Quick Take

Shorting the US Dollar has been without a doubt the best play over the last week as the Fed inundated the market with a new level of liquidity/funding capacity. The signing of the $2trn stimulus package by Trump, while not aiding stocks in the last 24h, has nonetheless alleviated the near-term economic stresses in the US. But it’s month-end books’ re-balancing that the Global FX Committee (GFXS) is warning us to be vigilant for the next 2 days, as “FX market participants may execute larger than usual FX volumes during end-of-month benchmark fixings.” The late weakness in the USD out of the blue in the last US session after a promising start shows how it all can turn on a dime in the blink of an eye. The currencies are flows’ driven, especially as Q1 ends, and prove of that is the out-performance of a Pound despite in the UK, PM Boris Johnson and Health Secretary Matt Hancock both tested positive for COVID-19, while at the same time, Fitch downgraded the UK’s credit rating to AA- with the outlook negative. The Oceanic currencies also did well last Friday even as equities and bond yields dropped. The CAD was a big mover last Friday too, as the BOC exhausts its ammunition by announcing an extra 5-bp rate cut and the introduction of QE as part of another emergency meeting. The Yen, Euro and Swiss Franc, the 3 funding currencies and poster children of the now terminated era of ‘long carry structures’ went through balanced flows on Friday.  

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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. 

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Trump signed off $2trn stimulus package: It happened last Friday following the approval by Congress to pass the historic bill to stem the fallout of the US economy. This package is designed to keep the country above water but far from reactivating the economy.

Equities end the week on a soft note: Equities finished the week giving back the majority of Thursday’s gains as the correction lasting 3 days lost steam. Judging by the level of the VIX at 65.00, high volatility is going to stay very elevated and “demand for cash should remain high as large parts of the US economy will remain closed”, an investor quoted by the FT said.

Safe-haven in demand: The lowering of global bond yields on Friday, including in the US, as equities sold off, was a recipe to see instruments with safe-haven attributes (Yen, gold) in high demand on Friday. The rise in these asset classes is supported by the near term USD weakness.

AUD, NZD rallies not aided by Friday’s context: The Oceanic currencies had a bullish run that based on risk metrics looks unsustainable and shows the bearings that month-end rebalancing may have had causing the disjointed moves. It’s hard to justify a sustained AUD, NZD rally when order flow is ‘true risk off’ as seen on Friday.

GBP outperforms: To further make a point that markets don’t make much sense based on the rapid evolution of fundamentals, the GBP was the outperformer during Friday despite in the UK, PM Boris Johnson and Health Secretary Matt Hancock both tested positive for COVID-19, while at the same time, Fitch downgraded the UK’s credit rating to AA- with the outlook negative. 

USD under the cosh: Last week, the USD index (I monitor the equally-distributed measure vs G8 FX) suffered the largest weekly fall that I can remember as far as data goes. However, this depreciation in the currency, triggered by the flooding of USD into the system, still occurs in the context of an unfolding structural bullish breakout as underscored in this YT video. 

Watch month-end benchmark fixings: The Global FX Committee (GFXS) issued a statement late last week, still applicable for the next 2 days, in which it warns: “Given the intense volatility seen in global financial markets this month, it is possible that FX market participants may execute larger than usual FX volumes during end-of-month benchmark fixings.”

BOC cuts and starts QE: In another emergency meeting by a Central Bank, and I’ve lost count how many we’ve had since the unraveling of the COVID-19 crisis into ‘full blown’ state, the Bank of Canada decided to cut its rates by 50bps to 0.25% and announced QE for the first time. 

Oil market in a state of disarray: It trades at a 17-year low as the key players causing the historic price war (Russia & Saudi Arabia) show no interest in returning to the drawing table. Last Friday, I warned traders that the outlook looks grim as the G20 meeting concluded on Thursday made no mention of oil nor energy, in a clear sign that positions are far apart. 

Worrying signs of deep political cracks in the EU: The messages of cohesion and solidarity the European Union should project are lacking as Italy gets into murky waters questioning the very existence of the EU amid the lack of camaraderie and financial assistance from the European block. France and Spain also joined forces supporting the idea of a large joint EU effort through ‘corona bonds’, which met the fierce opposition of the Dutch and Germans. 

The US focal point for markets: The fluid situation on the COVID-19 numbers continues to be disaportionaly bleak, with the Western Hemisphere going through the darkest times compared to the far east (Italy and Spain numbers show the deadliest days yet). Most of the focus in coming weeks will be in the US as the death toll keeps escalating rapidly. The trend is that an increasing number of countries are going into ‘hibernation’ as economies get paralyzed.

Grim outlook by US expert in the matter: As the U.S. becomes the first country to reach 100k coronavirus cases, the latest projections by Dr. Fauci, the director of the National Institute of Allergy and Infectious Diseases and a member of the White House coronavirus task, suggest the coronavirus will infect millions of Americans and could kill between 100,000 to 200,000. 

Must-watch video by South Korean top scientist: The highest-ranked scientist in infectious diseases out of South Korea, a country praised for the successful tackling of COVID19, gave a rare interview with English subtitles. I recommend watching it from minute 30. In it, Professor Kim Woo-joo from the Korea University Guro Hospital, warns that the world must brace itself for 18 months of no prospects for a vaccine and even when available, it’s hard to see how it can be made available for the majority. This video interview is a cruel reality check. His hope in the near term, he mentions, is drug repurposing. 

Economic data to play a secondary role: Remember that with economic data so hard to forecast in these unprecedented times, the market will continue to take guidance off COVID-19 count curve with the worst yet to come in countries slow to react like the UK and the US. This means that data will remain on the backseat and is very unlikely to be, in the grand scheme of things, a key driver. It therefore implies that this week’s US ISM PMI and payrolls should have little bearings vs the real data that matters.  

Recent Economic Indicators & Events Ahead

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Source: Forexfactory

Insights Into Forex Majors

This analysis complements one’s view by accounting for multi timeframe biases. Ultimately, it is the traders’ call, via a set of entries (watch my setups) thoroughly backtested, to decide if a market meets the prerequisites to enter a position. This analysis is mainly intended as a way to educate traders in upping their analytical skills.  

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EUR/USD technical analysis

• Volatility: It remains very high, 1 full standard deviation above an increasing 100-ma (seen as the new normal vol) of about 100 pips. In other words, swings worth over 200 pips has become the norm in the currency pair. The prospects for vol to stay elevated are quite high as month-end rebalancing will be specially impactful. 

• Price structure: The weekly chart rules here as it printed a successful rotation off the highs, suggesting that the rally faces the risk of being capped by the 1.1175-1.1250 mark, which would correspond with a right hand shoulder carved out.

• Momentum: As the smart money tracker indicates, the latest order flow is supportive of further upside momentum in both the daily and the 4-hour chart, but this collides with the technical restrictions off the weekly as pointed above.  

• Key levels: To the upside, any dealings through 1.1175-1.12 should hit a major cluster of offers. Notice, the 100% bull proj target off the latest bracketed area aligns with the area where expected supply is eyed. To the downside, any pullbacks that occur before prices make it into the red box are conducive to consider long positions upon one’s entry trigger (see green box for ideal buys).

• Bottom line: The EUR/USD still makes a case to see follow-through demand up until the highlighted red box overhead, where supply may kick in to see a turn of the tide. A break and close above the 1.1250 would invalidate this view. 

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GBP/USD technical analysis

• Volatility: It runs at about 1-standard deviation above an increasing new base as indicated by the 100-period moving average, hence still considered extremely high. It suggests wide stops are necessary to protect the downside on entries. 

• Price structure: It is unambiguously bearish both off the weekly and daily. However, the picture has reverted to bullish through the 4-hour chart after regaining the 1.20 mark. 

• Momentum: The weekly still tells us sooner or later sellers will step in to try to get control back of the price, but this is, for now, in contradiction with the dominant order flow off the daily and 4-hour, officially turned bullish as per the smart money MA slopes.

• Key levels: There is further room to appreciate until 1.2730. Once/if this level is hit, I am expecting the interest to sell the rally to increase exponentially. On the downside, until that upside target is met, the case to buy dips is very valid, hence I’ve underscored in green boxes the areas where buy-side pressure may re-emerge. 

• Bottom line: The GBP/USD appears to in buy-side mode for the time being on the basis of a strong bullish momentum off the lows that has further room to extend until 1.27+. 

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USD/JPY technical analysis

• Volatility: The swings to expect in this pair, at the bare minimum, as the 100-period moving average indicates, should average over 110 pips. However, 1-standard deviation from the mean has been a normal occurrence in the last month, which translates in the potential for range expansion of about 200+ pips on a daily basis. 

• Price structure: There is a lot of merit in producing a weekly successful rotation that leads to validating a bearish structure. As such, the origin of its late-Feb sell-off, when retested (red box), acted as the inflection point for sellers re-taking control. This also led to the 4-hour re-aligning of its tendencies to bearish in tune with the weekly. 

• Momentum: It’s gone back to bearish on the weekly and the 4-hour chart, with more work to be done off the daily to turn the tide around. It is precisely this daily chart that still makes a case for being a buyer of weakness, but with no backing from the 4-hour nor the daily structures, it’s certainly a risky proposition. 

• Key levels: I can envision, based on the daily, the next 150 pips lower as an area for buyers to step in (green box) as a case is made via a bullish structure/momentum. However, the upside should be limited by 109.40 up to 110.00 round number, a confluence reinforced by today’s ADR limit (about 200 pips). 

• Bottom line: A clash between buyers and sellers with the latter poised to ultimately take control of price action in line with the higher timeframe picture. Evidence of the bullish technical turning can be seen via the change in outlook via the 4-hour chart.  

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AUD/USD technical analysis

• Volatility: The range averages 1-standard deviation from the new ‘mean’ calculated by the 100-period moving average. What this means is that a range of about 200 pips, as in the case of the USD/JPY, is the new norm. That’s4x jump from pre-covid19 levels. 

• Price structure: The underlying trend off the weekly and daily is clearly bearish, with the price action going through a short-term reprieve in the shorter timeframe (4-hour). 

• Momentum: The daily and 4-hour show a constructive slope based on the smart money tracker, supporting the notion that buy side order flow is dominant near-term. This is still in contradiction with the higher timeframe (weekly), which is why this rally looks set to be limited in its upside magnitude towards the red box overhead.

• Key levels: It is precisely these red boxes that will most likely act as resistance for sellers to potentially return. But before we get to these highs, if a pullback is seen towards the 0.61-0.60 range worth 100 pips, a case is still made to be a buyer on dips. See the green box highlighted as the area where dip buying is still warranted. 

• Bottom line: The long play is still working out near term but the danger is real for the bull rally to eventually see a setback in line with the higher timeframes as guidance. 

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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

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