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The Swing Overview – Week 48

Positive economic data came out of the world's major economies last week, but news of a new coronavirus mutation sent risk currencies and stock indices into the red. The EURUSD currency pair fell below the magic value of 1.12. The Czech koruna is weakening in the context of the coronavirus. It is approaching an interesting resistance on the pair with the euro, which may be attractive for position traders, for whom the koruna brings attractive daily swaps.
 

The US economic data

The initial unemployment claims for the week ending November 20 reached 199k, which is the level last seen before the coronavirus. In the previous week, the number of claims was 270 thousand.
The manufacturing managers' index PMI reached 59.1, the previous reading was 58.4. New home sales were 745k in October, higher than the 742k sold in September. These economic data suggest that the recovery in the US continues.

The negative news was the information on the GDP growth, which reached 2.1% in 3Q. Analysts had expected growth of 2.2%.
 

The US dollar continues to strengthen

The US dollar strengthened especially after the US President Joe Biden formally renominated current Fed chairman Jerome Powell for a second term. This means that the continuity of the US monetary policy is assured, which is a strong positive signal for investors.

The USD index approached 97.0, the highest level of July 2020. The yield on the US 10-year Treasury bond reached 1.684% last week. However, bond yields fell sharply on Friday morning when news of a new coronavirus mutation emerged. This is due to investors shifting their focus to so-called safe haven assets, which includes US Treasuries as well. There is an inverse relationship between bond yields and bond prices.
 

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Figure 1: The US 10-year bond yield and USD index on H4 chart

 

The threat of a new coronavirus mutation has weakened stock indices

On Friday morning, report of a new coronavirus variant in South Africa, which is the most significant mutation so far, emerged. Meanwhile, some authorities are concerned that the mutation could be resistant to vaccines. This could completely bury hopes of reopening of economies. In the event of such news the markets tend to react quickly first and ask the questions later. In any case, this news has sent the major world indices into the red.

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Figure 2: US SP 500 index on 4H and D1 chart
 

The SP 500 index moved in a sideways range last week. Earlier in the week it made a new all-time high, which is now 4,744.

In the current correction, the index has approached the first support at 4,635- 4,650. Very strong support is then around 4,550, which has formed on the daily chart. If reports of resistance of the new coronavirus variant to vaccines are confirmed, it is likely that the current bullish trend could be ended. 
 

German DAX index

European countries continue to vaccinate against COVID-19 and have tightened restrictions. Slovakia has declared a two-week lockdown and Germany has crossed the 100,000 COVID-19-related deaths threshold. Austria had previously declared a lockdown, and these developments in Europe are having a negative impact on the DAX.

The manufacturing managers' index in Germany came in at 57.6, a slight deterioration from the previous month (previous reading was 57.8). The index has been declining since August 2021. The Ifo Business Climate sentiment indicator in Germany reached 96.5 which is also a deterioration compared to the previous month.


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Figure 3: The DAX on H4 and daily chart
 

In terms of technical analysis, the DAX continues to move in an uptrend, having reached a new all-time high at around 16,300. Since then, however, it has been weakening sharply. It can be seen that it has not respected the nearest support levels in doing so. Currently, it has reached the price of 15,600, where the next support is. Very strong support is in the 14,800-15,000 range.
 

The EUR/USD continues its free fall

The overall deteriorating situation with COVID-19 is mainly reflected on the European currency in the pair with the US dollar and the Japanese yen. Both of these pairs are in a strong bearish trend.  In the past week, the EURUSD saw a break below 1.12, reaching 1.1187. The EURUSD last traded at these levels in June 2020.
 

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Figure 4: The EURUSD on daily and weekly charts
 

The weekly chart shows that there is support at 1.12. However, there is no significant signal to change the trend yet. The nearest resistance is at 1.1260-1.1300. The next resistance is then at 1.1500.
 

The Czech koruna offers attractive carry trades
 

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Figure 5: EURCZK on H4 and daily chart
 

Given the COVID-19 situation in the Czech Republic and the new government measures, it is not surprising that the Czech koruna is also weakening. On the EURCZK pair, it is approaching the first strong resistance, which is in the band around 1.2570.  The next resistance is then at 1.2600.

These resistances are currently very attractive opportunities for short trades. The reason for this is the high interest rate differential between the EUR and the CZK. This is due to the fact that the CNB has raised interest rates to 2.75% while the ECB is holding rates at 0.0%. Therefore, holding the koruna in short trades has become a good opportunity for carry trades after a long time.
 

The New Zealand dollar is at strong support

The Central Bank of New Zealand raised interest rates by 0.25%. The current rate is 0.75%. Still, the Kiwi, as the New Zealand dollar is popularly called, has weakened. This was because investors were expecting a higher hike. Another reason for the weakening of the NZDUSD pair is the currently strong dollar and the fact that all commodity currencies weakened sharply at the end of the week on news of a new mutation of the coronavirus.

Figure 6: The NZDUSD on H4 and daily chart


The NZDUSD has reached an interesting support, which is around the price of 0.68. It last traded here in August 2021. To trade the bounce off the support, it will be advisable to wait for some form of confirmation, which may be a bullish engulf formation for example.
 

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