The Daily Edge

Safe Haven Currencies Rule As WHO Declares ‘Pandemic’


The Daily Edge is authored by Ivan Delgado, 10y Forex Trader veteran & Market Insights Commentator at Global Prime. Feel free to follow Ivan on Twitter & Youtube weekly show. The purpose of this content is to provide an assessment of the conditions, taking an in-depth look of market dynamics – fundamentals and technicals – determine daily biases and assist one’s trading decisions.

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Quick Take

How much worse can it get? Judging by the continuous declines in US equities, it appears as though we might still have further south to travel. Besides, the stats are far from encouraging as the VIX retus above 50.00 and the Dow and S&P enter bear markets, which by market standards gets called after -20{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} from the top.

Did you know it’s been the fastest drawdown from a peak into a bear market in history? With the WHO finally declaring a ‘global pandemic’ as COVID-19 spreads, Trump taking the plunge by banning travel from Europe into the US, and the BoE following the Fed with a 50bp rate cut, it definitely feels like we’ve finally hit that inflection point in which no longer COVID-19 is taken for granted. This has triggered a race against the clock for extraordinary measures all over the place.

Today is the tu for the ECB to show us what they’ve got in store in what represents the first big test for Lagarde as ECB boss amid the complete paralysis of the Italian society with other countries the likes of Spain or France not ruled out to follow next. The Central Bank must and will act. President Lagarde has been promoting left and right the need for EU leaders to come together with a coordinated policy response, with no room for delays.

The main beneficiaries of this madness we are witnessing include the Yen, Swissy, Euro, and the USD has now joined the bull party amid an unfolding crisis to get liquidity (3m FRA-OIS spread on a tear). The last measures by Trump in a speech through Asia today, however, have knocked down the USD. Then we have the second basket of vulnerable currencies, namely, the Aussie, Kiwi, Canadian Dollar, and the Pound now joining the group after the bombshell by the BoE which came as a shock.

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.

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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.

US President Trump flexes his muscle: As part of a televised nationwide speech just minutes ago to address the growing conces of the coronavirus pandemic, the US has banned, effective this Friday, all travel from Europe for next 30 days, with UK exempted from the ban, even if the speech did not include any concente economic/fiscal policy measures, which has taken its toll in the USD, marked lower immediately after the speech, with the Yen the main beneficiary.

Extraordinary measures launched in the UK: The Bank of England, alongside the UK govement, announced a coordinated effort to provide economic support to the economy as the COVID-19 keeps spreading. These measures included an emergency rate cut by 50bp and fresh fiscal stimulus valued at GBP30 billion ($39 billion).

The ECB is due today: It’s the first big test for Lagarde and with Italy paralyzed and other countries probably soon to follow (Spain?), the Central Bank must act. This time Lagarde may favour measures focused on liquidity boosts for banks and economic sectors most affected as opposed to further cuts in the ECB’s negative interest rates or more bond purchases. President Lagarde told EU leaders that a coordinated policy response is needed.

WHO, at last, takes the plunge: The World Health Organization finally declared the COVID-19 a global pandemic. WHO Director Dr. Tedros Adhanom Ghebreyesus said the WHO is “deeply conceed by the alarming levels of spread and severity” of the outbreak.

Equities in the US enter bear market: Equities in the US tanked with the S&P500 giving back yesterday’s gains by falling to the tune of 5{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} as the US is still falling short on expectations for a co-ordinated response to COVID-19 headwinds with no concrete policy measures yet. Note, the VIX, also referred to as the fear index, trades at a hefty 50.00, which is extremely high.

Putting things into perspective: the Dow and S&P crash from the last 24h has now confirmed a bear market, which by market standards gets called after a drop of 20{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} from the top, while as part of the bear market, it has now erased most of the Trump-presidency rally. As the site ZeroHedge notes, “this is the fastest drawdown from a peak into bear market in history, and the worst start to a year since 2009…”, adding that “we are crashing at the fastest pace since Lehman… (the sudden drop is reminiscent of the first moments of crisis in August 2007).”

Scramble for US Dollars: The US Dollar kept rallying as the massive scramble for liquidity continues (3m FRA-OIS spread on an absolute tear suggest shortage of dollars) and the rise of the currency amid panic selling in equities suggests perhaps most of the carry trade unwind is done, which would be logical judging by the latest disorderly moves in FX earlier in the week. Despite the rise in the Dollar, the market is still projecting 82bps of rate-cuts next week by The Fed.

A look at FRA-OIS spread: The FRA-OIS spread is the difference between 3-month Libor (the inter-bank lending rate) and the oveight index rate (the risk-free rate set by central banks). This spread is an key indicator of stress in the U.S. banking system (widest in more than eight years now). It makes interbank lending more risky (banks will demand higher interest payment to lend one another) as they stand to suffer losses if companies fail. This widening of the spread reflects, therefore, a deterioration in the credit/funding system. The blow out of the FRA/OIS means dollar funding is becoming increasingly problematic which may explain the USD fortitude.

Fed forced to increase bailout facility: With credit and funding markets showing signs of major stress, the Fed has been forced to increase the size of its daily bailout facility (oveight repo operations) to $150 billion on Monday. Credit Suisse’s Zoltan Pozsar, widely recognized as a guru in this matter, shared a note explaining that the Fed should “combine rate cuts with open liquidity lines that include a pledge to use the swap lines, an uncapped repo facility and QE if necessary.” More on this topic via ZeroHedge.

Liquidity injections won’t cut it: Fiscal and economic policy actions in the wake of the virus crisis are secondary. As this article by Marcetwatch explains, “monetary policy can’t mend broken supply chains.” This health crisis is not an issue as the GFC of 2008 that saw disruptions to the flow of finance being fixed by banks’ liquidity injections. “The problem today, however, is a sudden stop in production, which monetary policy can do little to offset”, the article notes.

Bleak outlook for US companies: The Institute for Supply Management (ISM) revealed the first-round results of a survey focused on business and supply chain impacts due to the virus. The findings were that nearly 75{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} of companies report supply chain disruptions in some capacity due to coronavirus-related transportation restrictions, and more than 80{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} believe that their organization will experience some impact because of COVID-19 disruptions. One in six (16{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6}) companies report adjusting revenue targets downward an average of 5.6{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6}.

It’s going to get worse before it gets better: “I can say we will see more cases and things will get worse than they are right now,” Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, said Wednesday moing. In fact, Congress’ in-house doctor told the govement this week that he expects 70-150 million people in the U.S. — roughly a third of the country — to contract the coronavirus, according to Axios.

Europe rushing to get their act together: In Europe, Italy remains in a state of shock after the draconian measures to contain the virus, including a nationwide lockdown with only supermarkets and pharmacies to be opened. Italian cases soared by more than 2,000 yesterday to over 12,000. This is causing govements in Europe to become more attuned to the harrowing prospects that the crisis is going to have in society. The boldest comment so far came from German Chancellor Merkel, waing that COVID-19 may infect 60-70{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} of the population.

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Recent Economic Indicators & Events Ahead

Source: Forexfactory

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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.

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The EUR index is consolidating its gains in the wake of the severe risk-off conditions witnessed this week, including a melt-up episode, which has characteristics of the final unwind of the carry trade long structures and the Euro now more likely to normalize its dynamics. On the upside, we can clearly see the 100{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} projection target acting as clear resistance. The Euro is poised to keep reacting positively to spells of risk aversion with the ECB the next vol event today.

The GBP index has accelerated its downward pressure after an off-the-cuff 50bp rate cut by the BoE. Even if the move was anticipated, timing was a bit of a shock. The index has now landed at an area of key support that so far has been paying good dividends to those whose plan of action has been to build long exposure in the GBP off this critical macro level. The market’s focus, remember, has moved away from the UK/EU trade talks amid such dicey conditions, with the scenario of a delay in the hard deadline to get a trade deal by Dec this year growing in odds.

The USD index appears to be on the brink of validating a fresh bullish cycle if it can muster enough buy-side pressure to break through its overhead resistance. The shortage of dollars in the system, as explained in the narratives section above, means a positive backdrop even if that may sound counter-intuitive as the Fed radies to set its rate towards its lowest band and even pondering the option of a QE resumption to address the stress in credit/funding. The vol in the USD remains sky-high, and I want to remind the readership how absurd the latest movements have been, as it only took the USD 24h (from Tuesday to Wednesday) to make back the same magnitude of gains as in 30 days in the Jan-Feb period when vol was rock-bottom.

The CAD index has found acceptance during the course of this week below a macro bearish target as measured by the 100{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} symmetrical move. This equilibrium found is a bad omen as it exposes and contextualizes a new reality for the CAD, that is, it is perceived as a currency that traders are willing to auction at much lower levels amid the debacle in Oil. The outlook for the CAD remains bearish from a macro perspective but short-term, a problematic emerges as the CAD’s huge downgap has caused a currency that appears very overstretched by any measure.

The JPY index continues to be the darling in Forex amid the protracted period of risk aversion that the market is well and truly engulfed by. The levels of volatility in the Yen, as seen in other currencies, has swiftly transitioned into GFC-like status. The current backdrop with COVID-19 and an Oil price war is hugely favourable for the Yen to keep appreciating as the projection from world experts is that it’s going to get worse for at least a few months. The ‘pandemic’ classification declared by the WHO is another cause for social hysteria to pick up (Yen positive).

The AUD index remains one the currencies most exposed to the global recession that we are experiencing before our very own eyes, which is going to force the RBA to tap into QE sooner rather than later in order to keep stimulating the economy. The level the AUD trades at, however, is rather expensive even if the mid-term outlook is firmly bearish. But given the fluid situation, I can certainly envision the currency selling off further from here.

The NZD index is showing a lot more steadiness, which may be partially caused by the RBNZ downplaying the chances of further rate cuts in the near term. The Goveor of the Reserve Bank of New Zealand said earlier this week 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. Technically, the currency looks poised for further downside though, with the flash crash now corrected.

The CHF index is positioned to benefit the most alongside the Japanese Yen as the harrowing effects of COVID-19 continue to play out across the world. Therefore, the Swiss currency remains one of the safest bets out there amid the perfect storm of an unwind of carry trade positions at a time of maximum risk-off dynamics. Remember, the symmetrical targets in the index have acted as a reliable guidance to find the best level to engage in the currency as shown in the chart below. Each and every 100{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} proj sequence has been respected. The current consolidation appears to be yet another period of accumulation before the next mark up.

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{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} 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{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} Fibonacci Projection


About the author

Ivan Delgado

Ivan Delgado is a decade-long Forex Trader. Feel free to follow Ivan on Youtube. Join thousands of traders who follow Ivan's insights to increase their profitability rate by learning the ins and outs of how to read and trade financial markets. Ivan has you covered with in-depth technical market analysis to help you turn the corner.


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