Feels like every day a new milestone can be written about. This time, the stat that captured my attention was the out sized move in the USD, to the point that it registered its best performance in over 4 years amid ongoing lofty vol as the market hopes for a large economic package out of the US. What else contributed to Tuesday's dynamics in FX? Keep reading ... 

Quick Take

The harrowing ‘risk-off’ scenes recently witnessed abated as the market appears to be welcoming news that the US is preparing a rich stimulus package to support the economic fallout from the coronavirus outbreak. Further coordinated intervention by G7 governments has too contributed to add fuel to the risk rally. With the S&P 500 rising circa 5% and US bond yields sharply higher too, the USD was the clear winner, with aggregated gains when crosschecking its performance vs G8 FX, unlike anything seen since 2016. The magnitude of the upside move in the USD speaks volumes of the amount of volatility we are experiencing as traders. On the flip side, the main beneficiaries in this chaotic market phase (Yen, Swissy and Euro), all performed quite poorly as the bloodbath in the unwind of carry trade structures takes a temporary pause. The Pound, a currency recently permuting as a play for diversification purposes amid the fall out of high-yielding currencies, also suffered the consequences of an increase in risk appetite, hence reinforcing this new adopted role. Lastly, the outperformance of the AUD and NZD despite sharp gains in the equity and yields space is a bad omen for these two currencies as the market shifts the focus to QE and negative rates by the RBA/RBNZ in coming months, even if RBNZ’s Orr is still downplaying the odds.

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Narratives In Financial Markets

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

Trump pitches economic stimulus: Hopes for a stimulus package out of the US have calmed market fears a tad, with the S&P 500 up nearly 5%, while US bond yields also portray a better bid tone. As CNN reports: “Trump pitched Senate Republicans on a payroll tax cut and other policy proposals meant to ease the economic fallout from the coronavirus outbreak, but multiple sources told CNN no consensus was reached on the proposals.” The US Treasury will also convene a meeting with the Fed, and SEC to discuss the impact of the virus on markets.

Coordinated intervention by authorities: It’s not only President Trump’s proposal to cushion the fall out of the US economy via varies stimulatory policies, but similar fiscal responses are also being unveiled as in the case of Italy with a €16bn package, while the UK, Canada and Australia are all about to announce their own set of measures this week. ECB president Christine Lagarde has also ordered a ‘rapid fiscal response’ from EU govts, plus a range of other measures. In Japan, The Abe government is about to unveil a second fiscal stimulus north of Y430b.

Bi-partisan consensus likely: According to the Research Team at NAB, amid the extraordinary circumstances faced due to COVID-19, “it is likely a bi-partisan consensus will emerge, though the exact formulation of a package is yet to be determined. Despite a fiscal response, markets still price aggressive Fed easing with 72bps priced for the March 17-18 Fed meeting.”

Bail out of the oil industry looms: Some industries in the US such as oil and airlines appear to have reached very quickly an insurmountable pain point, to the extent that the White House is already talking about bailing out oil companies. The Washington Post reports that “the White House officials are alarmed at the prospect that numerous shale companies, many of them deep in debt, could be driven out of business if the downturn in oil prices turns into a prolonged crisis for the industry.” The US federal budget deficit is set to keep ballooning uncontrollably.

Biden paves the way to nomination: Biden continues to be so ahead on delegates based on the distribution of the latest votes out of Michigan this Tuesday, that rumor has it that Bernie Sanders may be considering pulling out of the campaign. Biden is now the choice of a majority of Democratic voters nationwide, according to most of the polls.

China’s Xi takes victory lap: Chinese President Xi visited the city of Wuhan (the epicentre of the coronavirus outbreak). State media in China have promoted the visit as a positive sign that in China they are experiencing an inflection point in the battle to defeat the COVID-19 as the country aims to slowly go back to business as usual albeit with big precautions. Xi said that Hubei province should resume production step by step.

The USD has best day since 2016: The optimism surrounding a substantial stimulus package by the US is driving flows away from bonds and back into riskier assets such as equities, which has had a positive impact on capital flows drawn to invest in USD-denominated assets. Besides, the temporary pause in the unwind of structural carry trades is a dynamic benefiting the USD. Once the bulk of the carry trade gets unwound, and with US yields near the zero bound, the USD is set to no longer attract carry plays and further benefit from a risk-averse environment.

The price of Oil bounced sharply: The price went up over 10% even if there wasn’t a single catalyst driving the price up, bur rather, the rise was fueled by the overall improved market sentiment and a sense that the movements seen since the Monday open were an overkill.

Saudi Arabia is not bluffing: The news out of Saudi Arabia is far from encouraging as the country remains adamant to flood the world with Oil supply after it double-downed on its pledge to increase supply by over 12.3m barrels a day in April, more than initially indicated last week. Russia is also said to be preparing for a rise in production by another 0.5m barrels/day.

COVID-19 continues its advance: In Europe, the COVID-19 headlines continue to be pessimistic. Not only has Italy expanded its lockdown nationwide, with cities resembling a medieval town, as COVID-19 cases breach the 10,000 mark, but in the US, the CDC made the sobering statement that “the window for fully containing the coronavirus has passed in some parts of the U.S.” In Spain, events with more than a 1,000 people have been banned, the health minister announced, while Switzerland has now closed its border with Italy to prevent further spreading.

RBNZ Governor Orr plays down immediate measures: The Governor of the Reserve Bank of New Zealand said that the 50bp rate cut last year has made “time to be on our side” and that “we don’t need a knee jerk” monetary policy reaction. Orr added that the “50 bps rate cut last year has bought us an enormous amount of time”, and that “the RBNZ has powder in the gun in the face of an economic shock”. Orr went on to say that the Central Bank is “re-working forecasts as the coronavirus impact is seen worsening.” Orr did not rule out that lower bound for policy rates could be in negative territory. The market is pricing in just a 25 bps cut in March.

American Hospital bracing for a chaotic situation: The American Hospital Association (AHA) conference in February revealed that US hospitals are preparing, according to leaked medical conference documents, for 96 million coronavirus infections across the US. 4.8 million hospitalizations from the infection and 480,000 deaths in the United States are also the projections based on the document. Dr. James Lawler, a professor at the University of Nebraska Medical Center, presented the harrowing “best guess” estimates.

Recent Economic Indicators & Events Ahead

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Source: Forexfactory

Insights Into Forex Flows

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 so that traders can make better and smarter decisions by accounting for the aggregation of flows.

The EUR index has come under minor pressure as risk appetite emerged in the last 24h. Following the flash melt up in price, the index has settled below its 100% projection target after several failed attempts to retake the upside. The outlook remains firmly towards the upside amid the lofty levels the VIX still trades at. The Euro is poised to keep reacting positively to spells of risk aversion in the market as further unwind of carry trades ensues.

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The GBP index continues to be a sideshow, rather immune to the COVID-19 or Oil dramas. Cable has permuted into a currency playing catch up with funding currencies as a good vehicle for diversification purposes amid the fall out of high-yielding currencies. So, with the risk tone on the mend, the GBP has come under renewed downward pressure. The market’s focus has moved away from the UK/EU trade talks amid such dicey conditions. The Pound index has found static support in the form of a sequence of previous lows so far.

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The USD index has had its best day since 2016, a move in the chart that reveals the outrageous amount of volatility we seen. To put things into perspective, it’s taken the USD barely 24h to make back the same magnitude of gains as in 30 days back in the Jan-Feb period when the volatility in Forex was rock-bottom. That’s how quickly vol dynamics have evolved. The combination of stimulatory measures by the US and a return to risk appetite has emboldened the appeal towards the US Dollar, pausing its rise at a key resistance level.

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The CAD index has found willing buyers after the 10%+ rebound in the price of Oil as the market corrects its oversized downside movement. This shallow upside bounce plays into the view that adding CAD shorts when the price is so out of whack tends to be a dangerous proposition. The outlook for the CAD, nonetheless, remains bearish from a macro perspective as the Saudis are certainly not bluffing on flooding the market with Oil supply, which will be a major problem for Canada’s high cost oil producers. There is still a long way for the CAD to fill the huge gap as the price still struggles to even make it back to the opening level from Monday.

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The JPY index is back as the king of the market when conditions deteriorate, which by the same token, exposes the currency to suffer considerable losses if these dynamics revert, as seen in the last 24h as government around the world look set to intervene to cushion the COVID-19 economic fall out that is happening before our very own eyes. The levels of volatility in the Yen remain unlike anything seen in recent years amid a context that is hugely favourable for the Yen to keep appreciating in the grand scheme of things as the chart below illustrates with a market structure that is unambiguously bullish. With the virus situation only going to get worse, and an all-out Oil price war, the Yen enjoys the right context to be a buy on weakness.

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The AUD index, which is widely recognized in the trading floors as a growth-currency, has had to deal with yet another blow after the curveball thrown by the Saudis. Saudi’s response to Russia’s oil supply is very detrimental for the global growth outlook, and as such, the currencies most exposed to the global economic growth story (AUD, NZD) are set to suffer. The level the AUD trades at, however, is rather expensive even if the mid-term outlook is firmly bearish as the RBA ponders the option of QE as it’s fast approaching the lower band on rates setting policy.

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The NZD index continues to play catch up with the Aussie, not only technically, but fundamentally it also looks poised to see the RBNZ follow the same steps as the RBA by lowering the interest rate band later this month. I'd like to reiterate the point that the NZD has been the most fragile currency out of the G8 FX space during the COVID-19 crisis, and with the fluid situation only to get worse in the near-term, it’s hard to think how the market will shift its psyche towards a more benign approach towards the Kiwi.

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The CHF index remains, hands down, alongside the Yen, one of the safest bets out there. The combination of an epic unwind of carry trade positions and the harrowing risk-off dynamics as of late have been the perfect bullish storm in the currency. I still remain perplexed by how accurate the symmetrical targets have played out in this market since the onset of the rally. Notice that off the original bracketed area outlined in a white rectangle, each and every 100% proj sequence, without exception, has been respected. The only way for this market, based on the price structure and the momentum is to the upside.

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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