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.
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
Data as of
Data as of 13/3/2020
Data as of 6/3/2020
|| 32 900
|| 8 200
|| -42 300
||- 52 000
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.