Coronavirus and markets in the week from 19/5 – 25/5/2020
Any news on the development of the coronavirus vaccine is an expected injection for financial markets. The news came yesterday when another company (Novavax) announced the start of human testing. Currencies are also supported by progress in easing of the lockdown measures. However, the development in Hong Kong, in which China wants to introduce a new law on national security, which, according to the USA, would cause the loss of autonomy in this area, might trigger another phase of the trade war with a negative effect on currencies.
Technical analysis as at May 25, 2020
The moving averages used in the charts are EMA 50 (orange line) and SMA 100 (blue line).
The EURUSD currency pair
The EURUSD has been moving in a declining trend for a long time, see Figure 1, which is confirmed by moving averages, as EMA 50 is still below SMA 100. The upper trend line CE was broken last week, so it is no longer valid. The lower trend line of BD still functions as a support.
The key to further development of the euro will be whether the agreement between Macron and Merkel to create a € 500 billion EU rescue fund, presented on May 18, 2020, will be approved by other EU-27 members. If so, the euro could strengthen strongly.
Figure 1: The EURUSD currency pair on a daily chart
The nearest support area is at the level of 1.0850 - 1.0870. Here, there is a hidden gap on the candle formed on May 18, 2020. Another support is in the range of 1.0730 - 1.0780. Supports are also formed by the lower trend line BD.
The band 1.0978 - 1.1020 can be considered as the first resistance. Another resistance is in the zone 1.1140 - 1.1160.
Strong resistance is also SMA 100 moving average.
The USDJPY currency pair
The USDJPY strengthened slightly last week and stopped at the resistance we identified in the last article. At the same time, the pair is moving at a moving average of EMA 50. The USDJPY currency pair has been moving in a declining trend for a long time. Also from the perspective of the last month, the price is moving downwards, gradually creating a lower low.
The US dollar is currently benefiting from being considered the world's No. 1 reserve currency, and the Japanese yen, which is also the world's reserve currency, has so far lost slightly in the battle. The Purple Extreme indicator is overbought and so the USDJPY might start to fall, especially in the case of another batch of weaker economic data from the USA.
Figure 2: The USDJPY currency pair on a daily chart
The nearest support is in the range 106.75 - 106.95, where there is a hidden gap on the candle formed on May 11, 2020. However, since this gap has already been filled, it is possible to expect a decline to the next support at 105.90 - 106.10.
The nearest resistance is in the range of 107.90 - 108.30. There is a hidden gap in this zone formed on a candlestick on April 13, 2020. The next resistance is then in the zone 109.20 - 109.50.
The USDCAD currency pair
Since March 31, 2020, the Canadian dollar has been moving in the zone of the descending triangle defined by the trend lines EF and CD as you can see in Figure 3. Both lines were tested several times. Overall, the pair has been moving in a rising trend from February 20, 2020 and the price is consolidating in the triangle pattern. The development of the price in the oil market, which the Canadian dollar correlates with, will be essential for further direction. Oil prices are currently rising. This, along with optimistic sentiment for a rapid economic recovery, could support the Canadian dollar strengthening.
It is possible to trade a given consolidation in such a way that the trader would speculate on the reaction near the trend lines of the current triangle. If the trader entered a short price of 1.4080 with a target price of 1.3870 with a volume of 0.05 lot, then if successful, the transaction would bring him a profit of EUR 68. The stop loss could be at 1.4179 which in case of failure would mean a loss of EUR 31.
Figure 3: The USDCAD currency pair on a daily chart
Resistance 1 is in the range of 1.4200 - 1.4340.
The nearest support is at the level of 1.3830 - 1.3870, where Fibo 61.8% is.
The AUDUSD currency pair
This currency pair has been moving in a strong upward trend throughout April, as did the US stock indices with which it currently correlates. Now the situation seems to be that AUDUSD is moving in a growing channel, which is defined by points CE and BG. However, tensions between the United States and China in response to China's efforts to introduce a national security law in Hong Kong could have a negative effect on the Australian dollar as Australia has very close trade relations with China.
We have seen in the past that the US-China trade war has led to a weakening of the Australian dollar. The question now is who might be interested in escalating tensions in the current economic climate of recovery from the coronavirus pandemic. China may also decide to wait 6 months for the result of the next US presidential election so there is a possibility that the situation may calm down.
In any case, in the case of a strong movement in a growing channel, such as the example shown in Figure 4, it is risky to speculate on a price decline if the price is at the lower trend line of the channel. For short speculation, it would be more appropriate to wait until the price breaks through the lower trend line and only then look for places to enter trades on the short side.