The Daily Edge

Scramble For US Dollars Goes Up A Notch


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

The mass exodus of long-held positions in global equity markets amid an increase in margin calls, the disjointed movements in currencies, the sky-high volatility form part of the daily harrowing script the market has sadly settled into as the total loss of trust in policy actions flare up. The latest measures by US President Trump, the Fed or the ECB have not moved the needle and are a cruel reality check that the dire situation due to COVID-19 won’t be overcome through the type of policy actions we’ve been so accustomed since the GFC (liquidity injections). Don’t get me wrong, the Fed stepping in with more cheap money thrown into the system is still needed amid major stresses in the credit/funding channels to get US Dollars (explains the scramble to long the world’s reserve currency into fresh 2020 highs) but the market’s verdict is still tuing a deaf ear and one wonders what’s the ultimate circuit breaker? The market is screaming that an even bolder response from the Fed must come, and I am not talking about rock-bottom rates or the confirmed QE resumption (that’s backfiring) but a clear commitment that they may be pondering to dip their toes into buying corporate credit and even equities outright, essentially a ‘Japanification’ of the US monetary policy, even if the blessing of Congress is needed for these extraordinary measures to see the light. The markets, with a VIX around the 60.00 market, at a level of panic not seen since the GFC, however, unlike that period, this time what will revert the treacherous and fluid situation is a vaccine and containment/mitigation measures by govements/health system, which is why this black swan event is so hard to cope with from a monetary/fiscal policy standpoint alone. The net result when aggregating the flows in the last 24h through G8 FX, illustrates a reigning USD, with the usual suspects (EUR, CHF, JPY) following miles away but still net positive. On the contrary, the AUD, NZD, CAD and GBP are the currencies most punished by the brutality of these markets.

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.

Markets in utter distrust no matter the policy action: The chaos and disjointed moves in equities, bonds and currencies have become the new norm as the latest measures introduced by US President Trump (the US has banned, effective this Friday, all travel from Europe for next 30 days), ECB’s Lagarde (fell short on expectations), alongside the lack of bolder action by the Fed and politicians in the US gets penalized by markets.

Fed steps in, makes no difference: Even if the Fed stepped up to the plate by announcing stresses in the money and UST markets in order to attempt to circuit break the meltdown in equities, the plans backfired. The Fed measures also included an extension of $60bn Treasury purchasing to the whole UST Term Structure, which effectively means a re-introduction of QE (4th round). The market was unimpressed, which speaks volumes about the absolute loss of confidence and current panic.

ECB impotent in the wake of the COVID-19 crisis: At least, that’s the impression one gets from following Lagarde’s press conference, the bearish reaction in the EUR and judging by the underwhelming measures. The Central Bank, against expectations, held rates steady, while it decided to increase QE and lending via LTROs and TLTROs. Lagarde was very clear that this is a crisis that must be fought as part of a joint fiscal response by govements ‘first and foremost’.

US bi-partisan response not clear: The prospects for a meaningful bipartisan policy response by the US Congress to cushion the fall out of the economy are not yet that clear. As Politico reports, “Republicans have raised major objections to the Democrats’ multi-billion-dollar emergency proposal, which was unveiled close to midnight on Wednesday.”

The rout in the equities is brutal: For instance, the Dow Jones dropped beyond the 10{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} in what marks one of the worst days in history. The S&P 500 was not far behind, after circuit breakers kicked in and halted trading again. Yesterday, I mentioned that some of the statistical anecdotes included spooky developments such as the drop in equities has been the fastest drawdown from a peak into bear market in history. Gains in bonds no longer offset losses in equities is also another big issue fueling the selloff.

German to break its own rules: Bloomberg leat that German Chancellor Merkel’s govement looks set to break its own long-standing rule of respecting its balanced budget policy in light of the “exceptional circumstances” the economy is facing. Essentially, once approved, the German govement will be able to lift the debt levels restriction it sets. No official announcement yet.

Europe en-route to a complete shutdown: The draconian measures taken by govements around the world amid the rapid propagation of the COVID-19 is extending worldwide. In the last 24h, we’ve leat that the containment strategies implemented have been taken to the next level in countries such as Italy, Spain, France, Ireland, or via the suspension of all types of sporting events in most of the West. Closures of schools and universities, as well as enforcing social distancing and limiting public transport have been some of the impositions in developed societies. Latest developments can be found here via ZeroHedge.

Experts’ opinions on COVID-19: Renowned Infectious disease expert Michael Osterholmn gave a talk in the latest Joe Rogan show explaining in detail how serious is the coronavirus. You want to watch this short clip. Don’t forget the words from Dr. Fauci: “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.

USD liquidity shortage new driver: As I explained in yesterday’s note, the total loss of confidence as expressed by the turmoil in equities, the dislocation of capital amid sky-high volatility (VIX nearing GFC levels) and the crumbling of credit/funding channels (3m FRA-OIS spread), continues to fuel massive demand for the USD as it communicates shortage of dollars. Fed measures not enough: The more credit/funding deterioration, observed via the FRA/OIS spread, the more shortage of US dollars in the system, with the measures by the Fed a temporary relief but so far not having the intended consequences.

USD shortage vs repatriation of capital: The unstoppable rise of the USD against the likes of the Euro, Swissy or Yen means that new dynamics, other than the unwind of carry trades, are now at play. We’ve therefore moved from a scenario where repatriation of capital via hedging and margin calls in carry long structures driving currencies to USD liquidity shortage. The selloff in Euros, FRA-OIS spread blowing up, bank stocks tanking would suggest the carry trade unwind may have run its course in favor of the USD.

Massive stress in the banking sector: The reason the Fed decided to step in on Thursday is because the credit/funding channels are under extreme stress. The FRA-OIS spread difference between 3-month Libor (the inter-bank lending rate) and the oveight index rate (the risk-free rate set by central banks) has been on a tear. This shows massive stress in the U.S. banking system as lending is seen as more risky amid the anticipation of companies going under in the wake of this demand/supply shock.

Fed not done yet, more cuts are coming: The market is now pricing Fed rate cuts (100bp) by March 18 with further open liquidity lines, as well as an almost uncapped repo facility and further QE expansion. The aggressive move by the Fed oveight leaves no doubt that the Fed will do what it takes to guarantee sufficient USD liquidity for now. The fact that the NY Fed will offer $500bn in a three-month repo today, with a further $500bn three-month and a $500bn one-month repo tomorrow, shows that commitment.

GBP taken to the woodshed: The Pound, which had been holding relatively steady until the surprise rate cut by the BoE, tanked without mercy. As a reminder, the Bank of England, alongside the UK govement, launched a coordinated effort to stimulate the economy, including an emergency rate cut by 50bp and fresh fiscal stimulus valued at GBP30 billion ($39 billion).

Canadian PM under self-isolation: The jury is still out there as to how this may affect the CAD after news broke out that Canadian PM Justin Trudeay said he’s self-isolating because his wife is sick and they’re awaiting testing on COVID-19. “The doctor’s advice to the Prime Minister is to continue daily activities while self-monitoring, given he is exhibiting no symptoms himself. However, out of an abundance of caution, the Prime Minister is opting to self-isolate and work from home until receiving Sophie’s results,” read the statement.

The most vulnerable currencies: The Canadian, Australian and New Zealand Dollar remain the currencies most exposed to the calamity we are witnessing in the global economy due to this black swan event called COVID-19. It looks almost certain that these economies are headed into a recession along with many other countries, but the market has always considered them, as part of the G8 FX space, as the ultimate growth currencies, therefore, will be most punished at times of maximum stress.

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Recent Economic Indicators & Events Ahead

Source: Forexfactory

If interested in the best ‘free of charge’ News Indicator that can display data on past and future news in the Forex market via MT4, check this YouTube video I produced. The indicator allows you to save time, avoid mistakes. It’s spot on!

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
has broken into a fresh structural bullish cycle after finding a resolution away from its range. Follow-through buy-side continuation is now expected as the new regime of sky-high volatility continues to fuel the appeal towards the EUR…

The GBP index has accelerated its downward pressure after the impossibility by buy-side forces to hold a level of macro support that has been respected multiple times in the past. The price structure is telling us this market looks poised to keep selling-off in the near term…

The USD index has soared way out of proportion by any measures that we may have been accustomed to this year, which comes to show the panic buying currently underway given the shortage of USD liquidity despite the extraordinary measures by the Fed…

The CAD index holds a bearish outlook in the mid-term after it confirmed a major breakout of a 100{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} macro projection target. This development, in the wake of the Oil price war, is a major outlier movement that tends to happen when the market has fundamentally shifted 180-degree as in the case discussed here with the Loone. Selling strength is the way to go…

The JPY index continues to be the darling in Forex and with such elevated risk aversion for weeks if not months to come, it’s the best positioned to keep appreciating… The chart below shows the buy-side flows into the Yen are not abating with a bullish structure in place…

The AUD index remains one the currencies most exposed to the global recession that is unfolding, and as a result, the market is rushing to unload AUDs in mass. The proof is in the pudding (charts), with another collapse towards the next 100{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} proj target…

The NZD index is another currency that holds a very dire outlook in line with the other growth/commodity currencies (AUD, CAD). The chart below illustrates how sellers maintain the clear upper hand amid the huge uncertainty the virus has caused around the globe…

The CHF index, alongside the Yen, is primed to attract the most buy-side flows in a world where all that matters is the containment of COVID-19. The Swiss currency, based on the aggregation of flows, has broken into new highs, which means buy on weakness is technically well justified…

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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