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Coronavirus and markets in the week  21/4 – 27/4/2020

The total number of coronavirus infections has already exceeded 3 million and has affected 210 countries. The positive news is that the disease is slowing down in some countries and governments are beginning to cautiously ease restrictive measures. However, the WHO continues to warn of a sharp rise in the disease in Africa, where the number of cases has increased by 40% in the last 10 days. The economic impact of the pandemic will be reflected in the USA and the eurozone GDP data for 1Q 2020 which will be reported this week

Fundamental analysis

A summary of the most significant events of the past week is here:​

  •  
  • The total number of the coronavirus infections as at April 27, 2020, is more than 3,070,000 cases. The largest numbers are in the USA (1,010,000), Spain (220,000), Italy (199,000), France (165,000) and Germany (158,000). As the growth of new cases in these countries is slowing down, governments are beginning to announce plans for easing of restrictive measures.
  • Some emerging economies, such as India where the number of new cases has risen by 60% since last week to a total of 29,000, remain at risk. The situation is deteriorating sharply in Russia, where there are currently more than 89,000 cases (last week 52,000 cases).
  • The US reported a further increase in claims for unemployment benefits. Last week, 4.4 million unemployed people in the United States applied for support. In total, more than 26 million unemployed people have applied for support since March 19, 2020.
  • Retail sales in Canada for February fell from the previous value of 0.1% to 0.0%. The impact of restrictive measures is not visible here yet.
  • The Canadian CPI for March fell to -0.6% (previous month 0.4%).
  • The German PMI in production fell to 34.4 (previous month 45.4).
  • The Bank of Japan expanded monetary incentives to the unlimited purchase of government bonds and it increased the limit for purchase of corporate bonds as well.



Let's see how big traders react to the situation and what is the market sentiment on selected instruments. The data is based on the COT report, which is regularly presented every Friday and shows the number of positions of large speculators in the futures markets in New York and Chicago. Traders use this information to decide whether to speculate on the decline or the strengthening of the instrument. A positive number means an expectation of a strengthening of the instrument, a negative number means a weakening. 

 
Table 1: COT report - position of large traders
Instrument Data as OF
24/4/2020
Data as OF
17/4/2020
Data as OF
10/4/2020
Data as OF
4/4/2020
Data as at
27/3/2020
Sentiment
Euro 87,200 86,600 79,600 74,200 61,300 Strong bullish
Japanese jen 26,000 22,600 22,400 18,300 23,900 Bullish
Australian dollar -34,800 -35,500 -35,400 -31,700 -25,200 Bearish
Canadian dollar -23,900 -23,800 -24,400 -21,900 -29,200 Bearish
USD index 15,600 15,400 15,000 14,100 12,500 Strong bullish

The euro has the bullish sentiment for 6 consecutive weeks as the overall net positions of the big players grow. However, this has not had a significant effect on the price of the euro against the US dollar yet. The bullish sentiment continues on the Japanese yen too. The negative sentiment on the Canadian dollar could be due to low oil prices, which have a negative impact on the Canadian economy.
 

Technical analysis of selected instruments as at April the 27th, 2020

The moving averages used in the charts are EMA 50 (orange line) and SMA 100 (blue line).
 

The EURUSD currency pair

 

The pair can move significantly this week as the US central bank Fed meets on Wednesday and the ECB meets on Thursday. At the same time, both economies will report GDP for 1Q 2020. The decline in GDP is generally expected, but the question is how big the decline in GDP will be and what further measures the central banks will take.

The EURUSD has been on a declining trend for a long time, see Figure 1, which is confirmed by moving averages, because EMA 50 is below SMA 100 and currently the pair also forms a declining triangle defined by DG support lines and the declining EF trend line. The bullish sentiment of the big traders has not affected this currency pair yet.

Figure 1: The EURUSD currency pair on the daily chart

At a point G, there was a false break of the support zone, which is at the level of 1.0770 - 1.0790. Another strong support is in the range of 1.0630 - 1.0690.

The first resistance can be considered the declining trend line between EF points. If it breaks, the price could continue to rise to the next resistance band 1.0978 - 1.1000.

 

The USDJPY currency pair
 

The Japanese yen, like the US dollar, is considered a safe haven, and last week the battle for which one of them is safer turned out to be indecisive as the USDJPY moved in a narrow side trend. Overall, however, there is still a bearish trend on the USDJPY, as EMA 50 is below SMA 100. Given the continuing influx of bad data from the US, this trend might continue.

The Fed will meet on Wednesday and the question is what further steps the central bank will take to support the economy and how big the decline in US GDP will be, which will be reported. If the decline is significantly worse than the expected decline of 4%, it could cause a further decline in the USDJPY. In the past, however, we have seen that weak economic data from the US led to a strengthening of the US dollar, which has retained the status of a premium reserve currency. 
 

Figure 2: The USDJPY currency pair on the daily chart

The price again approached the support at the level of 106.90 - 107.20, which has so far held the price. This is the second test now. The idea of ​​breaking through this support is also supported by the declining trend line between EF points. If this support breaks and the daily candlestick closes below this level, the price should have room for a further decline to the support in the range 105.00 - 105.30, where 61.8% Fibo of BD movement is. The nearest resistance is in the range 107.90 - 108.10 and the next resistance is then in the zone 109.20 - 109.40.

If a trader took trade with a 0.05 lot, after breaking of the current support, and he would enter with a sell order at 106.70, then if he speculated on a decline to the support 105.30, he would earn approximately CZK 1,500. Such speculation can also be made on a small account.
 

Deposit of CZK 15,000, would mean a 10% appreciation of the account.



 

The USDCAD currency pair


While the situation in the oil market continues to escalate as demand for the commodity remains low and storage capacities are approaching to their limits, which is putting pressure on oil prices which fell sharply last week, the Canadian dollar has strengthened cautiously since April 22, 2020. However, it does not look like a new trend yet, but rather a short-term correction.

The reason for this is that the reduction in oil production agreed by OPEC + in mid-April, which is due to start in May, is already proving to be insufficient to halt the fall in oil prices. Because the Canadian dollar correlates with oil until sentiment on oil changes the Canadian dollar remains vulnerable to further weakening.
 
Figure 3: The USDCAD currency pair on the daily chart

In the chart, we can see that the price reached the previous level of resistance on April 21, 2020, from which it bounced downwards. The price could continue to move lower and fill the hidden gap on the candlestick that formed on April 15, 2020.
Resistance 1 is in the range 1.4200 - 1.4340.

The nearest support is at the level of 1.3830 - 1.3870, where the Fibo 61.8% is and it is also close to EMA 50 average.


The AUDUSD currency pair


The potential decline of this pair, which we wrote about in the last article, was only short-lived when the price dropped to 0.6250. Here, it created new support. The pair then strengthened since April 22, 2020, and it is currently testing the upper level of resistance, which is defined by Fibo 78.6%. In addition, there is also the upper limit of the hidden gap on the candlestick formed on March 12, 2020.

The growth of the AUDUSD is currently supported by risk sentiment on stock indices, which are strengthening under the influence of the approval of further economic support in the US last week in the amount of USD 500 billion.

 
Figure 4: The AUDUSD currency pair on the daily chart.

The current resistance is in the range 0.6440 - 0.6470, which the price is currently testing. As this is the second test, a breakdown could occur and the price could then rise to the resistance on SMA 100 moving average or horizontal resistance in the 0.6650 - 0.6680 range. The bullish mood is confirmed by the golden cross on the H4 time frame (EMA 50 is above SMA 100), as you can check yourselves in your platforms. We plotted a growing channel defined by BED points.

The nearest support is 0.6240 - 0.6270. 






 
 

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