Risk Buoyancy Hinges On US Fiscal Bill
The Daily Edge

Risk Buoyancy Hinges On US Fiscal Bill

Authored by Ivan Delgado

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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

Risk continues to be buoyed as the market keeps pricing in what appears to be an imminent approval by the US Senate of a huge $2 t covid-19 relief bill. The equities in the US, which acts as a barometer of risk, recorded back to back gains, even if the rally was far from impressive as after a 5{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6}+ rally, the S&P gave up over 80{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} of the gains. In the currency market, with volatility stabilizing between 4 to 5 times what we were used to pre-COVID19, the Canadian Dollar was the outperformer, the Sterling went nuts by trading in a wild 300 pips range all over the place, while the USD continues to weaken from grossly overextended levels. The gap in performance between the world’s reserve currency and any other currency since the onset of the ‘liquidity event’ has been impressive to say the least. The dislocations in the market, forced selling on margin calls amid sky-high vols led to an epic scramble towards cash. The Oceanic currencies, especially the AUD, were once again pressured and much of the ability to find a stronger footing lies on risk sentiment and the US bill to pass the Senate without further delays. This is precisely the next driver today, whether or not risk can be thrown another lifeline or instead politicians decide to throw a curveball with further delays in this much-needed action.

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!

Time of the essence to get US fiscal bill passed: Equities in the US recorded a second straight day of gains after the largest one-day rise in the Dow Jones the previous day since 1933. The equity market’s performance now hinges on the ability of US politicians to finally agree on a $2t fiscal package with some signs that Congress is not yet all in (vote ongoing) and has hit an impasse on the final approval of the bill. The risk is not so much on the actual passing of the bill but rather on further delays, which may put renewed pressure on equities.

USD keeps weakening from sky-high levels: Amid the more groovy vibes in equities and as fixed income finds stabilization after the unprecedented volatility seen, the USD extended its decline across the board. The infinite amounts of assets the Fed is committed to buy alongside the US fiscal bill has so far moved the needle, at a marginal level, to reduce the appeal towards the currency. It’s the first time since the virus crisis went haywire globally that the USD has recorded back to back losses, which correlates with the first back to back gains in US equities.

What’s the latest on COVID19? As part of the ongoing COVID-19 global crisis, numbers of deads have now surpassed the 20k mark at a time when the focus remains on the spread of contagion in the US, UK and Australia as countries where the lockdown measures came with delay. The situation in Italy appears to be stabilizing as the death toll is slowly flattening, while Spain’s exponential growth curve is still in ascend. Meanwhile, Trump keeps pushing the narrative that the economic repercussions of an extended lockdown may be worse than the remedy, at a time when the WHO was against lifting the lockdowns too early as the pandemic intensifies.

US Jobless claims the big release today: We should brace for a staggering US jobless claims figures today, likely to shock the unprepared, with economists talking about a ‘nuts’ range of 1-3 million Americans to have filed for claims insurance. This is the type of headline that when confirmed (Wednesday), may shock markets, as waed earlier this week.

GBP remains hugely volatile: The currency moed up and down in a big 3 figure range and is hard to rationalize what’s really causing the wild movements. One line of thought is that the UK continues to be way behind the curve in its measures, compared to other countries, to mitigate a nationwide COVID-19 contagion. Johnson imposed a nationwide lockdown by which it has collectively shut down cafes, pubs, bars and restaurants, while the finance minister recently announced that the govement would pay 80{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} of wages for employees unable to work — up to 2,500 pounds/month. All the latest about the virus in the UK can be found via the Guardian.

The Canadian dollar was the outperformer: One reason being attributed to the one-sided buying flows includes the measures by the govement to fund households by paying $2000/month to people who lost their jobs. News that the hardest hit oil companies would receive financial assistance from the govement, alongside the overall risk appetite, were also positive developments aiding the ride higher in the Canadian Dollar.

Potential Oil storage crisis brewing: This is a new threat to OPEC as the combined demand/supply shock due to COVID-19, alongside the all-out price war, has led to very cheap prices for crude oil as Saudi Arabia and Russia ramp up production to the boots. As Reuters notes, “there are 7.7 billion barrels of onshore storage capacity globally, according to analysts at Rystad Energy. Right now, more than three-quarters of that storage space is already being used…” But it gets worse as Reuters elaborates in the following article.

EU prepares credit lines: As Bloomberg reports, “the EU is preparing to make available credit lines from its bailout fund worth up to 2{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} of each country’s output…” as part of joint action to complement the individual national stimulus measures. According to a draft statement seen by Bloomberg, EU leaders are negotiating ESM credit lines, set to be finalised by next week. The credit lines would be derived off the European Stability Mechanism (ESM), a fund intended for emergency loans to Eurozone countries at risk of a collapse. The option most viable to finance it appears to be ‘coronabonds’ – combined securities from different EU countries -.

Germany approved fiscal bill: The eye-popping 750bln euro crisis package was given the green light, which will ease pressure on those smaller/mid mid size firms and the self-employed. By any measures, the numbers are huge. As Forexlive notes, “Germany’s GDP is one-fifth of the US which just unveiled an enormous $2 trillion package. In relative terms, this is much bigger.”

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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Quick review weekly FX flows: The overall volatility in the Forex market continues to decrease from greatly inflated level, which in the case of the EUR or USD, it recently hit a spike of over 1,000{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} above its pre-COVID19 levels, which was of course unsustainable. By scanning through most of the indices, it appears as though currencies are trading at an interval of 3 to 5 times the pre-COVID19 volatility on average. What this means is that if during the depressed vol era the EUR/USD would be trapped in a 40-50 pips range, it now displays, on average, a range that is 4 to 6 times wider, in other words, between a minimum of 160 and 250 pips. This same example can be extrapolated to most currencies. The Pound remains very volatile in the context of a bearish trend, with vol still running in the highs 300{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} from normal levels. To put things into perspective as to how ‘mind boggling’ the run in the USD has been, at its peak, the currency netted an increase in volatility of 1,600{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} from its pre-COID19 crisis levels. This is the type of ramification when the global financial markets go haywire in a classic ‘liquidity event’. The CAD still maintains a bearish outlook technically-wise with the 50{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} retracement a tough nut to crack, even if the currency keeps showing big resilience as of late. The Yen still looks promising for longs structurally as it just recently filled its early March up-gap with vol still running rampant, in the case of the Yen, around 400{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} above levels recorded earlier in 2020 before COVID19 went global and markets started to panic. The same story applies to the Swissy. Lastly, the outlook on the AUD and NZD remains overall bearish with vol stabilizing near the 200{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} increment mark.

Let’s now get started with a look at every index…

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