Central bankers and finance ministers look set to step up in order to stabilize the markets in a coordinated manner. All the focus in now on an emergency call, scheduled at 11pm ET this Tuesday, to discuss a response to the impact of the coronavirus. Playing into this global intervention, the RBA is the first Central Bank to cut rates in a move that was fully priced in. Keep reading to stay in tune with the latest...

Quick Take

The European funding currencies (EUR, CHF) kept charging higher on Monday even if the aggregated flows, I am highly agnostic of this one-way traffic to continue. One of the much-awaited circuit breakers to see the bloodbath in carry trade long structures to come to an end was always going to be a coordinated intervention by G7 Central Banks. 

That’s exactly the type of response that the market is now awaiting for after reports indicate a conference call has been set up at 11pm ET Tuesday by Central Bankers and Finance Ministers to discuss a response to the impact of the coronavirus. This call will be led by Mnuchin and Powell. Whether or not the massive turnaround seen in equities has further legs will largely depend on how much details they are able to provide in decisive actions to be taken. 

The RBA, just minutes ago, is the first Central Bank that showed renewed willingness to support the economy by cutting the benchmark rate 25bp. The Aussie, with the cut fully priced in, appreciated as the initial algo sell activity was used to close long-held positions. A currency that has re-discovered its safe-haven profile in this market rout was the Yen, so as a consequence of the nearly 5% rally in the S&P 500, the currency was the most punished on Monday. 

The US Dollar, meanwhile, continues to see tepid flows, even if the technical studies at an index level reveal a very attractive area to start toying long inventory in the currency once again. A currency that shows no signs of life is the Pound, as the market psyche appears to have turned rather negative following the defying stance by UK PM to walk away from EU trade talks later this year if not enough progress is made. The first round of talks started on Monday and will run until Thursday and will center mostly on negotiating formalities. Lastly, the Canadian Dollar retains a better short-term outlook following the transient recovery in risk appetite.

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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.

The RBA cuts interest rates by 25bp: The statement prepared by Governor Lowe read: “The global outbreak of the coronavirus is expected to delay progress in Australia towards full employment and the inflation target. The Board therefore judged that it was appropriate to ease monetary policy further to provide additional support to employment and economic activity. It will continue to monitor developments closely and to assess the implications of the coronavirus for the economy. The Board is prepared to ease monetary policy further…”

G7 Central Banks to the rescue: Central bankers and finance ministers look set to step up to the plate and intervene in the markets in a coordinated manner. Reports indicate a conference call has been set up at 11pm ET Tuesday to discuss a response to the impact of the coronavirus, which may include emergency rate cuts across multiple countries, including the Fed. For more info, visit Reuters.

Equities’ circuit breaker: As a result of the news, the S&P 500 as the bellwether of equities in the US, gained 4.6% as hopes for rate cuts build up. The prospects of central bank stimulus is yet to spark selling interest in the funding currencies, which have been outperforming across the board as of late. The Carry trade unwind continues to see pressure on the USD while lifting the EUR.

Powell laid the ground last week: Fed’s Powell was the first to suggest, via an ‘emergency’ statement last week, that a March rate cut is on the table, warning that “while the US economy remains strong, the coronavirus poses evolving risks…” Markets fully price a rate cut in March, with even calls for a 50bp rate cut, around 25% priced in.

BoJ first to act by pumping liquidity into the system: We’ve already seen the Bank of Japan announcing measures to boost liquidity support into the financial system via a ¥500bn repo market injection and further purchases of equity ETFs.

The virus is now in 8 US states: On COVID-19, US VP Pence said that he expects many more cases of coronavirus, the same day the OECD warned that global growth could fall by half. The virus is now in 8 US states: Washington, California, Illinois, Rhode Island, New York, Florida, Oregon and New Hampshire. The latest updates on the virus can be followed via ZeroHedge.

It is Super Tuesday tonight: One third of the delegates to the US Democratic Convention will be determined tonight. It will take 1,991 pledged delegates to win the Democratic nomination on the first ballot of the convention with Sander still the favorite by betting sites. CNN Politics carries more details ahead of the event. Note, Anne Klobucher has quit the race, and is now endorsing support for Joe Biden, increasing the prospects of a Biden win.

Trump criticizes the Fed again: Although nothing new, Trump attacked the Fed’s independence by tweeting that “As usual, Jay Powell and the Federal Reserve are slow to act. Germany and others are pumping money into their economies. Other Central Banks are much more aggressive. The U.S. should have, for all of the right reasons, the lowest Rate. We don’t, putting us at a competitive disadvantage. We should be leading, not following!”

US/EU PMIs not as bad as feared: The economic data in the US saw the Manufacturing ISM come worse than forecast even if it still managed to scratch a read above 50 (50.1 vs 50.5 expected). Meanwhile, the final Eurozone manufacturing PMIs readings were barely changed from the previous ‘flash’ estimates.

SNB intervention 'hand' remains present: Data by the Swiss National Bank and analyzed via Reuters provided further evidence that the SNB is stepping up its interventions in the foreign exchange market to stem the rise of the Swiss franc. "The SNB is clearly intervening at the moment. I don't think they have a lower threshold they will come in at, but they are showing the market they are present and they want to prevent too fast an appreciation of the franc," said Credit Suisse economist Claude Maurer.

EU/UK trade talks kick off: The EU and the UK trade talks got underway on Monday amid deep tensions over Prime Minister Boris Johnson’s threat to walk away from the negotiations if not enough progress is made within four months. As SCNow reports, “the first round of talks will run until Thursday and will center mostly on negotiating formalities, although some discussion on the substance of an agreement is expected. The teams are expected to meet every two to three weeks. Half a dozen or so rounds of negotiations are expected to take place by the end of June.”

Recent Economic Indicators & Events Ahead

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Source: Forexfactory

Insights Into Forex Flows

The unwind of the carry trade has sparked a massive rally in funding currencies, with the Euro at the front-seat of this enormous rise as the market bails out of long carry structures.

However, we need to start asking, at what point will the market be attracted to start adding short Euro inventory? When will the market start to perceive the Euro valuation out of whack?

As the regular reader of my report can attest, the most powerful predictive tool I’ve ever come across to answer such a question is the drawing of symmetrical 100% measured moves.

Guess where we are at in the EUR index? You guessed it. We’ve hit the 100% projection target off the daily timeframe, which holds major weight to anticipate near-by exhaustion.

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Interestingly, this potential toppish formation in the EUR pairs comes at a time when the GBP is visiting a huge level of support. However, treat this support with extra cautious so far, bulls are nowhere to be found as depicted by the bearish close near the NY lows.

Nonetheless, if this market keeps breaking lower, it will soon be facing its 100% proj target too, so be aware that most of the move may be done by then.

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The real value when performing these aggregated flows analysis is to match up expected strength against weakness. That’s the whole point of monitoring these non-tradable indices.

This approach can serve the purpose of finding incredibly valuable areas to engage in certain pairs. A clear contender to start face added sell side pressure could be the EUR/USD.

Why? Check where the USD index has landed at. Major support, which comes at a time when the EUR is incredibly inflated from a technical valuation standpoint.

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The CAD index is a chart that definitely looks more tricky as the bounce off a key support has already occured, yielding solid buy-side opportunities for those keeping an eye on this area.

I’ve highlighted on the way up the next key resistance levels to bear in mind. There is a decent likelihood that the market may look to re-engage short at these technical levels.

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The Japanese Yen index, amid the monstrous movements in equities and stocks, has been on a tear as of late, yet in the last 24h, the upcoming G7 call by Central Banks has deflated the momentum. This move lower has landed at a key support where buyers will be lurking around…

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Talking about overextended currencies, if the EUR looks extremely pricey, the opposite is true when analyzing the level of the AUD as the sharp declines stalled at the 100% proj target.

If you are a brave soul looking for contrarian trades, even if I’d never recommend it unless backed up by intraday price action, short EUR/AUD or a strategy that looks to exploit a short-term campaign short the pair definitely looks attractive (positive swap as bonus).

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There is not much clarity in the NZD index to be honest. The currency has been absolutely demolished as of late and even if it looks extremely cheap, I struggle to see a technical case.

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Lastly, another currency that looks very expensive, akin to the Euro, is the Swiss Franc. It’s very aggressive to remain a buyer on this currency unless there is a release of the buy-side pressure.

When we trade currencies, unless looking to scalp intraday, we must ask ourselves, whether or not value exists to engage in purchases of that currency that would put us in an advantageous position. I’ve always struggled to understand how, as a retail trader, if you are not into scalping, you’d see any kind of value by engaging in CHF buys at these levels. But again, if that gets to be matched against a currency with weak prospects near term, it can still work, no doubt.

The point of these daily analysis in flows aggregation is to provide an eagle view of where we stand macro wise, so that one can make better and smarter decisions.

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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