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Safe Haven Flows into Gold and Treasuries on China Coronavirus Contagion

Outbreak of China’s Wuhan coronavirus continued to be a big market mover last week. According to China’s own numbers, new cases in the country seemed to have slowed even though new daily deaths maintained at around 100 level. What’s worrying is that contagion to other countries, in particular Asia, is getting alarmingly serious. In particular, number of infections in South Korea skyrocketed to 433 as of Saturday. Excluding Diamond Princess liner, cases in Japan also reached 100 while Singapore at 86 is not far behind. Five deaths are record in Iran, making it the largest outside of China. The coronavirus has now spread to over 30 countries including Taiwan.

Global financial markets turned into risk-off mode, in particular towards the end of the week, with heavy safe haven flows into Gold and US treasuries. Yen ended as the weakest one as the coronavirus contagion creates economic and political uncertainties Japan. Even the 2022 Summer Olympic could now be in jeopardy. Australian dollar followed as next weakest as rebound in unemployment rate added to the case of April RBA easing. Swiss Franc was the strongest one on risk aversion, followed by Canadian Dollar. Dollar was originally one of the strongest, but ended mixed, partly due to profit taking, falling yields, and speculations of Fed cut.

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Dollar index resumed long term up trend, then halted

Dollar index originally surged last week to as high as 99.91, resuming long term up trend from 88.26 (2018 low). However, the index pared back much of recent gains on towards the end, after markets increased bet on a Fed rate cut this year (60% chance by June meeting). There seems to be some concern on the impact to the US economy, from the outbreak of China’s coronavirus, which is spreading to Asia. Safe haven flows turned more into gold instead, while free fall in yields also weighed.

Considering the depth of the retreat, 99.91 should be a short term top in DXY. Near term outlook is turned neutral for consolidation, with risk of deep correction. But downside is expected to be contained by 38.2% retracement of 96.35 to 99.91 at 98.55 to bring rebound. Current up trend is still expected to resume sooner or later to 78.6% retracement of 103.82 to 88.26 at 100.49 next.

10-year yield could break 1.429 support to 2016 low at 1.336

US treasury yields were dragged down by risk aversion, with 30-year yield hitting new record low at 1.886, before closing at 1.1918. The picture in 10-year yield is no too far from it. TNX hit as low as 1.439, just above 1.429 low, before closing at 1.471. Near term outlook stays bearish as long as 1.639 resistance holds. Current downside acceleration raises the chance of a break of 1.429. In that case, 2016 low at 1.336 would be the next target. It’s too early to tell, but if TNX is resuming multi-decade down trend, then 61.8% projection of 3.248 to 1.429 from 1.949 at 0.8248 would be the next long term target.