What does a fall in-sync in the EUR, CHF, JPY tell us about the mood in the forex market? What's going on with the Kiwi, why such a vertical movement in price? Are you aware that the EUR is printing fresh multi-year lows when aggregating the flows in the G8 FX space? Don't miss any of the key developments and keep reading today's report...

Quick Take

The more days that go by, the more traders are getting a sense that the worst in the NCoV scare may be behind us. This is not a hunch or something I write out of my gut feeling, but as usual, I let price action and the aggregated flows in G8 FX tell the story. We are witnessing, without exception, the three funding currencies (EUR, GBP, CHF) be dumped this week. Whenever speculators show a greater interest to borrow a low-interest rate currency to use it as a funding currency to profit, it suggests the carry trade is ‘back on’, and this would not be happening if the market was still engulfed by elevated levels of uncertainty. As one shifts the focus to equities, the same picture arises, with the S&P 500 making fresh record highs. Chinese equities? The same story, with 7 days of straight gains in the CSI 300 index. The Aussie has clearly benefited from this recovery in risk, at a time when the RBA Governor Lowe is starting to sound more upbeat on the economy judging by the speech given this Thursday. However, the Aussie performance was eclipsed by the aggressive mark-up in the New Zealand Dollar after the RBNZ hints at the end of its easing bias. Shifting gears to the world's reserve currency, the USD maintains a bullish outlook with a notable dip buying participation noted as Fed's Powell testimony failed to act as a catalyst to alter the northbound tendency. Its neighboring peer, the Canadian Dollar, had a stellar performance as Oil keeps recovering in line with risk, while the Pound saw very tepid aggregated flows. 

(Click on image to enlarge)

Narratives In Financial Markets

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

Another day, another record high for equities: Equities in the US keep charging higher, coupled with bond yields on the mend, gives off the sense that the risk dynamics continue on the mend at a steady pace. This was also reflected in the stabilization of the Yuan or the 7 days of straight gains by Chinese equities as the CSI 300 index managed to fill the gap lower from the reopen last Monday. The underperformance by the Yen, the Franc and the Euro, the three favorite funding currencies, portrays a market jumping back into carry trades in order to borrow at low rates to speculate in higher-yielding currency bets. 

Jump in new NCoV cases but there is a catch...  At the open of markets in Asia this Thursday, China's Hubei province reported 14,840 new coronavirus cases, leading to an immediate yet brief sell-off in the AUD. Digging deeper, the authorities in Hubei revised their diagnostic standard for coronavirus cases, hence it’s important to make the distinction that out of 14,840 new cases, 13,332 were "clinical diagnosis". Nonetheless, this explains the spike in new cases and the panic selling in the Aussie. The Health Commission for Hubei Province said that “in order to be consistent with the classification of case diagnosis issued by other provinces across the country, starting today, Hubei Province will include the number of clinically diagnosed cases into the number of confirmed cases.”

RBA Governor Lowe sounds more upbeat on the economy: Speaking on a panel this Thursday in Asian hours, Lowe said that the outlook for the Australian economy is improving, noting that the coronavirus is having an uncertain impact, but absent the virus Oz outlook improving. The areas most affected by the virus scare, the RBA boss noted, included education and tourism. Lowe said that the Chinese policy stimulus will be a positive for Australia and that low interest rates are working but will take time.

The Euro/US Dollar hits its lowest level since May 2017: a technical picture which is equally bleak when looking at the performance of the EUR index, finding a fresh multi year low. There has not been any particular catalyst to attribute for the steady selling in the currency, even if one could argue that the recent data, including Wednesday’s EZ industrial production, is not helping the case for the ECB to stay that constructive in the economic recovery. There is speculation that a dovish shift in rhetoric at the March ECB meeting could be in store. A piece by MNI, quoting an unnamed official, who said “a few weeks ago, before the virus outbreak, I would have said that the policy outlook remained unchanged….but now the picture has changed. We just need to properly weigh up to what degree”. Remember, Germany is facing a tough environment during a Chinese slowdown due to the exposure in goods exports it has.

Powell keeps it uninteresting: The second day of testimony by Fed’s Chairman Powell in front of the Senate banking panel offered very little to grab on in terms of headlines. It was a reiteration of the old mantra we are too familiar with. Among all the prepared remarks, one that stood out was when Powell said that “the Fed is likely to need to QE and make the case for lower rates in its forward guidance in a downturn”, adding that “we will see the impact of the NCoV in data fairly soon.” You can click the following link for a list of most highlights. Overall, the comments were unsurprisingly tame and there was clearly no interest in shifting the narrative away from the Fed is in neutral ground.

RBNZ Governor Orr defends neutral bias: Following the strong appreciation in the NZD amid a hawkish surprise by the RBNZ on Wednesday, where the forecasts for the OCR show they do not expect more cuts this year and economic growth to accelerate over H2, the Governor of the RBNZ may have had the subtle intent to water down a tad this rhetoric, noting that low rates remain necessary. Orr added that the coronavirus is the downside risk to the outlook and that real wages are starting to pick up, reaffirming, in his words, that “we are seeing monetary policy work.” Besides, he stated that the fact that the government is spending more fiscally, “give us confidence” Orr said. RBNZ Assistant Governor Christian Hawkesby, in an interview via Bloomberg, also insisted that the RBNZ has a genuine neutral bias on interest rates at this point. Hawkesby sees household consumption gains boosting growth in H2 while expecting the labour market to soften, hence why low rates are necessary to support the possible downturn.

Mnuchin attempts to talk up phase 2 of US-China trade deal: US Treasury Secretary Mnuchin said that the entire chapters of phase 2 China deal have already been dealt with despite the coronavirus issues in China. This is, in the eyes of the market, a positive input that may fuel further the momentum in stocks. On the flip side, Mnuchin said that the implementation of China phase 1 deal has slowed down - to a certain extent - due to the coronavirus crisis. Mnuchin went on to say that 3 to 4 more weeks of data will be needed to assess the overall impact of the coronavirus in China.

WHO says NCoV cases stabilizing: The World Health Organization Chief, Mr Tedros, updated the general public, at a press conference, that the number of NCoV cases in China have stabilized over the past week, but that must be interpreted with extreme caution, as the outbreak could still go in any direction. He also said that the behavior of the coronavirus outside Hubei province doesn't appear to be as aggressive or accelerating, which he described as “a good sign.” One of Tedros’ highlights included that “slower spread in other Chinese provinces still gives us an opportunity for containment potential interruption of the virus, but is not guaranteed.”

Crude oil inventories jumped this week: The weekly reading stood at 7.459M vs 3.200M estimate, while the private data came in stronger at 6.0M. Nonetheless, Oil has regained further after tentative evidence, even if massaged by the Central government in China, is achieving the goal of creating the perception that the coronavirus outbreak may be nearing its peak. For an in-depth analysis of the latest report on oil inventories and the breakdowns, read this link. Relevant for Oil traders as well, OPEC cut the Q1 oil demand growth estimate by 440k bpd due to the NCoV outbreak.

The Riksbank left rates intact on unanimous decision: The Swedish Central Bank decided to leave its rate unchanged in a decision that was reached by unanimous consensus, a rare development considering the recent fragmented views on the board. The Sweedish Central Bank, nonetheless, downgraded its 2020 inflation forecast, while keeping the forecast repo rate trajectory unchanged. The SEK found pockets of demand as a result.

Recent Economic Indicators & Events Ahead

(Click on image to enlarge)

Source: Forexfactory

Insights Into FX Index Charts

The EUR index keeps selling off unperturbed and the momentum it has gathered suggests that this is a market that remains, now with a higher degree of conviction, on sell-side mode. The validation of a new bearish cycle by finding acceptance below the previous low means this is an inflection point to see further interest to be a seller on rallies as retracements occur. The next 100% projected target still allows for significant room to the downside.

(Click on image to enlarge)

The GBP index has barely changed its valuation as it consolidates above a key level of support where a potential bottom may have been formed. From a market structure standpoint, the Pound is still holding a relatively benign outlook with the smart money tracker back to bullish. I remain cautiously optimistic on the GBP outlook until the price action proves me wrong.

(Click on image to enlarge)

The USD index continues to see buy on dips activity in line with the market structure and smart money tracker. The USD has proven rather immune to the risk profile at play. While the valuation in the USD remains high, notice that during 2020, the currency is yet to make a significant correction to the downside beyond the extension seen in the last 2 days. If you are betting on more USD weakness, you are essentially betting on this pattern to be broken.

(Click on image to enlarge)

The CAD index is on the verge of breaking into bullish territory by breaching the previous swing high. Once that occurs, with the smart money tracker already pointing bullish, it would enhance the outlook for the currency. That said, it’s not all done yet as the index has stalled at the resistance level one would have anticipated, with the tick volume suggesting little commitment. Remember, the case to be a CAD seller, from a fundamental standpoint, has debilitated following a string of positive inputs, including the Canadian jobs, which reduced the odds of a BOC cut.

(Click on image to enlarge)

The JPY index was swamped by a wave of selling pressure right from the European open, placing the index in a compromising position for the interest of buyers. Technically, if the previous low is cleared, it would validate the resumption of the downtrend based on market structures. Beside,s this final bearish push to confirm a downcycle would coincide with the smart money tracker slope turning bearish, hence reinforcing the sell-side prospects going forward.

(Click on image to enlarge)

The AUD index continues to put up a fight as pressure into a resistance line builds up. However, based on the aggregated tick volume, nothing has changed, and the retest into this resistance for a second time is far from compelling as the buy-side volume activity is reducing. While the price structure of lower lows and lower highs has not changed, what has indeed seen a variation is the slope of the smart money tracker, now headed up. Longs the AUD remain a risky bet, but one that soon may have the technical backing of the daily if the prior swing high gives way.

(Click on image to enlarge)

The NZD index has broken to the upside on the back of the RBNZ hawkish policy statement, as the Central Bank is preparing the market for an end of its easing bias, barring a major deterioration in the NCoV situation. This markup has the momentum behind to see further gains short-term, but allow a retracement to engage at suboptimal price entries. As mentioned yesterday, this is a move, stimulated by a Central Bank decision that may be about to set a new direction in policy, hence why it’s important to be aware of its significance as an inflection point that may see the onset of a prolonged trend in the Kiwi even if it’s still early days.

(Click on image to enlarge)

The CHF index, for the first time since the beginning of 2020, has seen its bullish price structure violated, which speaks volumes about the more lax approach to the NCoV uncertainties, even if equities have been communicating the same message for over a week now. The bearish breakout via the breach of the prior swing low carries some red flags though, as neither the smart money tracker nor tick volume agrees with an outright bearish stance yet. Ideally, you want to see a price structure bearish with the slop of the moving averages also lower, and if on top of that, one sees a pick up in volume, then it translates in more capital committed.

(Click on image to enlarge)

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