The Daily Edge

USD Benefits From Unfolding Liquidity Crisis


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.

Let’s get started…

Quick Take

There is no respite in financial markets as equity futures in the US (S&P 500) hit a limit-down just minutes after the open of markets in Asia as forced-selling and liquidation from those trapped long appears to still play out. Remember, selling originated from the longest bull market in history! That’s important to understand in order to put into perspective the sheer magnitude of positioning unwind going on. 

This reaction in equities is certainly not what Central Banks would have wished for after yet another round of coordinated intervention to enhance the provision of global U.S Dollar liquidity and soften the economic blow. The Fed and the RBNZ, both cutting rates to the lowest bound, are the latest to step in (second time for the Fed), even if the market keeps telling us loud and clear such measures are insufficient. 

The Bank of Japan is next with an unscheduled emergency meeting for this Monday to discuss steps to stabilize markets. Last Friday, it was time for the BOC and Norges Bank to also move down rates as both countries calibrate on the fly monetary policy after the double-whammy of the Oil bust/global recession. 

The unfolding COVID-19 crisis has continued to expand the gap in performance in what can be classified as the safe-haven currencies (JPY, CHF) and the growth currencies (AUD, NZD, CAD). We then have a EUR that still finds further residual demand from the unwinding of carry long structures, which even if it may have run its course, may have inflicted a paradigm shift whereby the single currency is seen as a safer harbor to allocate capital in times of stress. 

The US Dollar, meanwhile, continues its rampant appreciation as the real crisis the market is facing involves the shortage of US Dollars in the system. Proof of that is that no matter what action the Fed takes (cut rates, QE to infinity), the USD keeps appreciating. Lastly, the Pound’s sharp fall has defied any logic, although in these imperfect and tumultuous times, it will be a futile exercise trying to make sense of each and every move amid the dislocation of capital.

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. If you found the content in this section valuable, give us a share by just clicking here!

Narratives In Financial Markets

* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Twitter, Institutional Bank Research reports. If you found this fundamental summary helpful, just click here to share it!

Coordinated Central Bank measures to soften the blow: News over the weekend continued to move at light speed, with Central Banks, in yet another coordinated move, rushing to cut rates near the 0{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} bounce. These emergency policy actions by Central Banks, even ahead of the official meetings, is a clear declaration on the utter state of desperation to do whatever little is possible from their side to soften the blow in economies.

Fed lowers rates again: The Federal Reserve cut interest rates to near 0{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} on a Sunday evening emergency meeting, as a follow-up move less than two weeks before it cut rates for the first time. In the official statement, the Fed said that “the effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook…” The Fed will also expand holdings of treasury securities by $500 bln and mortgage backed securities by $200 bln in coming months. One can follow the subsequent virtual press conference in this link and comments summary.

Shortage of US Dollars in the system: The Coordinated Central Bank action to enhance the provision of global U.S Dollar liquidity, which also saw the Fed, BOJ, Bank of Canada, ECB and Swiss National Bank agreeing to lower pricing on standing US dollar liquidity swaps by 25 bps, is the real crisis unfolding. As FX strategist Viraj Patel puts it, “the Fed has thrown a kitchen sink of policy measures that should in theory weaken the US dollar. Problem is the global backdrop due to Covid-19 isn’t conducive to putting money to work in other countries/FX…”

Cash flow crisis: One of the banks best explaining the situation is Nordea Bank. They note that this is an unprecedented crisis that at its core involves a cash flow shortage as opposed to a credit crisis as Central Banks are addressing. This strengthens the notion that the Fed QE is not the optimal tool. “Everybody seemed to build cash positions at the same time last week, and it is arguably also tough to find value these days”, Nordea notes. By looking at the behavior of metals last week, it becomes clear that the global dash for cash was a prelude to the liquidations seen, not acting as safe-havens but liquidity vehicles.

RBNZ the last to cut rates in an aggressive move: The RBNZ cut its key interest rate by 75bp to 0.25{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} from 1.0{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} in another emergency decision, with Goveor Orr assuring markets that the rate will stay this low for at least 12 months. The culprit is the impact of COVID-19 in the economy as the govement plans broad-based economic stimulus. “The slowdown in the global economy would act as a serious headwind for the economy. Inteational and domestic initiatives to limit the spread of the virus would have a serious impact on travel and trade affecting both supply and demand channels in the economy.”

BOJ next to step in: The Bank of Japan has called an emergency meeting for this Monday to discuss steps to stabilise markets. The meeting is due at 12pm Singaporean time, and will replace the scheduled rate review on March 18-19, the BOJ said in a statement released on Monday. As the Strait Times notes, “the central bank’s nine-member board will likely discuss measures to smooth corporate financing and stabilise financial markets, a source familiar with its thinking said.”

BOC/Norges cut rates last Friday: Bank of Canada and Norges Bank (Norway) both unexpectedly cut by 50bp on Friday, joining the rest of Central Banks in releasing further liquidity into the system. In China, the PBoC lowered its Reserve Requirement Ratio for some banks to also support the economic pain.

RBA’s QE nears in Australia: The RBA said it is ready to purchase Australian govement bonds, according to various market sources. RBA will announce further policy measures on Thursday this week. This move would be in line with the aggressive measures taken by Central Banks elsewhere.

Market doesn’t care about rate cuts: Despite the coordinated intervention by Central Banks, equities are unfazed with the newly introduced measures as the S&P 500 futures hits limit down at the open in Asia, clearly telegraphing that at this stage in the game, this is not enough.

Will the Fed go the extra mile? The incessant sell-off in equities as the world goes into a hold (both demand and supply shocks) has the market in absolute disarray and desperate for the Fed go out of its way by negotiating with Congress a new mandate whereby it proposes a targeted stocks/corp bond buy program.

US banks’ stock buy-backs done for now: The Financial Service Forum, representing eight of the nation’s largest banks in the US, issued a statement noting they are done repurchasing stock until at least the end of Q2. The Full FSF statement read: “The Financial Services Forum announced that its eight members decided today to temporarily suspend share buybacks for the remaining period of the first quarter and the second quarter of 2020.” This decision is only going to put further strains in the Fed to act with unorthodox measures in coming weeks.

Inevitable surge in US COVID-19 patients: The Washington Post reports that “triage tents are popping up outside emergency rooms in the United States, and health-care workers are physically squeezing extra beds into break rooms and physical therapy gyms to prepare for what seems like the inevitable surge in patients.” For a round up of all the latest news regarding the unfolding COVID-19 crisis, check this link by Zero Hedge.

CDC keeps pressure on White House: US’ CDC recommends gatherings over 50 people should be postponed for 8 weeks. The help stem the spread of the coronavirus outbreak, US’s CDC recommended cancelling all large in-person events with 50+ people anywhere in the US for the next eight weeks.

Draconian actions all over: The measures taken by authorities in the Weste hemisphere continue to occur at light speed amid the unfolding crisis. The NYC Mayor said NYC schools will close for at least a month starting Monday, Italy reports largest one-day jump in cases, while France also reports highest daily jump since the outbreak began. Germany also reported 1,000+ new cases, while Spain goes into total lockdown and deploys the military to patrol the streets and enforce confinement.

Insanity in US airports: Trump’s Europe travel ban, which went into effect, have backfired in an epic proportion as US airports see unprecedented crowds of people freaking out wanting to retu to Europe. To make matters worse, it happens at a time when procedures are slower as new federal travel requirements and coronavirus ‘enhanced’ screening was instituted by Trump. As the Breaking Aviation News report, “Chicago’s O’Hare Inteational Airport revealed the most chaotic scenes with thousands standing shoulder-to-shoulder in an airport corridor amid a deadly pandemic, reportedly for at least seven hours before entering the screening area .”

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.

If you found the content in this section valuable, give us a share by just clicking here!

The EUR index extended its upside towards the next 100{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} proj target in another display of strength as the correlation between risk-off flows and the currency stays the course. The path of least resistance for the Euro is unambiguously to the upside as portrayed by the price structure of higher highs and higher lows and backed up by the smart money tracker off the 4-hour chart.

The GBP index sold off very harshly in the last 24h of trading after a break of structure found a backside resistance as the perfect role reversal location to amplify the bearish move. The overstretched movement in the Pound has now reached the 100{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} proj target, where a bounce has ensued as supply dries up. The Pound’s outlook has worsened considerably in recent days.

The USD index has surged by a magnitude we haven’t experienced for years, which comes to show the panic buying amid the cash flow crisis explained in the narratives section. None of the measures introduced by the Fed have moved the needle to depreciate the currency, which speaks volumes about the direction the market is betting the currency to travel to for now. I am expecting, therefore, the USD to be a major beneficiary of the current conditions playing out.

The CAD index holds a bearish outlook and is now back into a wide box outlined below where I’d consider the market allocations to be net negative in the Canadian Dollar judging by the recent double whammy events unfolding (Oil price war and true risk-off conditions). There are not yet price action clues that may suggest the expected tuaround. The further appreciation of the currency despite the BOC 50bp rate cuts tells us the market was definitely overstretched.

The JPY index has entered a consolidation patte in the context of a solid bullish trend. I am expecting the market to go through a transient accumulation of longs before the next phase up. Watch BoJ action today for further clues on the next fundamental move. The take out of lows late last week saw a quick grab of liquidity rejecting the level decisively towards the mid-range. When ranging, look for what side goes through most fake outs. If to the downside as seen, that allows to solidify the notion that the market is preparing for the next bull run by amassing Yens.

The AUD index hit its lowest levels since late-2008. News over the weekend of additional containment down under and the RBA preparing QE measures dented the appetite towards AUD long holdings. Besides, stock market crashes and global recessions are historically very pervasive combinations for the outlook of the Aussie.

The NZD index should trade as a carbon copy of the Aussie as the market follows conventional dynamics that are known to be respected. In the case of the Kiwi, it is set to follow the downward trend in the Aussie following the 75bp rate cut by the RBNZ today. The chart below illustrates the dire technical picture as measures of risk aversion remain extreme.

The CHF index, alongside the Yen, is primed to attract the most buy-side flows and the chart below resonates with such a bullish view as the price structure based on the aggregation of flows is clearly pointing towards this direction. The Swissy has broken into new highs and the only way to play this currency is to engage in buying weakness until there is some type of circuit breaker implemented by the Fed that tilts the balance towards a change in sentiment.

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.


Error validating access token: The session has been invalidated because the user changed their password or Facebook has changed the session for security reasons.