Posted on: 25 Feb, 2020
The market is clearly developing a growing correlation between the proximity of the virus to the Western world and fear in market participants as well as government. Equities are 'catching down' to this reality, re-connecting with the dreadful fundamentals that exists if the worst case of a global recession plays out. In the Forex market, we are observing some interesting dynamics too, with the US Dollar softer relative to the likes of the Euro of the Japanese Yen. Keep reading to make sure you don't miss any important details...
To our Market Insights
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…
It is fair to say that the market has definitely hit the panic bottom as equities suffer drops to the tune of nearly 4%, while bond yields continue the dramatic falls, all indicative of a market that is pricing in, at this pace, a global recession this year. The culprit? The spreading of COVID-19 to the West. It is precisely this proximity of the virus to the West that the market is finally picking up, no longer complacent, as we clearly observe a developing and growing correlation between the proximity of the virus to the Western world and fear in market participants as well as government. Besides, the more the virus spreads outside China, the more the tail risk for the markets as the international monitoring of the COVID-19 stats will be much a more accurate representation of the evolution of this disease after allegations of the rigged methods by China. In the currency market, most of the selling towards the Oceanic currencies (AUD, NZD) got done during inter-market dealings, with surprising resilience afterwards. This comes to show why through these daily reports I monitor market symmetries as a location to estimate order flow shifts, which is precisely what I was expecting in the EUR/USD, and as a result, softer buy-side commitment of the US Dollar across the board for the time being, even if the currency remains ‘hands down’ the king of forex this year. The fast that the market sees three quarter rate cuts by the Fed this year may help explain the under-performance of the USD on Monday too. The Canadian Dollar, amid a collapse in the industrial commodity complex, with Oil the most punished, could no longer ignore these dynamics and imploded. New COVID-19 cases in Canada also weighted. Interestingly, it didn’t take long for the Yen to re-discover its safe-haven appeal, further reinforcing the belief that last week’s debacle in the currency may have been a major readjustment by Japan’s GPIF (pension fund). Unlikely we’ll ever really know what exactly happened that day. Lastly, the Pound traded on the soft side without specific catalysts of note.
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, Twitter, Institutional Bank Research reports.
If you found this fundamental summary helpful, just click here to share it!
Collapse in risk as COVID-19 fears go sky-high: As fears of the coronavirus spreading internationally mount, with South Korea, Europe and other countries the latest hit by the disease, we’ve seen a major collapse in the value of both equities and bond yields around the globe. Main indices in Europe and the US were down nearly 4% as panic selling settles in, the US 30-year bond yield prints yet another record low, Gold balloons past the $1,670 mark, the Japanese Yen re-discovered its safe-haven bids by surging vs its main peers, while in the industrial commodity complex, Oil is the most punished down over 4%.
WHO refuses to call it a pandemic yet: The WHO's Chief Mr. Tedros said that the rise in cases in Italy, Iran and South Korea are 'deeply concerning, while re-affirming that even if “the coronavirus has pandemic potential”, the WHO does not yet consider it a pandemic, despite noting “increases in cases outside China are concerning. Tedros notes that “at the moment we are not witnessing the uncontained global spread of this virus and we are not witnessing large-scale deaths, hence we must focus on containment while preparing for a potential pandemic.” The number of confirmed cases of COVID-19 has expanded to over 30 countries, with the worldwide death toll over 2,600. A summary of the latest COVID-19 developments can be found here.
COVID-19 direction moving away from China: These latest developments, according to Quincy Krosby, chief market strategist at Prudential Financial Inc., “show the path of the virus -- you have the duration, how long this is going to last and you have the direction -- and the direction is moving away from China and moving onto areas that we haven’t seen before,” she said. “If this were to hit the U.S. in ways -- and remember the U.S. is large -- in ways where in New York City, and LA and Chicago started to see the number of cases starting to build and folks actually in hospitals and dying, you’re going to see people much more nervous.” Readers should be reminded that yesterday I cited Kai Kupferschmidt, Science journalist and molecular biologist at Science Magazine, as part of a series of Tweets he had posted, where he warned that “the last few days have felt like a profound shift in the epidemic as we are clearly entering a new phase.”
What is new for the markets? Alec Young, managing director of global markets research at FTSE Russell, describes it perfectly, when noting that “what’s new is that we’re getting significant outbreaks in Italy, for example. It happens to be close to Milan, which obviously is the financial center of Italy and it’s also close to southern Germany and Switzerland, which together that region is really the manufacturing hub of Europe. That’s new,” he said. About the mechanics of the COVID-19, which are so hard to grasp in a time-efficient manner by markets, Young said “this issue is very unusual in markets where information normally comes pretty quickly, and it can be discounted. This issue by definition comes in dribs and drabs over a period of many weeks and months. It’s very dangerous. A lot of people were too dismissive of this too early.”
Proximity of the virus to the West: The market is clearly developing a growing correlation between the proximity of the virus to the Western world and fear in market participants as well as government. If we throw into the mix that an outbreak of the virus outside China means truth finally coming to the surface on the real ramifications of the COVID-19, then it significantly increases the tail risk in the markets. The reasoning, as I stated in yesterday’s note, is that the international monitoring of the COVID-19 stats will serve as a more accurate representation of the true evolution of the virus as these are countries where robust processes of transparency will be implemented to report the real situation as opposed to China.
Market sees three quarter rate cuts by the Fed this year: The US money markets are now pricing 0.75% worth of rate cuts by the Federal Reserve. One quarter-point rate cut is fully priced by June, while the rest of cuts are almost fully priced by November, time when the Presidential election takes place. Meanwhile, the US 10-year Treasury yields dropped another 10bps to a low of 1.375%, not too far from its record low of 1.318% . The economic impact of the viral outbreak, in view of bond traders, will trigger a monetary as well as fiscal response by some countries, including the US. This relaxation in US monetary policies may help explain the underperformance of the USD on Monday.
How will the ECB react to COVID-19? The increase in Covid-19 cases in Italy over the weekend, in view of Morgan Stanley Economics Team, implies increased risks to euro area growth. The team wrote the following thoughts as the situation unfolds. “Extra domestic disruption would be expected if the outbreak were to expand materially across the region, pushing us towards a more bearish economic scenario, with increased pressure on the ECB and governments to provide further support the economy. We see pressure for an extra cut and possibly extra QE.” In terms of fiscal policy support, the bank’s Economists note that “could play a bigger role in this scenario, with Europe’s finance ministers showing greater openness to coordinate policies.”
What’s the drop in yields telling us? Jim Paulsen, chief investment strategist at Leuthold Group, shared his thoughts on what it means having the US 30-year yield and the 10-year yield at record or near record lows. “I think that is a bigger culprit behind the sell-off than most appreciate. I think the bigger thing in the room is the bond market and the bond market seems to be suggesting some near-term calamity while stocks seem to be ignoring it and it’s creating a lot of fear.” There is already talk emerging of a global recession, predicated on the basis that international businesses will struggle to continue to function in a world where borders start to get shut. Amid this pessimistic backdrop, it also means coordinated easing by Central Banks.
G20 is ready to step up: As a reminder, the G20 has pledged that it is ready to step up its efforts with a decisive response in the wake of the COVID-19 outbreak outside China through coordinated fiscal stimulus as it raises uncertainty and disrupts supply chains. The official communique read “agreed to be ready to intervene with the necessary policies related to risks.” China’s Xi said that “the outbreak of novel coronavirus pneumonia will inevitably have a relatively big impact on the economy and society.” A summary via Reuters can be found here.
German IFO on an unjustifiably increasing path? Germany’s February IFO business climate index came at 96.1 vs 95.3 expected, the expectations printed 93.4 vs 92.1 expected, while the current assessment was 98.9 vs 98.6 expected. Traders should not let this temporary improvement in business morale through February override the current concerns surrounding the coronavirus outbreak. Even if the IFO institute notes that the domestic economy does not seem to be affected by the virus situation, chances are the data still has to catch up to the worsening of conditions. Last Friday, Phil Smith, Principal Economist at IHS Markit, as part of the German Feb flash PMI, said that it looks like the Feb datasets still don’t fully represent what’s to come: “February’s ‘flash’ PMI results show that the German economy managed to eke out another marginal increase in business activity, despite a fresh setback to exports in the wake of the outbreak of the coronavirus.”
SNB is back on intervention mode: The SNB is stepping up its commitment to defend the strong Franc after it broke the 1.06 handle against the Euro, in a move that may have triggered intervention. As Bloomberg notes, “the amount of cash commercial banks hold at the central bank, known as sight deposits, rose by 2.1 billion francs ($2.1 billion) last week, the largest increase since early January, data on Monday showed.” SNB’s modus operandi is not to disclose intervention activity, hence, as Bloomberg adds, “analysts are closely scrutinizing the sight deposit data for clues.” “It looks like the SNB intervened,” said Credit Suisse economist Maxime Botteron cited by Bloomberg, adding that “we’ve got to prepare for more interventions,” Botteron also said.
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!
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, on the back of testing a weekly 100% symmetrical target, has confirmed its most significant shift in order flow since Jan 29th. The lower timeframe, specifically the H4, showcases a market dominated by buyers short-term as portrayed by the successful rotations to the upside seen, which has the backing of the upward slope by the smart money tracker, meaning this is a market that is attuned with it structure and momentum. Note, for the education of the reader, that this evolving bullish pattern comes on the heels of a compression into the lows, a typical behaviour that implies distribution, in other words, a pick up in shorts closure activity. Considering the bullish bias occured at such a macro level in the chart (100% proj target), this may be a meaningful bottom even if an overhead resistance tough to crack is nearby.
GBP/USD has validated the establishment of a daily range after the failure to break & accept into lower lows. This is an important concept to grasp. Not only the breakout is necessary which actually did occur, but price must accept below in whatever timeframe we are monitoring, to validate that the trade premise, in this case a bearish bias, remains true. This failure has raised the prospects of choppier price action in lower timeframes. In the H4 chart, the structure remains bearish, and even the momentum has been re-confirmed via the smart money tracker, but I remain skeptical for now as the price has failed at the daily support again, with a sizeable tail, which implies buyers have drawn a line in the sand for now. I’ve marked in white areas the key fighting grounds on the upside between buyers and sellers going forward. Until buyers don’t find acceptance above the immediate resistance, the upper hand is still for sellers structurally wise, even if as I said, the risk is increasing that these get caught wrongsided. An acceptance below the line of daily support removes this danger for sellers near-term.
USD/JPY stopped in its tracks at the confluent level of the 100% projection, and to be honest, I didn’t think it would turn back down in such a rapid fashion. The interaction with such strong resistance at 112.15, coupled with the velocity of the rally, was a clear risk. But fast forward to Tuesday, and after the fall seen, it makes further downside progress much harder to come by, with the reason being that the market is fast approaching the origin of a the strong demand from last week. More often than not, this leads to unfilled buy orders to overpower the line-up of offers temporarily, hence why you want to be on high alert for your personal favorite price action triggers to appear in this type of areas if looking for longs. Just be aware that while structurally wise this is a market with bullish signs written all over the wall, the momentum must readjust back up, as the aggressive selling has turned the smart money slope in the H4 bearish now. Front-running entries before this indicator returns to bullish territory offers the benefits of better entry placements but carries more risk of price going further against you.
AUD/USD paused its downward momentum at the 100% projection target, which hopefully reinforces the notion among the readership that these symmetrical patterns are instrumental to your ability to read market structures. The market has now transitioned into a range as a result of this temporary exhaustion in sell-side interest, which as a reminder, makes logical sense structurally wise, as the 100% proj measure is the area that offers the least value to keep engaging, in this case in sales, technically speaking. Even if follow through occurs from here by the range breaking out, this resumption of the dominant trend is best suited to be exploitable by scalper and momentum traders with strategies designed to be in and out within hours unless the market can start testing higher levels as we remain very overstretched.
NZD/USD has entered a ranging phase in the broader context of a market that is yet to come into contact with its 100% proj target off the daily. What this means is that any rebound towards key technical areas represent an opportunity to short this market on the assumption that the bearish cycle is incomplete. Look to lean against areas of technical value, either at the top of its existing range or higher up where a key level of resistance off the daily comes at.
USD/CAD remains trapped in a broad range with the daily not offering much clues. However, asone drills down into the H4 chart, a fresh storyline has been revealed through price action. Here we can see a new bullish cycle has been validated after the take out of the previous swing high, which means that this is a market with buy on dips strategies likely to thrive on Tuesday. Besides, the sequence of bottom-side failures pre-bullish breakout is another testament that this has been a market potentially building long positions with sellers now caught wrong-sided. This behavioral pattern reinforced the notion of buying dips on the retest of the previous resistance.
USD/CHF, to a certain extent, has shown the predictive price action one could have expected judging by the location price has landed at in the chart, that is, a weekly horizontal resistance. The H4 chart, with the structure of higher lows violated last Friday, has continued to evolve in a manner conducive to see further downside after the printing of another successful rotation. This price action still places the odds for a market susceptible to be on sell-side mode until the next logical level of confluent support is met at the 100% proj + horizontal line.
Feel free to get in touch with us to find out more about our service.