 03:05 ET (0805 GMT), GBP/USD traded at 1.2957, down 0.3%, near a seven-week low.

Overnight, the Australian dollar rose after the Reserve Bank of Australia decided to hold the official cash rate steady at 0.75%. The decision was largely in line with expectation, but analysts do look for another rate cut in the near future.

At 03:05 ET (0805 GMT), the AUD/USD pair traded 0.4% higher to 0.6717.

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The dollar held firm on Tuesday after a key U.S. manufacturing survey showed a surprise recovery, while concerns about a widening coronavirus outbreak in China kept the yuan and the Australian dollar subdued.

The dollar index (=USD) rose 0.44% on Monday, the biggest gain so far this year, and last stood at 97.802. It was boosted by a report from the Institute for Supply Management (ISM) reported that U.S. factory activity unexpectedly rebounded in January after contracting for five straight months amid a surge in new orders.

Against the yen, the dollar traded at 108.62 yen , after a gain of 0.3% on Monday, the biggest gain in a downtrend that started in mid-January.

The euro stood at $1.1062 (EUR=), having slipped 0.3% on Monday.

In Asia, coronavirus remained in focus as the number of cases and deaths showed little sign of slowdown.

"The question is how long it will take to contain the epidemic. While some people are selling risk assets, there are also lots of people who are looking for a chance for bargain-hunting," said Ayako Sera, market economist at Sumitomo Mitsui Trust Bank.

"If we start to see a decline in the number of new cases, then we could see an end. But at the moment, it is hard to say when that will happen."

The offshore yuan traded at 7.0127 yuan per dollar , holding slightly above its one-month low of 7.0230 per dollar hit in European trade on Monday.

The Australian dollar fetched $0.6690 , within sight of its 10 1/2-year low of $0.6670 touched last October, ahead of an interest rate decision Reserve Bank of Australia (RBA) due later in the day.

Although most investors expect the RBA to keep rates on hold at this month's meeting, a cut has not been completely ruled out, with markets pricing in a 100% chance of such a move by May.

Elsewhere, sterling fetched $1.2999 , having lost 1.54% on Monday on renewed worries about Britain's relations with the European Union. Prime Minister Boris Johnson set out tough terms for Brexit talks with the European Union, rekindling fears Britain would reach the end of an 11-month transition period without agreeing a trade deal.

Traders are also casting an eye on the U.S. state of Iowa, where Democrats are kicking off a process to choose a challenger to President Donald Trump.

Market players say a victory by a progressive candidate such Senator Bernie Sanders and Elizabeth Warren could hurt shares and lift safe-haven currencies as some of their policies are thought to be not in best interests of Wall Street.

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