Posted on: 19 Feb, 2020
As Apple sparks renewed concerns over the spillover effects of the COVID-19 to the global economy, the market is back on the defensive, with the usual suspects (AUD, NZD, EUR) selling off, while the Yen and the US Dollar cement its grip as the top performing currencies this year. The demand in Gold also tells us a lot about the current period of uncertainty. Plenty to be updated with today.
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The Daily Edge is authored by Ivan Delgado, 10y Forex Trader veteran & Market Insights Commentator at Global Prime. Feel free to follow Ivan on Twitter & Youtube weekly show. You can also subscribe to the mailing list to receive Ivan’s Daily wrap. The purpose of this content is to provide an assessment of the conditions, taking an in-depth look of market dynamics - fundamentals and technicals - determine daily biases and assist one’s trading decisions.
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The behavior in currencies has re-aligned with the overall COVID-19 induced growth concerns, this time kick started early on Tuesday after Apple downgraded its revenue guidance, attributing the setback to constrained iPhone supply and suppressed demand in China. This led to a cascade of selling pressure in those currencies most fragile to the Chinese growth story, that is, the Aussie and the Kiwi, while the Euro’s free-fall won’t stop either after a much worse-than-expected German ZEW readings, which reflects the the feared negative effects by German enterprises of the Coronavirus epidemic in China on world trade. However, the story of the day was the strong gains in Gold, surpassing the $1,600.00 mark. The USD continues to be the king of Forex, proven to be extremely resilient since the outbreak of the virus. The Yen has shown more two-way volatility through this same period, but it’s starting to catch a bid tone once again, not surprisingly, ever since a key test of support in the JPY index. The Pound, bolstered by healthy employment figures in the UK - the employment rate rose to a record high of 76.5% - has also been a beneficiary of the latest market drivers. Remember, the Pound has been very much immune to the unfolding COVID-19 drama so far, instead, it trades as a function of local economic fundamentals and Brexit/politics. Another currency that keeps displaying a great performance is the Canadian Dollar, so far unfazed by the pick up in risk-off, even if it’s hard to see the BOC retaining a neutral stance if global growth suffers and the price of Oil continues to fall as a result. Lastly, the Swissy is a currency that has been gradually debilitating, yet it finally found pockets of demand as the risk aversion kicked in.
The indices show the performance of a particular currency vs G8 FX. An educational video on how to interpret these indices can be found in the Global Prime's Research section.
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
Apple sets risk-off tone: Markets traded more cautiously, with the rise in the Yen or Gold (story of the day), a reality check for investors about the severe impact that COVID-19 is having on growth prospects. What triggered the wave of risk aversion was the news that Apple downgraded its forward guidance. Apple said it does “not expect to meet the revenue guidance provided for the March quarter” due to coronavirus related issues, with constrained iPhone supply and suppressed demand in China the culprits. The official statement can be found here.
Apple's official statement: As part of Apple’s announcement, it outlined two critical factors as the source of the lower projected earnings (a) “while all of [our] facilities have reopened, they are ramping up more slowly than we had anticipated” (e.g. workers are stranded in quarantine zones); and (b) “All of our stores in China and many of our partner stores have been closed. Additionally, stores that are open have been operating at reduced hours and with very low customer traffic.”
Insights into Apple’s story: "The suppliers are doing their best to produce and ship the iPhone within four weeks. ...The delay can't be too long, otherwise, it will affect the sales strategy of Apple's new products in the second half of this year," a source with direct knowledge told Nikkei.
True risk-off profile: This new round of risk aversion led to steady selling in equities from Asian all the way to America, global bond yields, a major spike in the price of Gold above the $1,6000 level, or buying pressure in the Yen as well. Investors seem more interest in reshuffling their portfolios away from risk-seeking strategies and into safe-havens once again. The USD remains the king in FX, even ahead of the JPY, while the Euro keeps suffering.
EUR selling goes on: The sell-off in the Euro came courtesy of a disastrous data release out of Germany, this time in the form of Germany’s February ZEW survey, which saw major declines across the board. The current situation came at -15.7 vs -10.0 expected, the expectations came at 8.7 vs 21.5 expected, while Eurozone expectations stood at 10.4 vs 25.6 prior. The setback is a direct reflection of the dampened sentiment on COVID-19 woes. “The feared negative effects of the Coronavirus epidemic in China on world trade have been causing a considerable decline of the ZEW Indicator of Economic Sentiment for Germany”, the ZEW report notes.
NCOVID19 a protracted headache for the global economy? According to the Research Team at NAB, “the debate on whether NCOVID-19 is a transient economic shock or worryingly a more longer lasting global economic headwind appears to be shifting in favour of the latter following Apple’s admission that it does not expect to meet revenue guidance given just two-weeks ago.”
Moody's lowers China’s growth outlook: Moody’s lowered China 2020 growth forecast to 5.2% from 5.8%, with the official statement outlining that the revision reflects a severe but short-lived economic impact. Moody’s expects weaker demand and disruptions in the supply chains to lower Asian growth too. Moody’s said that the coronavirus creates new risks to the prospects of incipient stabilization of global growth this year resulting from truce in the US-China trade war.
Conflicting reports about 'business as usual' in China: When it comes to the situation on the ground in China, China’s Global Times reported that “more than 80% of the 20,000 manufacturing firms supervised by State-owned Asset Supervision and Administration Commission of State Council have resumed production”, with the news outlet highlighting that the operating rate of petroleum, communications and transportation has reached level between 95% and 100%. However, key metrics such as pollution levels and traffic congestion are not matching these inflated levels that the government is promoting.
Green shoots in the UK employment data: The UK December average weekly earnings came a tad softer at +2.9% vs +3.0% 3m/y expected, while the average weekly earnings (ex bonus) was +3.2% vs +3.3% 3m/y expected. The ILO unemployment rate stood at 3.8% vs 3.8% expected, with the employment change coming strong at 180k vs 148k expected. The January jobless claims change was 5.5k. The unemployment rate remains very tight in the UK, and encouragingly, the employment rate rose to a record high of 76.5% after the +180k change in employment. The Pound had a solid performance finding strong demand through the European hours.
RBA minutes still sees case for further rate cuts: The RBA minutes did not add new insights to its existing stance, especially after the recent appearances by Governor Lowe and the SoMP release. On the case for further cuts, the RBA noted that it could “speed progress towards the Bank’s goals and make it more assured in the face of the current uncertainties.” The RBA continues to note that an extended period of low rates is required. Unemployment data will continue to be key to the RBA’s decision. On COVID-19, it said “coronavirus is a new source of uncertainty for the global economy, too early to judge impact.”
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The indices show the performance of a particular currency vs G8 FX. An educational video on how to interpret these indices can be found in the Global Prime's Research section. The idea of this analysis is to complement one’s daily bias by accounting for this holistic analysis.
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The EUR index keeps extending lower with the bearish engulfing continuation bar printed on Tuesday a clear precursor of the intentions of this market to keep selling until the next 100% measured movement, which is closing in as days go by. The technicals continue to scream that this is a market headed lower in the near term, hence one should hold the horses and stay away from aggressively looking to build long EUR inventory just yet as sellers show no signs of slowing down its grip in anticipation of a more dovish ECB as China’s COVID takes its toll. This is a market that remains a sell on strength at regular intervals until the 100% proj target.
The GBP index keeps finding buying interest with the price structure supporting the idea that this market is headed towards the previous swing high, a trade premise that is still backed up by the smart money tracker as a gauge of the short-term momentum. The aggregated flows in GBP tells me that buying on dips is still the way to go up until the next resistance. Once/if that level is reached, it will be real ‘show time’ with a tag of war between buyers and sellers for control.
The USD index has firmed up its dominance by breaking into new trend highs for the year, reinforcing the notion that seeking out buy on dip opportunities is the way to go. This bias is in complete agreement with both the price structure and the momentum via the smart money tracker. Just as in the case of the EUR the technicals show 0 indication of a turnaround, the opposite applies to the USD, the technicals show all the reasons to be a buyer. The USD remains the top performing currency in this new decade by a fair margin.
The CAD index just keeps on going building on top of its gains. The recent breakout of a key swing high last Friday has invigorated buyers, which see the ongoing momentum now supported by both the market structure and the momentum as gauged by the smart money tracker. This market has ‘buy on dips’ written all over the wall up until the next line in the sand, where I am expecting sellers to step in and longs to take profits in mass. Note, tt’s hard to see the CAD gaining much more ground if risk aversion is going to kick back in again.
The JPY index is still trading within a relatively confined range, even if buyers look to have set the sight towards the overhead resistance as the risk profile worsens. The overall macro bias remains rather positive as the market consolidates above the previous broken swing high with the smart money tracker still pointing mildly to the upside. Should the Yen see a breakout of the immediate resistance, there is a clear pre-defined target buyers will aim for as illustrated below.
The AUD index is starting to see sellers cement their grip again amid the struggle to breakout the overhead resistance, a clear line in the sand disallowing further gains. Even if this area were to be broken, there is further strong resistance lying just above, which could easily set the stage for potential bullish traps if the Aussie were to recover further. The commitment from buyers to break this tough technical level has been very poor so far. The price structure of lower lows and lower highs continues to be in place even if the smart money tracker is still bullish.
The NZD index has been unable to sustain the gains after the RBNZ hawkish surprise, with the market unconvinced that building NZD longs is the right move amid risk aversion kicking in. I must say, the areas where the Kiwi has landed it’s a pristine one to consider NZD longs as we are retesting the origin of the RBNZ-led demand imbalance after a successful rotation higher. As I said, if we were to see a gradual fading of the coronavirus concerns, which is a risky bet, knowing that the RBNZ aims to retain a neutral bias, alongside the fact that the Kiwi has been one of the worst performing currency since the COVID-19 outbreak, it offers strong upside potential, but only on the basis of the COVID-19 drama not being a long-lasting drag.
The CHF index has been rejected off a broken swing low, which now acts as critical resistance on the way up. This breach of the swing low was the first breakout of structure at a time when the smart money tracker had already re-aligned to the downside. The index trades now confined between this resistance overhead and a horizontal support line. That said, it is my observation that the buyers no longer have the upper-hand as technical readings stand.
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