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Coronavirus and markets in the week  31/3 – 6/4/2020

In the markets it is said that when America is coughing, the world has a fever. This has been confirmed many times in past crises, and it is confirmed now as well. As the pandemic epicenter moved to the US, alarming economic signals are beginning to emerge. Another record number in claims for unemployment insurance in the US and the weak eurozone PMI in the area of ​​services prove it. It turns out that in times of uncertainty, investors rely on the US dollar, which strengthened last week despite bad data in the US.

Fundamental analysis

EU finance ministers will discuss additional support possibilities this week to help countries affected by the pandemic. There was also news on Monday afternoon that the US was planning further support. These reports helped grow the Australian and the New Zealand dollars. Strengthening of the euro began on April 7 in the morning too. However, a coronavirus vaccine is still not available. 
 

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

 
  •  
  • The total number of infected as at April 6, 2020 already exceeds 1,350,000 cases, almost double of that since the last week. The highest numbers are in the USA (368,000), Spain (137, 000), Italy (132,000), Germany (103,000), and France (98,000).
  • The Reserve Bank of Australia left the key interest rate unchanged at 0.25% on April 7, 2020.
  • China is beginning to revive production. Caixin manufacturing PMI in the production on April 1, 2020 positively surprised when it reached 50.1 (previous data was 40.3).
  • The euro area CPI index for March fell to 0.7% year on year basis. Previous data from March 18, 2020 was 1.2%.
  • The EU PMI index in production reached 44.5 (previous figure was 44.8). PMI in services fell to 26.4 (the data for the previous period was 51.6). By comparison, in the 2009 financial crisis, the lowest value of this indicator was 38.9.
  • The USA reported another record number of 6.6 million job seekers (twice a week) in unemployment insurance claims. The number of lost jobs (NFP indicator) decreased to – 701, 000.
  • US unemployment rose to 4.4% in March (3.5% in the previous month).

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 strengthening of the instrument, a negative number means weakening. 



 
Table 1: COT report - position of large traders
 
Instrument Data as OF
4/4/2020
Data as OF 
27/3/2020
Data as OF  20/3/2020 Data as OF
 13/3/2020
Sentiment
Euro 74 200 61 300 32 500 -12 700 Strong bull
Japanese jen 18 300 23 900 32 900 8 200 Bullish
Australian dolar -31 700 -25 200 -28 700 -54 000 Bearish
Canadian dolar -21 900 -29 200 -9 600 -2 000 Bearish
USD index 14 100 12 500 7 200 12 400 Strong bull
The euro has a bullish sentiment for the 3rd consecutive week as the overall net positions of the large traders rise. However, this has not been reflected in the price of the euro against the US dollar yet. The bullish sentiment continues with the Japanese yen, although the overall net positions are slowly declining here.

Net positions on the USD index rose for the second week in a row, explaining the appreciation of the dollar last week against almost all currencies. So far, the US dollar has ignored bad economic data from the US. However, their effect should gradually become apparent.
For the Canadian dollar, total net positions rose. It is possible that this reflects the prospects for improving in the oil market and the potential agreement between Russia and the Saudis to reduce production.

The reason for the negative sentiment on the Australian dollar is dependence on the Chinese economy, which is strongly affected by the pandemic coronavirus. It seems that improving the economy in China could lead to a turnover and a strengthening of the Australian dollar.

 

Technical analysis of selected instruments as of April the 6th, 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 long been in a downward trend and last week this trend was confirmed, see Figure 1. Overall, it is interesting that despite the gradual rise in long positions on the euro according to the COT report, the price of the euro weakened against the USD. The reasons for the decline in the euro last week were both bad data from the euro area and the fact that the US dollar is now viewed by investors as the safe currency number one. 

Figure 1: The EURUSD currency pair on the daily chart

The price  created a new low at point B. This is another new low and confirms that the pair is in a downward trend. EMA 50 is below SMA 100, which also confirms the downward trend. The price reflected the first resistance on Fibonacci level of 61.8%. Currently the price is approaching the support in point B. The price is now on the level as it was on February 20, 2020, from where it gradually increased to a point A. We will see if it turns up from here again. To confirm the change of direction, it would be good to wait for some bullish reversal candlestick pattern.

Further developments in the euro will be influenced by information on support for the euro area economy, which may be available at the end of the week. If an agreement is reached, this could be a positive signal for the euro.

At the same time, however, data from the US on unemployment insurance will be reported on Thursday. We will see if there is another record increase in this indicator and whether investors will still trust the dollar, which could then push the euro to lower levels again.

The closest resistance is in the band 1.1150 - 1.1170. Strong support is in the band 1.0630 - 1.0680.

 

The USDJPY currency pair 

 

The yen is historically considered a safe haven, so in times of crisis we often see that it is strengthening, so the USDJPY should fall. However, this was not the case last week when the Japanese yen depreciated against the US dollar. This pair sets two world reserve currencies against each other and it turns out that the US dollar is currently preferred to the yen. However, due to bad US data, a turnaround could occur soon. 
 

Figure 2: The USDJPY currency pair on the daily chart

The price has now approached SMA 100 moving average resistance and at the same time filled the first hidden gap formed on a daily chart. The upper level of the next hidden gap is on 110.655, which is also close to the last swing at a point D, where there is a significant resistance. If the price reaches this level, it could turn around. It will be appropriate to wait for some bearish candlestick formation for confirmation.

It is still true that the currently low interest rates on the US dollar, the negative outlooks for the global economy and the position of large speculators support the likelihood of a further decline in this currency pair. The downward trend is also confirmed by the fact that EMA 50 is below SMA 100.

The current resistance is in the band 111.20 - 111.70. The closest support is in the band 106.90 - 107.20.

 

The USDCAD currency pair


The Canadian dollar weakened slightly last week due to low oil prices. The agreement between Russia and Saudi for reducing oil production is not confirmed yet. Once the deal is concluded, it could be a signal for the Canadian dollar strenghtening.
 
Figure 3: The USDCAD currency pair on the daily chart

The closest support was created in the band 1.3910 - 1.3960. Another significant support is on the level of 1.3730-1.3800, where the moving average EMA 50 is and at the same time the previous resistance turned into the support here .

Significant resistance is in the band 1.4600 - 1.4660. There was a sharp price rejection here, so if the price approaches this point in the future, it is possible that the decline could be initiated again.


The AUDUSD currency pair


This currency has weakened strongly in the current crisis. This is justified by the link between the Australian economy and China, to which it exports industrial commodities such as coal and iron ore. 
 
Figure 4: The AUDUSD currency pair on the daily chart.

Overall, the pair is in a downward trend confirmed by the lower low at point B, which is also the closest support on 0.55. If the price breaks this support, it can be expected to fall to 0.4750, where the lowest value since 2001 is.

Last week, the Australian dollar weakened due to the overall Risk Off market sentiment. But the bull candlestick on April 6, 2020 suggests that the price could now head up to some other resistance. The closest resistance is in the band 0.6170-0.6200. Significant resistance is in the band 0.6440 - 0.6470, where the previous support was broken and at the same time there is Fibo 61.8% of the move between points AB. 





 
 

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