It's all about the COVID-19 and the spillover effects for the global economy as an increasing number of countries announce new cases. This backdrop continues to weight very heavily on the Aussie, the Kiwi, equities, bond yields or Oil to name a few. The COVID-19 narrative has overpowered everything with the market still digesting the true dimensions of this crisis. Find out the latest in today's report...

Quick Take

The behavior in financial markets continue to portray how deeply concerning the COVID-19 situation has gotten as numerous agencies around the globe set the stage for an upcoming ‘pandemic’, even if that’s a term that the highest health authority (WHO) is yet to adopt. After two days of a meltdown in the equity market, a temporary pause ensued, even if that's far from helping to turn around the 'risk-off' sentiment. The broader aggressive selling recently seen elsewhere from bond yields, Oil, Aussie/Kiwi, or the spike in the VIX, remember, encapsulates the huge ramifications of a COVID-19 pandemic as more countries impose airline/event cancellations, travel curbs and quarantines, with the social, economic and health-related costs associated with it. The increased exposure into funding currencies (EUR, CHF, JPY) and selling in the commodity-linked complex such as the Aussie, Kiwi and Canadian Dollar keeps on going. Of note is the acceleration in CAD weakness. The Euro and Swissy have shown the most demand interest, even if in the last 24h, the US Dollar starts to challenge that status as its likely transient spell of weakness is finally showing signs of reversing back up. The Pound, meanwhile, was engulfed by sell-side action since the early stages of Europe, as the market readies to hear the UK mandate for the upcoming post-Brexit trade talks.

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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.

Authorities keep warning of a COVID-19 spread: German and US health authorities are warning that the COVID-19 infection is set to spread and strain health systems. The US CDC recently stated that it is when and not if that COVID-19 will hit the States. Meanwhile, the WHO, still refusing to call it a pandemic, said that the globe is “simply not ready” to tackle the widespread of the virus. German Health Minister Spah warned about “the beginning of a coronavirus epidemic”, while FDA officials warn the COVID-19 virus is on the "cusp" of being a pandemic.

The world isn’t ready for such crisis: Michael Every, Head of Market Research at Rabobank, wrote a note to clients in which he agrees that the world isn’t ready, noting the following. “Imagine the strain on health services even in developed countries if COVID019 were to sweep in, especially with up to 20% of the population aged over 65 and hence most vulnerable based on the observed mortality pattern so far. We simply don’t have enough hospitals or ICU units anywhere.”

Trump no longer denies possible spread of COVID-19 in the US: The US President Donald Trump said in a speech that the coronavirus will probably spread in the US, which has prompted him to consider possible travel restrictions from Italy, South Korea even if he added that now is not yet the right time. The USD and equities sold off on Globex.

Leaked docs show China downplaying stats: More reports are coming to light that China is getting back to work with traffic congestion and pollution continue trending higher even if they remain below 2019 levels. However, the assumption that the novel coronavirus outbreak in China is much worse than the authorities want the public to believe gained further traction after leaked docs obtained by the Epoch Times revealed the outbreak in the Shandong province is much worse than the officially reported.

Will the containment measures work? While the World Health Organisation (WHO) said that the rate of new infections seems to be slowing in China, this is in contradiction with the early pattern seen in the rest of the world. But as the Research Team at the National Australian Bank notes, “the WHO found that the epidemic peaked and plateaued between the 23rd of January and the 2nd of February and provides some hope that containment measures could help stem the spread of the virus.”

The COVID-19 spread into the West keeps its course: Financial markets are still not buying into this ongoing weakness as investors remain cautious of the COVID-19 spread into the West with more international cases identified every day (Brazil, Greece Norway, Italy, Iran and South Korea…). While there has not been a whole lot of data to provide new drivers for the markets (latest developments here), the markets are largely trading based on the existing depressing mood from the negative headlines.

No respite for equities or bond yields: This glass half-empty approach in trading financial markets was well reflected in the behavior of equities in the US, initially opening with relatively strong gains of nearly 2% but succumbing back down as the day went by, with the S&P500 ending -0.1% at 3,124. Yields also continued to trend lower globally.

Oil losses $50.00 as stockpiles build up eyed: A market that remains tail-spinning below the $50.00/barrel is WTI, printing its lowest sub $49.00, not seen since late 2018. The main culprits include airline cancellations, travel curbs and quarantines, all leading to expectations of a major build-up in crude stockpiles.

EU-UK trade talks in focus: The Pound saw an intraday spike in the broader context of selling pressure after the top European Brexit negotiator Barnier said the EU is ready to offer UK super preferential access to EU markets. However, this ‘apparent’ positive headlines doesn’t change the equation a bit. The Sterling quickly gave back the gains, as Barnier reminded the market that “the EU-UK trade talks are set to be complicated with not much time to strike a deal…”

RBA rate cut further priced in for April: The coordinated intervention by Central banks to lower interest rates is a scenario that markets are decisively pricing in. Not only the market sees the Fed easing its policy by as many as 3 quarter cuts this year, but the bond traders are telling us, via the Australian fixed-income, that the RBA is also looking like a contender to lower rates, with an April move close to 50% chance.

Australian Q4 capex disappoints: The data came well below estimates at -2.8% q/q. This reading was a major miss, even if it referred to Q4 2019. The estimate 5 for '19-20 is seen at AUD 120bn (from 117 for the previous estimate, 4), while the 2020/21 estimate is for 100bn AUD. This news will be another drag on the Australian Q4 GDP, due Wednesday 4 March.

Recent Economic Indicators & Events Ahead

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Source: Forexfactory

Insights Into FX Majors

EUR/USD has come into contact with an area of prior strong supply imbalance. It therefore becomes a possible turning point for the market, especially judging by the compressive nature of the ascent we are seeing. In other words, every time highs are taken out, the market fails to extend much further up, which is suggestive of a short-building campaign going on. The approach of price on now four drives, with each leg smaller in magnitude than the previous, is also a sign of exhaustion. Note, this is just the prelude and half the equation as to confirm as turnaround, a breakout of structure is what’s needed next to gain more conviction.

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GBP/USD keeps navigating through a daily range, which makes it difficult to assess the next directional bias until a resolution outside of it occurs. In the 4-hour chart, bulls have failed to capitalize on the prior day breakout of the swing high and instead, selling has ensued, taking the price all the way down to retest the pocket of demand and opposite swing. This is an area where buying opportunities may still arise, but be aware that the way the price went up before the decisive sell-off means this market is susceptible to face further selling at the area marked, which is where I expect most long-side risk exposure to be mitigated. This is best visible if the trader goes into lower timeframes such as the 1-hour chart.

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USD/JPY is finding strong bids at a buyers’ stronghold, which is why I have been expecting the re-emergence of bids, precisely what we saw on Wednesday, even if it’s still premature to be jumping the gun to validate a new up-cycle off the H4 chart. If further setbacks, I am still expecting bids at regular sequences down to 109.60, below which big pockets of liquidity are thought to be layered, and possibly acting as an area for shorts to close exposure. This is a market where the long case compels me, but first a shift back to a bullish market structure with momentum via the smart money slope also picking up in the 4-hour chart is necessary.

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AUD/USD continues to be dragged lower, which has led to yet another technical milestone intraday at the 4-hour chart resolves its range by extending way beyond its support level. There is absolutely zero evidence via price action that the market is done selling the pair even if we’ve now reached the 100% projection target, from where the market may temporarily stall. A retest of the backside of the old range up to the prior midpoint offers pristine intraday areas to re-engage in sell-side action with the most well defined trend in G8 FX this year.

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NZD/USD validated a breakout of its range structure by accepting into lower levels, therefore opening the doors to further downside until the next 100% proj target gets met. The approach here, by assessing the daily chart, and by now getting the green light via the 4-hour chart, is to sell this market as the core view if one’s entry trigger shows up. I personally have nill conviction that the Kiwi is going to revert from here as the triggers are not there. Follow price action.

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USD/CAD is a textbook example of the outcome one can aspire to get by spotting what side is suffering the most pain (trapped), and from that read, add your exposure. The compression at the lows last week ahead of the bullish breakout was clearly the building of long positions, with the retake of a strong resistance (break of structure) the ultimate signal that this market was poised for higher levels this week. Every touch of the resistance-turned-support has yielded a predictive series of bounces eventually taking prices into new daily trend highs. This behavioral pattern led me to promote buying dips this week, a directional bias that has paid off.

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USD/CHF has extended its downward correction in the 4-hour chart but is starting to show more two-way price action as I would have expected given the sticky daily support encountered. I personally find this market to now be in a period of transient distribution until the next wave of buying or selling reveals what type of market structure keeps playing out. It looks like the market may be transitioning into a range for the time being, as the two bounces off this daily support have met strong selling for a revisit back down. It would be a hasty decision to call for a particular directional bias in this market until more data inputs around this vicinity come in.

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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