Coronavirus and markets in a week from 17/3 – 23/3/2020

Coronavirus continued to have a strong negative effect on the markets last week. The winner in current situation is the US dollar, which investors consider as a strong reserve currency. The dollar index approached the value of 103, where it last moved in December 2016. However given the massive interventions to support the economy in America, the situation could change and some currency pairs could reverse very soon. Our clients could use this situation for interesting speculation.

 

Fundamental analysis

In the fight against coronavirus, central banks and governments around the world are taking steps to minimize the impact of this pandemic that we have not experienced in Europe for a very long time. Summary of the most striking steps is here:​
 
  • ECB announces € 750 billion Pandemic Emergency Purchase Program.
  • The Bank of Japan spends 2 trillion yen to support the economy.
  • Central banks cut interest rates. The Fed holds the rate in the range of 0 - 0.25%, the ECB holds the rate at 0%.
  • The Fed announced on March 23, 2020 that quantitative easing will currently have no limits. This step should have a negative effect on the US dollar.

Let's see how big traders react to the situation and what the market sentiment on selected instruments is. The data is based on the COT report, which is regularly issued every Friday and shows the number of positions of large speculators on 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
20/3/2020


Data as of 13/3/2020


Data as of 6/3/2020

Sentiment
Euro 32 500 -12 70 -86 700
Strong bullish
 
Japanese jen   32 900   8 200   -42 300 Strong bullish
Australian dolar -28 700 -54 000 - 52 000 Weak bearish
Canadian dolar -9600 -2000 10600 Bearish
Swiff frank 7400 600 -3200 Bullish

We can see a significant change in sentiment in the euro and the Japanese yen. The big traders expect the two currencies to appreciate especially against the US dollar. The euro saw a significant change from bearish to bullish sentiment last time in May 2017. At that time the EURUSD currency pair started to strengthen significantly and this trend lasted almost the whole year, until EURUSD reached a maximum of 1.2540 in January 2018.

For the Japanese yen, the reason for the change in sentiment could be that it is traditionally seen as a reserve currency that tends to appreciate in times of crisis. The argument for yen strengthening is that by lowering rates in America and unlimited QE, the US dollar lost the advantage of the interest rate differential against the yen. Bullish sentiment is also on the Swiss franc, which, like the Japanese yen, is considered as a reserve currency.

The negative sentiment on the Canadian dollar can be explained by low oil prices, which is a very important commodity for the Canadian economy. The reason for the negative sentiment on the Australian dollar is dependence on the Chinese economy, which is heavily hit by the coronavirus pandemics.

Technical analysis of selected instruments as at March 23, 2020

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

The EURUSD currency pair

 

The EURUSD sharply weakens from 10.3.2020. Support at the level of 1.1060, which we mentioned in the previous article, was quickly broken last week and this currency pair reached a minimum of 1.063. Previously, the pair was in a long-term downward trend due to weak economic data from the eurozone. 

Figure 1: The EURUSD currency pair on a daily chart

Currently, it seems that the price creates another level of support in the band 1.0630-1.0690. If it is broken down, the price could drop to 1.0500. The weakening of the euro should be supported by the fact that the countries most affected by coronavirus include Italy, France, Spain and Germany.

However, according to the COT report, big speculators expect euro strengthening. From the point of view of technical analysis, the Purple Extreme indicator is indicating that the EURUSD is sold out, which supports at least short-term pullback. The decisive factor is whether the price breaks the closest resistance in the 1.0780-1.080 band on the daily chart and closes above it. If yes, the price may rise further.  

For the short entry, it will be better to wait for the current support to break through, or until the price approaches Fibonacci retracement resistance of 61.8% at 1.1160.

 

The USDJPY currency pair  

 

The Japanese yen is historically considered to be a safe haven currency, so in times of crisis we often see that it is strengthening, so USDJPY should fall. Last week, however, the USDJPY surprised by strengthening.

Figure 2: The USDJPY currency pair on a daily chart

However, the price is approaching the level of significant resistance in the 112.00-112.40 region. Here, one could consider short trades. The moving average of the EMA 50 is below the SMA 100, which also confirms the downward trend.

The lowering of the interest rate on the US dollar, the negative outlook for the global economy and the increase in the positions of large speculators support the likelihood of a further decline in this currency pair. If the trade in the short direction was realized at the current price of 110.50 and the target price was the last low at around 101.50, the potential gain of 0.05 lot could be 10,000 CZK.
 

The USDCAD currency pair


The Canadian dollar is weakening strongly, linked to low oil prices. This is reflected in the growth of the USDCAD currency pair.
 
Figure 3: The USDCAD currency pair on a daily chart

The price is below the resistance in the band 1.4600-1.4690 and is now accumulating. Fundamentally, the strengthening of the Canadian dollar would be supported by an improvement in the oil market situation. However, the oil prices are adversely affected by the current restrictions on transport due to coronavirus and the trade war between Russia and Saudi Arabia to gain market share.

If the price breaks through the current resistance, another upward movement of USDCAD can be expected. If resistance is not broken, there is room for the USDCAD to drop to 1.3800.


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. The decline in economic growth in China has negatively affected the demand for these commodities. 
Figure 4: The AUDUSD currency pair on a daily chart.

Last week the price dropped to 0.55, where a support was created. If the price breaks through this support, it can be expected to fall to 0.4750, where it is the lowest value since 2001. Current price movement indicates a correction of the existing downward trend. Input in the short direction and speculation on a decline of the AUDUSD can be considered at some levels of resistance, for example, around 0.6300 or 0.64500. 


 
 

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