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Coronavirus and markets in the week  7/4 – 14/4/2020

The total number of infected cases with the coronavirus has already exceeded 2 million. However, the light seems to appear at the end of the tunnel as the growth of new cases slows down. Some currency pairs reached interesting levels of resistance in the past week so some corrections or turnover could occur. The speculators on the euro have further strengthened their positions, expecting the euro to appreciate.

Fundamental analysis

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

 
  • The total number of infected cases with the coronavirus as of April 15, 2020, already exceeds 2,000,000 cases. The highest numbers are in the USA (614,000), Spain (174,000), Italy (162,000), France (143,000) and Germany (132,000).
  • The positive news is that in these countries the increase in new cases is starting to decrease significantly.
  • Some emerging economies, such as India, where there are currently more than 11,000 cases, remain at risk. The situation in Russia, where there are 21,000 cases so far, is also of concern. Very low numbers of infected are reported from Africa.
  • The Fed meeting minutes on April 8, 2020, reported that an optimistic scenario could lead to economic recovery in the second half of 2020. The worst scenario is a recession in 2020 and a very slow recovery in 2021. In both scenarios, low inflation is expected due to lower resource use and low energy prices. The scenario development depends on the development of the pandemic.
  • The Fed also states that the current situation is not comparable to the 2008-2009 financial system crisis. The current healthy banking system suggests that an economic shock caused by the coronavirus may not have long-term negative economic consequences such as the last financial crisis.
  • The US reported another, near previous record number, 6.6 million claims for unemployment insurance. In total, over 16 million applications were made in the last 3 weeks.
  • The 10-year US bond auction reached 0.782%. In February it was still 1.6122%.
  • The Canadian PMI fell to 26. In 2009 it reached its lowest value of 36.1.


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
10/4/2020
Data as OF
4/4/2020
Data as OF
27/3/2020
Data as OF
20/3/2020
Data as at
13/3/2020
Sentiment
Euro 79,600 74,200 61,300 32,500 -12,700 Strong bullish
Japanese jen 22,400 18,300 23,900 32,900 8,200 Bullish
Australian dollar -35,400 -31,700 -25,200 -28,700 -54,000 Bearish
Canadian dollar -24,400 -21,900 -29,200 -9,600 -2,000 Bearish
USD index 15,000 14,100 12,500 7,200 12,400 Strong bullish

The euro has bullish sentiment for 4 weeks as the overall net positions of the big players grow. However, the price of the euro against the US dollar was not yet significantly affected. The bullish sentiment continues on the Japanese yen.

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

Technical analysis of selected instruments as of April the 14th, 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 moving in a downward trend, see Figure 1, which is confirmed by a lower low at a point B and also by moving averages. But it seems that the impact of bullish sentiment according to COT is starting to show, as the euro strengthened last week. 

Figure 1: The EURUSD currency pair on the daily chart

The price created a new support at a point D, which is on the level of 1.076 - 1.0790. The price has reached resistance to the moving average of EMA 50. However, it seems that the price wants to rise further up. On the H4 and H1 timeframe charts, a golden cross pattern was formed (EMA 50 is above SMA 100), which also confirm the current bullish mood.

The nearest resistance is in the band 1.1150 - 1.1170. Strong support is in the region 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. This was confirmed last week when the Japanese yen appreciated against the US dollar. Given the expected bad data from the US, this trend could continue. 
 

Figure 2: The USDJPY currency pair on the daily chart

The price is now approaching the support at 106.90 - 107.20. If a break occurs here and the daily candlestick closes below this level, the price might further drop to the support in the 105.00 - 105.30 band, where 61.8% Fibo is of the BD movement.

If a trader took trade with 0.05 lot, after the break of the current support, with a sell order on the price 106.70 speculating on movement to the support 105.30, he would earn approximately CZK 1,500. Such speculation can be made even in a small account, wherein the case of a deposit of CZK 15.000 CZK, it would mean 10% appreciation of the account.

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

The nearest resistance is in the band 109.20 - 109.30.


 

The USDCAD currency pair


OPEC agreed with other countries on Sunday to reduce oil production by 9.7 million barrels per day in May and June. At first, oil did not respond to this report by strengthening, because in a context of very low demand due to the coronavirus measures, this reduction does not seem sufficient. But the Canadian dollar, which correlates with oil, strengthened slightly last week. 
 
Figure 3: The USDCAD currency pair on the daily chart

The chart shows Fibo between high and low for March. The price is now approaching the support at 1.3820 - 1.3850, where the Fibo 61.8% is and it is also close to the EMA 50 average.

The nearest resistance is in the band 1.4230 - 1.4340.


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. Currently, however, the Australian dollar strengthens along with stock indices which this pair is currently correlated with. However, the price approached significant resistance, where a turnover could occur, see Figure 4:
 
Figure 4: The AUDUSD currency pair on the daily chart.

The resistance is in the band 0.6440 - 0.6460, where the price stopped. There is a monthly Fibo of 78.6% of the move between AB points, which is the move of March. Here, the previous support was also turned to the resistance. Since this pair is generally in a downward trend, this level may be a good place to consider speculation on a decline after a confirmation signal, which may be, for example, a strong bearish candlestick on a daily chart that closes below the previous bullish candle.

The nearest support is in the zone 0.6160 - 0.6200. 





 
 

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