Funding Currencies Rule As COVID-19 Goes Global
The Daily Edge

Funding Currencies Rule As COVID-19 Goes Global

Authored by 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.

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

A replica of the story narrated in my last report played out last Friday as a market long carry trade structures kept imploding. The colossal weekly losses in equities – worst week since 2008 -, commodities and bond yields kept facilitating higher volatility in FX as the unwind of short exposure in funding currencies becomes the trend to exploit by market forces. 

The ‘eye-popping’ miss in China’s PMI over the weekend – worst on record – has only aggravated the fears that the market is quickly headed towards a global slowdown, with coordinated Central Bank intervention through lower interest rates to start as early as tomorrow when the RBA meets. Powell’s ‘emergency’ statement on Friday, laying the ground for lower rates in the US this March, has served as a minor circuit breaker to halt the bloodbath in equities. 

Central Banks still have the money bazookas but the vaccines are still a distant prospect, so one wonders that if the ‘probabilistic neglect’ theory the world is trapped into courtesy of COVID-19 keeps damaging consumer and business sentiment, how much of an impact monetary policies alone can have. What’s clear for all to see is the consequences that such treacherous environment is having on the likes of the AUD, NZD, with the CAD also joining the party, as COVID-19 goes global. 

The world’s reserve currency is still maintaining a healthy amount of demand when compared to the weakest links, yet it’s also been hammered against the dominance of funding currencies. Lastly, the British Pound, largely immune to COVID-19 related fears, is starting to be negatively affected after experiencing sharp falls on Friday as BOE’s Goveor Caey show a more pessimistic view on the economy due to COVID-19, with the hard-line stance adopted by UK PM Borish Johnson as part of the political brinkmanship in trade negotiations with the EU not helping.

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.

Worst week for equities since the GFC: The panic selling last week did not see signs of abating last Friday with equities, commodities and bond yields all hit hard. To put things into perspective, It was the worst week for most indexes both in Europe and the US since the global financial crisis of 2008. The UK FTSE 100 registered losses of -11.1{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6}, German DAX -12.4{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} or -11.5{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} in the S&P 500.

Funding currencies rule in a world caught long carry: In FX, since the outbreak appears to have gone global, instead of flows moving away from specific regions like Asia, the movements are more classic in nature. This implies that there is a genuine interest to go into the safety of the Yen, the Swiss Franc, which alongside the unwind of carry trade structures (paid by holding high yielders), is also benefiting the likes of the Euro as one of the preferred funding currencies.

China PMI implodes, worst level on record: To make matters worse, leading to further Yen buying and Aussie selling through interbank dealings on Monday, China’s PMIs plummeted to the lowest reading ever. The manufacturing print stood at 35.7 (expected 45.0), while the non-manufacturing was 29.6 (expected 51.0).

A world headed into recession in 2020? The depressed reading, especially after the sharp fall in new export orders, plays into the view that a global slowdown will materialize. Global PMIs this week will shed further light, as well as today’s Caixin manufacturing print. The market has certainly taken for granted how bad things in China really are as the weekend devastating print was miles away from expectations.

Insights into China’s PMI debacle: The Research Team at National Australian Bank notes that “most firms expect to resume production by end of March, though the pace of a pick-up remains to be seen and high-frequency data continues to suggest activity running 15-30{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} below 2019 levels. Sourced headlines also suggest Chinese Q1 GDP will be sharply negative. Source stories suggest annual growth may be closer to 3{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} y/y, meaning Q1 GDP could be -1.5{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} q/q.”

Fed lays the ground for a March rate cut: The bloodbath in equities managed to be reversed almost in its entirety on Friday after Fed’s Powell signaled a March rate is on the table as an extraordinary measure to address the tightening of financial conditions. Powell’s ‘emergency’ statement read that “while the US economy remains strong, the coronavirus poses evolving risks…” Markets have fully priced a rate cut in March with a 30{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} chance of a 50bps cut.

Fed’s blackout period coming up: The Fed’s blackout period starts on Friday, so if the Fed is into talking the market out of this aggressive pricing, they should be acting in the following days. In my opinion, Powell’s statement is an admission that they are indeed preparing the market for easier policies. Otherwise, it makes little sense to come out with an unscheduled statement.

This is what Powell had to say… The unscheduled statement from the Fed chair that was about a rate cut at the upcoming March 17-18 FOMC meeting read the following. “The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.”

RBA first to cut? As Central Banks appear to be reacting in a coordinated fashion, according to RBA watcher McCrann, who’s somehow gained an unfounded reputation as the authority that the market tends to follow about the RBA inteal manoeuvrings, “we will now all-but certainly get a rate cut from the RBA on Tuesday, if not also “other” action”. The market is fully pricing in a March RBA rate cut this week as chatter about negative rates and QE to intensify this year. What’s quite perplexing is the fact that only 2 out of 28 economists are calling for a move, an unusual divergence in views that may see an adjustment during the course of the day.

BoC to follow with a rate cut? Note, the Bank of Canada is another Central Bank that may resort to lower interest rates when it meets on Wednesday this week. The markets are pricing 82{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} chance of a cut. Chinese tourism to Canada has been growing in importance. In the Conference Board of Canada‘s latest “Provincial Economic Outlook,” released last week, it’s predicted that Chinese tourism spending in Canada will be cut by a third this year.

BoJ to act with soft measures as well? Chatter has it, via MNI, that the BoJ is set to soon release a statement in order to appease markets by ensuring actions to be taken as necessary, possibly expanding special loans to support bank lending to companies and injecting fresh liquidity into the system.

BoE sees downside risks as COVID-19 effect goes global: BOE’s Goveor Caey has also shown a more pessimistic view on the economy by noting via Sky News that the Coronavirus could mean economic growth downgrade for the UK. Caey, nonetheless, refuses to overcommit to any predetermined path in policy by saying that it’s too early to tell how deep the impact will be on the UK economy.

Watch COVID-19 spread in the US: The Washington Post reported that the COVID-19 spread in the US has probably been spreading undetected for about six weeks in Washington state. The news adds to the negative vibes following the first U.S. death on COVID-19 in Seattle. As the article notes, “a genetic analysis suggests that the cases are linked through community transmission and that this has been going on for weeks, with hundreds of infections likely in the state.”

Inteational cases of COVID-19 soar in Italy: On a more global scale, Coronavirus cases have continued to jump over the weekend. The official statement by the World Health Organization (WHO) notes that 1,739 new cases of the infection confirmed over the past 24 hours, with the total tally at 87,137 globally. Italy continues to see the fastest increase with over 500 new cases. For a full round up of the latest news conceing the coronavirus, follow this link via ZeroHedge.

WHO raises risk for COVID-19 to ‘very high’: The WHO has now raised the global risk for coronavirus to “very high”, noting that the window of opportunity to contain the spread of the virus is narrowing every day. The daily press conference last Friday added that the health system around the world is not yet ready, and that the continued increase in the number of coronavirus cases is clearly a conce.

Added challenge in containment: Dr. Anthony Fauci – the director of the US National Institute of Allergy and Infectious Diseases, said on Sunday that “community spread” (infection via unknown origin) of the new coronavirus are becoming more common throughout the US. According to Fauci, “this was something that was entirely expected when you have diffuse infections throughout the world, sooner or later there are going to be cases in your country that you can’t directly trace to anyone,” he said.

Biden keeps chances alive after landslide win: In the US political landscape, Joe Biden was given a boost after a landslide victory in the South Carolina primary, which keeps his chances alive in the race to challenge President Donald Trump in November’s election. Biden was 48{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} vs Sanders 20{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} and Buttigeig’s 8{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6}. Ahead of Super Tuesday primaries, the pledged delegates include Beie with 56, Biden with 48 and Buttigeig with 26. According to betting markets, Sanders remains the favorite.

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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

This section includes regular commentary on currency flows and the opportunities that arise as a result of what I call shifts in order flow that leads to ‘market traps’. A brief video summary of this predictive market behavior can be found here. These types of video tutorials are regularly produced and accessible via the Global Prime’s YouTube section. These examples aim to demonstrate the story-line behind unfolding flows and the exploitable pattes as a result.

Accustomed to such low vol environment (lowest in years pre-COVID19), it’s very seldom to see the magnitude of Friday’s movement in the USD/JPY, with the dislocations of capital retuing back to the allure of the Yen leading to a negative 200+ pips move. The patte preceding this rout in the pair saw a poke into upper liquidity before a shift in market structure led to an immediate recognition by longs that mitigating exposure was the safest play. The unfolding flows that followed were one-sided throughout the day.

A similar picture was observed in what was the best Forex play during last week (short AUD/JPY), after an upward stepping formation trajectory tued in a dime. The shift in order flow created a structural breakout in line with the dominant trend. The retest of the backside level that had initially led to the last manipulative move up served as a pristine entry point to gain short exposure, capitalizing on the bearish momentum at an inflection point for it to resume.

A pair that has been absolutely destroyed by sell-side forces has been the New Zealand Dollar. The compression-like correction last Thursday saw an intraday break of structure, a point from which sellers maintained the dominance by defending the backside of the last swing low before the latest sell-off eventuated. This play yielded some incredible downside potential for the avid traders that managed to spot and exploit the patte towards the end of NY on Thursday.

Last but not least, the Gold market, against conventional belief, remained pressured following extremely overstretched conditions off the daily as of late. A land in the sand had been drawn where buy stop orders would most likely be placed got taken out on Thursday before a shift in order flow back down. This break lower raised the prospects of sellers re-engaging in pockets of strength at the role reversal level. The selling that followed was nothing short of extraordinary. Bold yet rewarding play for shorts.

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