The Corona Virus Keeps Risk Tone Suppressed

The fears of the corona virus spreading at a faster rate-than-expected continues to suppress the outlook for a more protracted recovery in the risk profile, while the dovish tilt by Fed's Powell on inflation sends the US Dollar a touch lower. Curious to find out the rest of market dynamics at play? Keep reading below...

The Daily Edge is authored by Ivan Delgado, 10y Forex Trader veteran & Market Insights Commentator at Global Prime. Feel free to follow Ivan on Twitter & Youtube weekly show. You can also subscribe to the mailing list to receive Ivan’s Daily wrap. The purpose of this content is to provide an assessment of the conditions, taking an in-depth look of market dynamics - fundamentals and technicals - determine daily biases and assist one’s trading decisions.

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Quick Take

The USD kept advancing further ground up until the point when a dovish tilt by Fed’s Powell on inflation during Wednesday’s FOMC press conference led to a change of heart by the market. The currency ended softer after the remarks by Powell as the market now prices about one and a half cuts by the Fed by the end of 2020 vs 1.2 cuts pre-FOMC. The EUR, which continues its recovery, finds little technical grounds to expect the current run higher to last. 

When it comes to the Pound, it’s all about the BOE in the next 24h, in what’s arguably the most tense policy setting decision for some years. This unpredictability in today’s rate outcome is well reflected in the market pricing, which is not better than a coin flip, with a 50% chance of a cut today. 

The CAD finds itself still engulfed in a technically bleak context with the dovish outcome by the BOC last week still reverberating and keeping the bearish outlook intact. The Yen, meanwhile, continues to be driven by the coronavirus outbreak news; while the news are not yet alarming, the continuous buy-side pressure reflects the degree of unrest still present, aided on Wed by the declines seen in global bond yields after the FOMC and the soft end in US equities. 

On the contrary, despite the upbeat Aus CPI figures on Wed, the Aussie keeps struggling as the coronavirus woes are a real concern that keeps the market on tenterhooks. The fact that the Aussie has been unable to hold onto positive data-driven gains (jobs, inflation), is a very telling sign that the currency remains strongly driven by the virus as the key driver. Lastly, the Kiwi keeps the downward pressure intact piggybacking the Aussie, while the Swissy is still buoyed under such a treacherous environment.

The indices show the performance of a particular currency vs G8 FX. An educational video on how to interpret these indices can be found in the Global Prime's Research section.

Narratives In Financial Markets

* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.

FOMC keeps rates on hold: There wasn’t much meat in the bone as part of Wednesday’s FOMC policy statement after it decided to keep rates unchanged at 1.5%-1.75% range. However, despite the expectations for a dull outcome were high, and judging by the statement you’d think economists were right, the language used by Fed’s Chairman Powell in the press conference managed to spice things up a tad. As a result, the movement in the USD was a touch softer, even if nothing earth shattering, with the market still fixated on the coronavirus as key driver.

Powell turns more dovish on inflation: The development in the presser worth highlighting included Powell being more dovish on inflation, which may explain the retreat in the USD, by stating that the “Fed is not satisfied with inflation running below 2% and it is not a ceiling.”

Market prices 1.5 rate cuts by the Fed in 2020: There has been a change of heart by the market after Powell's remarks on inflation, as the base case now shifts to a worsened inflation outlook vs the more benign December FOMC stance. As a consequence, the market now prices one and a half cuts by the Fed by the end of 2020 vs 1.2 pre-FOMC.

Powell strikes constructive note on the economy: While more pessimistic on the prospects of inflation, Powell said there is tentative evidence to stay “cautiously optimistic” about the economy based on the easing of financial conditions, reduction on trade tensions and lower chances of a hard Brexit.

Coronavirus remains the key driver: On the coronavirus front, the market has no longer overreacted to the fluid news, as most of the cases, over 97%, as still within China’s border. Besides, more evidence so far suggests that the mortality rate is lower than SARS, even if these are still early days. The latest official stats, which must be taken with a huge pinch of salt, note 6,065 cases and 132 deaths. Beijing health official said on Wednesday that risks of coronavirus infection in the city is rising too.

WHO impressed with China’s efforts: One of the reasons that the risk-off dynamics may have not been justified to return with a vengeance is the fact that the WHO continues to consider that the coronavirus is not yet grave enough to be labeled an international emergency situation. Wednesday’s World Health Organization press briefing on the coronavirus highlighted, nonetheless, that “the last few days the progress of the virus, especially in some countries, especially human to human transmission, worries us,'' naming Germany, Vietnam and Japan. The WHO chief also recognized that he was “very impressed with the level of Chinese engagement at all levels and fight against coronavirus”, adding that “they are taking extraordinary measures in the face of what is an extraordinary challenge.”

Too early to draw conclusions on the virus spread: What’s important to emphasize in the coronavirus saga is that we are still at the bare minimum, 7 to 10 days away from the diseases reaching a potential peak. According to Xinhua, citing a top Chinese scientist deep in the weeds to control the disease outbreak, the Novel coronavirus outbreak may reach peak in one week or 10 days. "I think in one week or about 10 days, it will reach the climax and then there will be no large-scale increases," Zhong said, the head of a national team of experts set up for the control and prevention of the virus. Therefore, it’s too early to draw conclusions.

Update on CoronaVirus by China: Xinhua reports that 7811 are now infected, with 12 167 suspected cases, 170 dead and 1370 in serious condition. This is a 1,228% increase in infected people since last week. The disease is, for now, spreading faster than predicted. Check in this link a table where it provides a handy comparison table. If the data provided by officials or leaks suggests that the rate of reproduction is above estimates, it will feed into the risk-off.

China's GDP to be shaved by at least 1% this year: New statistics provided by the Chinese Academy of Science reveals that the extent of the impact from the virus on GDP growth could be in the 1-1.2% vicinity from 6% y/y to just under 5% in Q1, which would imply a slowdown on the growth trajectory to about 0.3% in Q1 from 1.5%, which helps to explain why we’ve seen such a severe decline in the AUD since late last week. An important caveat is that this forecast is based on the huge assumption that the virus outbreak will peak by mid-February and peter out by the end of March, as stated above.

Oil suffers the consequences of the coronavirus: The price of Oil has also been dramatically affected by the outbreak of the coronavirus in China, as the travel/tourism industry has been gravely impacted. More airlines around the globe are canceling direct flights to China as a result of preventive measures implemented. The cartel group OPEC has announced that it’s considering moving the March meeting to Feb to find emergency measures that may help re-balance the demand/supply conundrum.

RBA Feb rate cut ruled out after Wed’s Aus CPI: The odds for lower rates by the RBA in February were reduced further to just 10% on the back of a not too shabby inflation readings out of Australia on Wednesday. As a reminder, the Aussie inflation came at touch firmer with a headline number of 0.7% q/q, which was slightly higher than the 0.6% expected. In terms of the core inflation, the trimmed mean, which is what the RBA historically monitors most closely, came at 0.4% q/q, which was bang on estimates.

Downside risk on Thursday’s US Q4 GDP: Ahead of Thursday’s US GDP Q4 print, the data published out of the US on Wednesday does not provide a good omen as the iss in US goods deficit and inventories creates downward pressure in the reading, which has a consensus of 2.1%. As the NAB tea notes: “Importantly for the outlook, Q1 GDP could be soft as well as imports recover from the tariff uncertainty and as Boeing weighs on Industrial Production and the manufacturing sector more broadly.” The latest US pending home sales on Wed was also very disappointing at -4.9% versus +0.5% estimate, with sales slow by fewer listings.

BOE the event of the day: With the prospects of a hard Brexit largely reduced, which allows the BoE more maneuver to act based on UK fundamentals, this is probably one of the most intriguing policy statement outcomes in years. It’s going to be a close decision, and as a reflection of this unpredictability, the market is pricing a 50% chance of a cut today. The worsening of the UK ‘hard’ data supports the call for lower rates, but that must be reconciled with improving sentiment indicators ever since the election in December.

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Recent Economic Indicators & Events Ahead

Source: Forexfactory

Insights Into FX Index Charts

The indices show the performance of a particular currency vs G8 FX. An educational video on how to interpret these indices can be found in the Global Prime's Research section. The idea of this analysis is to complement one’s daily bias by accounting for this holistic analysis.

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The EUR index keeps moving higher in what still appears to be a technical correction that may soon face increasing sell-side pressure as the currency heads straight into the origin of a supply imbalance from Jan 23. I will say this. Whenever a chart corrects higher as in the case of the EUR in an environment dominated by a bearish price structure coupled with all smart money trackers via the monitored moving averages pointing lower, I get laser focus to spot opportunities, in this case, the potential for short positions in the currency. The higher the currency goes amid this technical background, the more appealing the opportunity is. As a reminder, from a technical standpoint, my base case is also reinforced by the fact that the down-cycle dynamics are still at play until the 100% proj target is met.

The GBP index has definitely become one that I will sit out from trading until the dust settles post the BOE meeting. The net balance is for the risks to still be skewed to the upside based on technicals, as there is congruence between the price structure and the set of moving averages that act as my guidance to spot the smart money flow intentions. However, we are at the mercy of the BOE policy decision, which carries a highly unpredictable outcome in its rate call today. After the decision is out, and vol settles to relatively normal dynamics, long setups in line with the overall bullish outcome make a lot of sense, hence I’d say that buying on weakness upon the agreement of price action remains the way to go unless technicals prove us wrong. Also, as in the case of the EUR, by measuring the projected symmetrical target (100% measured move), there is a not too shabby +1.5% of topside potential until the up-cycle completes.

The USD index has reached its 100% proj target, with the added caveat for those holding long positions that a key resistance comes immediately overhead, alongside the fast that there is an obvious tick volume tapering this week. What this means is that the risk of a setback towards lower levels is a scenario to start anticipating with a higher degree of conviction. However, be aware that such contrarian view would be against the strongest trend in January, so you might want to think twice before shorting the USD. My remarks are more a warning for those holding USD long exposure to be on high alert as the tide may soon be turning near-term. Therefore, while technically the topside looks mature, buy on dips is still the main case in line with the backing of the price structure, coupled with the moving averages tracking smart money flows.

The CAD index, as warned, has faced sell-side pressure off the retests of the backside of its broken range, which occurred on the back of last week’s BOC dovish tilt. The technical read I have in this market is still bearish, with the short bias aided by the bearish price structure and across-the-board downward slopes in the smart money MAs, all pointing lower. I wouldn’t be surprised in the slightest if we see follow through sell-side continuation that sees the index extend its decline all the way towards a retest of the equal lows carved out last week. Just as I’d be surprised that the EUR index breaks through that noted supply area, in the case of the CAD, the preponderance of technical evidence indicates bear side action is more likely.

The JPY index is retesting the critical resistance where the currency has stalled from but on much lower tick volume than its first pass. What does this mean? It portrays a significant reduction in the number of committed buyers, which will make a breakout of this area much more challenging, hence why shorting the Yen at these levels remains an appealing proposition. As I noted yesterday, my prognosis has shifted near term in such as way that I believe the movements in the Yen from earlier in the week were out of whack, even if one must recognize that the Yen will continue to have the backing of what’s turned out to be a more protracted risk-off environment as the coronavirus hype is unlikely to go away for a few weeks. That’s a source of uncertainty for the market and strength for the Yen. The question is, at what levels the market will feel comfortable re-engaging in Yen longs. I think is too early for a rally resumption.

The AUD index is resting at another hugely relevant macro support. In fact, this level where it’s landed after the aggressive selling in recent weeks corresponds to the double bottom found last August. However, this support found occurs in the context of a bearish resolution of a multi-month broad range, which carries clearly bearish connotations. In the near term, while the coronavirus risk is obviously a major drag for the Aussie, technically-wise, it represents good value to consider long AUD opportunities against the weakest links such as the EUR for instance. I remain of the view that the current levels to sell the currency are not attractive, hence why for the brave souls, this is an area in the index to be fading further downside. The fall in the Aussie has reflected a currency very fragile to the current news driving markets but we’ve gone down too harshly in a relatively short period of time, and that tends to be unsustainable.

The NZD index, as reflected by its price action, has stuck to the bearish script I had subscribed to ever since the breakout of its multi-week range. This technical development made me turn bearish on the currency near term until the first phase of the sell-side cycle completes, which will occur, in my book, once the index reaches the 100% proj target. Until that materializes, a rebound in the NZD would be considered an opportunity to sell on strength. Since the sell-side follow through, the downside potential is about 0.4% based on the 100% proj measurement. Notice, the moving averages tracking the intended directional bias by the smart money also validates this sell-side bias, as does the overall risk-off dynamics dominating markets.

The CHF index has entered a consolidation phase by creating a double rejection of the highs in a context of lower volatility as depicted by the bollinger bands flattening. This means that the most attractive areas to engage in trades, judging by the index, is at the edges of the range. Notice, to the upside, the symmetrical 100% proj target gave us the signal to start anticipating the potential formation of a range, while to the downside, the index found demand imbalance at a key horizontal support line. As a result, we’ve morphed into a consolidation. In the grand scheme of things though, the overall picture remains neutral to bullish as the range settles in the context of a bullish rally that managed to find strong legs in January.

Important Footnotes

  • Market structure: Markets evolve in cycles followed by a period of distribution and/or accumulation. To understand the principles applied in the assessment of cycles, refer to the tutorial How To Read Market Structures In Forex
  • Horizontal Support/Resistance: Unlike levels of dynamic support or resistance or more subjective measurements such as fibonacci retracements, pivot points, trendlines, or other forms of reactive areas, the horizontal lines of support and resistance are universal concepts used by the majority of market participants. It, therefore, makes the areas the most widely followed and relevant to monitor. The Ultimate Guide To Identify Areas Of High Interest In Any Market
  • Fundamentals: It’s important to highlight that the daily market outlook provided in this report is subject to the impact of the fundamental news. Any unexpected news may cause the price to behave erratically in the short term.
  • Projection Targets: The usefulness of the 100% projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100% projection, you can anticipate the area in the chart where some type of pause and potential reversals in price is likely to occur, due to 1. The side in control of the cycle takes profits 2. Counter-trend positions are added by contrarian players 3. These are price points where limit orders are set by market-makers. You can find out more by reading the tutorial on The Magical 100% Fibonacci Projection
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