Market Keeps Pricing In A 'COVID-19 Pandemic'

The best word that comes to my mind to describe what we are seeing in the equity market is 'realization'. Realization that things in the COVID-19 saga have deteriorated too rapidly to ignore. The fallout in equities is telling us investors are finally waking up to realize the world may fall into a recessionary spiral this year, hence over-riding for now any circuit breaker of excessive liquidity in the system. Amid this sour mood, funding currencies are excelling, most notably the Yen. For a full round up of the latest developments, make sure you keep reading today's report...

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.

Let’s get started…

Quick Take

Risk-off is certainly back with a vengeance with no mercy for equities, which appear to finally be ‘catching down’ to the reality of a world that faces the prospects of a recession. News that more cases are popping up in European countries (Spain, Italy, Germany...) alongside the state of readiness by some states in the US for a virus outbreak keeps spooking the market. It feels as though the market has finally caved in and now prices convincingly an upcoming announcement by the World’s Health Organization that we are facing a ‘pandemic situation’. 

The behavior in the Aussie and the Kiwi keeps playing into this view as the currencies suffer the most its proximity to China and are set to experience the greatest economic pain if the global economy stagnates. The US Dollar, although to a lesser degree, also joined the fragility in the Oceanic currencies, in what still looks like a technical correction in a very well-established uptrend this year. The weakness in the Canadian Dollar is a nascent development to also keep an eye on as the unwinding of the ‘carry trade’ back to old fashion ‘risk-off’ dynamics with Oil flirting with the $50.00 handle is far from the backdrop that would make the currency thrive. 

In this treacherous environment, the appeal towards funding currencies the likes of the Yen, the Euro and the Swissy has been re-discovered, even if a special mention must be placed to the Japanese currencies, once again reasserting its safe haven characteristics and finding no rivals for a second day in a row. In line with this outperformance by the Yen, another currency excelling on Tuesday was the Pound as it kept finding further buy-side flows just as the EU published its mandate for the upcoming post-Brexit trade talks, while on Thursday it will be time for the UK to publish theirs.

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.

Narratives In Financial Markets

* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Twitter, Institutional Bank Research reports.

The stock market rout isn’t over: It was another day of bloodbath in the equity market as new COVID-19 cases were reported in Spain and Germany, the CDC warned Americans to prepare for an outbreak at home, San Francisco Mayor declares state of emergency, while the CDC finally makes the admission that a pandemic is no longer a question of ‘if’, but ‘when’. For a full round up of the latest developments when it comes to the COVID-19, ZeroHedge as usual does a tremendous job.

Strong wording by the CDC depresses sentiment further: Nancy Messonnier, director of the CDC’s National Centre for Immunization and Respiratory Diseases in the US, said that “We expect we will see community spread in this country,” adding that “It is not a matter of if, but a question of when, this will exactly happen.” This bold statement by the CDC director added fuel to the fire and fed into the risk off sentiment seen in equities.

COVID-19 vaccine will take more than a year to be ready: The talk by the scientific community is that it will take at least 12-18 months to develop a coronavirus vaccine, which is a timeframe that far exceeds what the market can take, hence building up the rhetoric that when a pandemic is confirmed, preventive measures and a change in seasonal to warmer temperatures will be the main weapons to fight the viral infections. Trials of a vaccine are thought to still take 3-4 months and then the second round another six months. Once these phases are done, pharmaceuticals will move into production and distribution. .

Bond yields keep imploding: The US 10y and 30y bond yields registered fresh record lows, a watershed moment which tells us a couple of powerful stories to keep monitoring. Firstly, there is a decisive repricing of Fed rate cut expectations (three-quarter cuts fully priced this year, first cut priced in April). Secondly, the fixed-income market has become the go-to place to diversify into as an alternative to the rout in stocks as concerns mount that the global economy will go into recession this year.

Fed’s Clarida doesn’t take the plunge: So far, there are no new clues given by Central Bankers. In an appearance by Fed Vice Chair Clarida and right-hand man from the big boss Powell, he aimed at soothing fears by noting that “the economy and Fed policy are in a good place”, while recognizing that “the Fed is closely monitoring the virus outbreak as disruption could spill over to the rest of global economy.”

What circuit breakers exist to see a turnaround? While it feels as though we are getting deeper into the eye of the COVID-19 storm, do not underestimate certain circuit breakers that exist, which may lead to temporary relief rallies by those assets punished the most (commodity currencies, industrial commodities, equities…). I am referring to coordinated monetary/fiscal responses by developed countries (US, Europe, Japan…) as recently hinted during the G20 meeting celebrated in Saudi Arabia over the weekend.

COVID-19 international trend worsens: Other circuit breakers that may act as oxygen for the market, even if it looks premature to be counting on them to act as the onset to repair the damage, may include a gradual decrease in virus statistics, even if the trend that is clearly developing is a spread into the West with cases on the increase in a growing number of countries. The virus thrives in cold conditions, hence a transition into warmer temperatures in the West may correlate with a plateau in the number of cases. If that ends up playing out, we are not there yet.

COVID-19 over-rides economic data: The US February consumer confidence came at 130.7 vs 132.1 expected. The headline was on the soft side even if by digging into the details, we could see how expectations were slightly better by coming in line with estimates. Note, we are in one of those rare phases in the market where the COVID-19 is the overarching topic overriding everything else, so it’s hard to make an assessment that is going to be of any practical use for Central Bankers as the prospects are that is going to get significantly worse before it gets better.

The EU ready to start negotiations with the UK: The EU published its mandate for the upcoming post-Brexit trade talks, while on Thursday it will be time for the UK to publish theirs. According to the official statement by the EU, “the Council today adopted a decision authorising the opening of negotiations for a new partnership with the UK, and formally nominating the Commission as EU negotiator. The Council has adopted a clear and strong mandate for our negotiator, Michel Barnier. This confirms our readiness to offer an ambitious, wide-ranging and balanced partnership to the UK for the benefit of both sides.” The deadline is 10 months away.

Olympics at risk? According to the WSJ, citing IOC member Dick Pound, the Tokyo Olympics this summer could be a victim of the Coronavirus. The article reads, citing Mr. Pound that “as outbreaks of the coronavirus spread, it raises the possibility of cancellation or postponement of the Games.” This would be a massive blow for the expected boost to Japan’s economy, with Tokyo targeting to spend more than $20 billion on hosting this summer’s Olympic Games.

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Recent Economic Indicators & Events Ahead

Source: Forexfactory

If interested in what in my opinion is the best ‘free of charge’ News Indicator that can display data on past and future news in the Forex market via MT4, check this YouTube video I produced. The indicator allows you to save time, avoid mistakes, and it doesn’t have a sharp-looking appearance that will be diverting your attention from the price action. It’s spot on!

Insights Into FX Majors

Regular educational videos and technical analysis on how to interpret these charts can be found in the Global Prime's YouTube section. The idea of this analysis is to complement one’s daily bias by accounting for the trade premise I observe based on market structure and momentum.

EUR/USD has met the expectations for a temporary shift in order flow away from its 100% symmetrical target off the daily/weekly, and into the stickiness of its immediate resistance. The approach of price on three drives, each failing to gain much upside ground beyond the take-out of the preceding peak is of concern for bulls. Typically, the pattern that tends to play out when the conviction to penetrate into new highs is half-hearted, creating this type of compression movements, is a transition into more two-way order flow with an eventual reversal, which in this case would align perfectly with the dominant trend in the higher time frames. But that’s front-running events, what’s in front of us in the 4-hour chart is a market dominated by buyers short-term as nascent successful rotations were nonetheless achieved. The upward slope by the smart money tracker is also backing up the intraday bullish bias. Just be reminded that this daily resistance area acts as a pocket of contention that could see sellers aiming to retake control.

GBP/USD navigates through a daily range, which makes the prospects of any upside potential contained by its upper edge around 1.3070 or thereabouts. The failure to break & accept into lower lows last week triggered a shift into GBP buy-side dynamics, favored by the buying that ensued in the EUR/USD market off the 100% weekly proj target. In the 4-hour chart, however, the picture has cleared up in favor of the bulls after a decisive breakout of market structure, with the momentum via the smart money tracker also giving us the green signal. I’ve marked in a white area the key battle ground to the upside, which gives bulls significant room to exploit a further extension of the buying cycle. Note, a target of roughly 1.3070 makes logical sense symmetrically speaking as it’d align with the 100% measured movement, while even more importantly, it constitutes a double top, an ideal area for buyers aiming to find liquidity to close the building of the current long inventory campaign. A case to buy on dips is definitely present.

USD/JPY retraced very abruptly from its confluential level in the form of a 100% projection + horizontal resistance above the 112.00 area, landing back sub-110.00 handle now. This is buyers’ dominated territory, so I am expecting the re-emergence of bids at regular sequences down to 109.60, below which big pockets of liquidity are thought to be layered. To put it bluntly, the easy gains on the way down are likely done and it’s going to take a lot more ammunition by sell-side accounts to overpower what I expect to be an area clustered with strong bids. Be on high alert for entry triggers to appear in this type of areas if the long case compels you. Ideally, we want to first see a shift back to a bullish market structure with momentum via the smart money slope also picking up in the 4-hour chart. Front-running entries before these conditions are true makes it riskier but at the same time one can get better entry placements. As usual, a personal call based on one’s personal make-up as a trader.

AUD/USD shows very little new price action that may prompt a re-assessment of the current market conditions. Its downward momentum stalled at the 100% projection target, from where the market has now transitioned into a range. A resolution is needed to declutter the messiness of the shorter time frame chart well represented through the 4-hour price data sets, clearly portraying the re-balancing of flows, which leads to reduced clarity to engage in trades. I’ve marked in white a few areas where a further release of the sell-side pressure may take us to. These are liquidity pockets where sell-side accounts would aim to re-dominate proceedings by re-engaging in what’s arguably the most well defined trend in G8 FX this year.

NZD/USD is trading in lockstep with the AUD/USD as the COVID-19 saga makes both Oceanic currencies be taken to the wood sheds at a similar rate of depreciation. The path of least resistance continues to be to the downside, even if in the short timeframes such as the 4-hour chart, the market offers more two-way price action as a range was validated. The approach here, by assessing the daily chart, is to let the market play its hand once again, and if the outcome happens to be a breakout to the downside, look to re-engage short, while any rebound must be looked also as an opportunity to sell at the critical levels outlined in the 4-hour chart.

USD/CAD displays bullish tendencies off the 4-hour chart after re-taking a key sellers’ stronghold, which is now acting as an area to lean against to be a buyer on weakness. This play has yielded a predictive series of bounces so far, with the base case being that an eventual retests of the previous swing high is in store. As stated yesterday, remember that the compression pre-bullish breakout plays into the view of building long positions as sellers are now caught wrong-sided and would want to mitigate the risks. This behavioral pattern reinforced the notion of buying dips on the retest of the previous resistance. Note, an overshot of this latest trend high is a tall order to eye for as a huge sticky resistance lies immediately ahead - the upper end of the multi-month range in the daily -. This resistance has been rejected for over 6 months now, a clear testament that sizeable offers are protecting this level tooth and nail.

USD/CHF has extended its downward correction in the 4-hour chart to such a degree that is now a whisker away from meetings its 100% measured movement target, layered on top of a horizontal support where a termination of the downcycle may ensue. By assessing the daily chart, it should be clear how relevant this area has been as a reactionary level where shifts in order flow have emanated from. Going back to the 4-hour chart, so far, the current dynamics remain short-term bearish as yet another bearish successful rotation was accomplished, no doubt assisted by the buying pressure seen in the EUR/USD market.

Important Footnotes

  • Market structure: Markets evolve in cycles followed by a period of distribution and/or accumulation. To understand the principles applied in the assessment of cycles, refer to the tutorial How To Read Market Structures In Forex
  • Horizontal Support/Resistance: Unlike levels of dynamic support or resistance or more subjective measurements such as fibonacci retracements, pivot points, trendlines, or other forms of reactive areas, the horizontal lines of support and resistance are universal concepts used by the majority of market participants. It, therefore, makes the areas the most widely followed and relevant to monitor. The Ultimate Guide To Identify Areas Of High Interest In Any Market
  • Fundamentals: It’s important to highlight that the daily market outlook provided in this report is subject to the impact of the fundamental news. Any unexpected news may cause the price to behave erratically in the short term.
  • Projection Targets: The usefulness of the 100% projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100% projection, you can anticipate the area in the chart where some type of pause and potential reversals in price is likely to occur, due to 1. The side in control of the cycle takes profits 2. Counter-trend positions are added by contrarian players 3. These are price points where limit orders are set by market-makers. You can find out more by reading the tutorial on The Magical 100% Fibonacci Projection
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