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Coronavirus and markets in the week 24/3 – 30/3/2020

Coronavirus continued to have a negative impact  on markets over the past week. As the epicenter of the disease has shifted to the US,  negative news about the impact of the pandemic on the economy are emerging. However, the light seems to be appearing at the end of the tunnel as production is starting to recover in China. This could result in a reversal of movement on some instruments. Our clients could use this situation for interesting speculation. For more details, be sure to read the rest of our article.

Fundamental analysis

In the fight against coronavirus, central banks and governments around the world are taking steps to minimize the impact of this pandemic. What stops the crisis, however, is not the economic stimulus, but the coronavirus vaccine. This is not available yet. 
 

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

 
  • ​The total number of infected with coronavirus as at March 30, 2020, exceeds 785,000. The highest numbers are in the USA (164,000), Italy (102,000), Spain (88,000), China (82,000), Germany (67,000).
  • The positive news is that the growth of newly infected in Italy has started to decline.
  • China is beginning to revive production. PMI in the manufacturing sector reported on March 31, 2020, positively surprised when it reached 52 (expectations were 45).
  • The US reported a record number of 3.3 million unemployment insurance claim applications (four times more than the previous peak of nearly 40 years ago) 
  • President Trump has signed a record-breaking $ 2.2 trillion US economic support bill. This support is targeted at sectors, firms affected by a coronavirus and also directly to households.
  • The Central Bank of Canada surprised on Friday by lowering its key rate to 0.25%. This step thus brought Canadian rates closer to other central banks.
  • The CNB lowered the rate to 1.0%. So far, the Czech koruna is still maintaining stronger interest rates against the USD and the euro, which could prevent its significant weakening if the rate is not further reduced. 

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 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 27/3/2020 Data as OF 
20.3.2020
Data as OF 13/3/2020 Data as OF
 6/3/2020
Sentiment
Euro 61 300 32 500
-12 700
 
-86 700 Strong bullish
Japanese jen 23 900 32 900
8 200
-42 300 Bullish
Australian dolar -25 200
 
-28 700 -54 000 - 52 000 Weak bearish
Canadian dolar -29 200 -9 600 -2 000 10 600 Strong bullish
Swiff frank 4 900 7 400 600 -3 200 Bullish
The bullish sentiment continued to rise strongly in the euro as long positions rose further. The bullish sentiment continues with the Japanese yen and the Swiss franc as well. Although the total number of positions for the two currencies declined, the long positions still prevail.

Significant decline occurred in the Canadian dollar, which has currently strongly bearish sentiment. This reflects the current negative outlook in the oil market and interest rate cut. It can be expected that the Canadian dollar might further depreciate against the USD.

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

Technical analysis of selected instruments as of March 30, 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 been in a downward trend for a long time. However, it strengthened strongly last week, see Figure 1: 

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. The EMA 50 is below the SMA 100, which also confirms the downward trend. The price is now approaching the first resistance level on the Fibonacci level of 61.8%. The last day candlestick of March 30, 2020, is bearish, indicating a possible turnover and weakening of the EURUSD. 

However, according to the COT report, big speculators expect rather strengthening of the euro. From the point of view of the technical analysis, the Purple Extreme indicator has exited the oversold zone which may also indicate its further rise.

So we have quite conflicting signals here. Fundamental data could, therefore, determine the next direction of movement. This week, PMI data from Germany, which have a strong impact on the euro, are expected on Wednesday. ISM PMI data will be reported in America on Wednesday, further information on unemployment benefits will be reported on Thursday and NFP data will be released  on Friday.

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 Japanese yen is historically considered as a safe haven, so in times of crisis we often see that it is strengthening, so USDJPY should decline. This actually happened last week when the pair began to decline after approaching the resistance level.
 

Figure 2: The USDJPY currency pair on the daily chart

The candlestick on March 30, 2020, however, opened and closed at approximately the same price, indicating indecision. Stock markets grew on Monday and this resulted in a halt to the decline of this pair. Further development will be indicated by the above-mentioned economic data from the USA.

In any case, the currently low-interest rates on the US dollar, the negative outlook for the global economy and the position of large speculators tend to support the likelihood 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 current resistance is in the band SMA 100 in the band 108.80 - 109.20. The closest support is near Fibonacci retracement 61.8% in the band 105.00 - 105.20.
 
 

The USDCAD currency pair


The Canadian dollar is weakening strongly due to low oil prices. 
 
Figure 3: The USDCAD currency pair on the daily chart

The USDCAD bounced off the resistance level in the 1.4600-1.4690 band last week. However, the downward movement has come to a halt, probably as a result of interest rate cuts and the price is now approaching the resistance band again.

The current sentiment according to COT suggests the USDCAD should rise, which is also supported by technical analysis, where the EMA 50 is above the SMA 100. If the price breaks the current resistance, we can expect the further movement of the USDCAD upwards. If resistance is not broken, there is room to drop to 1.3800, where the nearest significant support is.

If the trader speculated long with an entry on the level 1.4200 with the target price 1.4650, then a volume of 0.02 lot would generate a profit of approximately 1,500 CZK. This could result in an appreciation of 10% of an ESMA regulated account with a balance of CZK 15,000.


The AUDUSD currency pair


This currency pair has weakened strongly in the current crisis. This is justified by the link between the Australian economy and China, to which Australia exports industrial commodities such as coal and iron ore. In the last week, however, the Australian dollar strengthened strongly due to weak US data. The latest economic data from China was also surprisingly good. 
 
Figure 4: The AUDUSD currency pair on the daily chart.

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

The current movement indicates a correction of the current downward trend and the price is approaching the first level of resistance in the band around 0.6300. Another resistance is around 0.64500. As the center of the pandemic is shifting to America while the economy is beginning to restart in China, it is possible that the AUDUSD will continue to grow. 




 
 

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