USD Panic Buying Stays The Course
The Daily Edge

USD Panic Buying Stays The Course

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.

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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.

Let’s get started…

Quick Take

As authorities around the world continue in an unprecedented race against the clock to resuscitate battered stock indices, and laboratories ramp up resources to come up with a vaccine unlikely to see the light for distribution this year, there is a bigger problem at play. Govements simply can’t bring back to life an economy in comatose mode as global lockdowns are still in phase 1 and getting worse by the day. It’s a simple equation: No movement of people, no economic activity. So, what’s left? Govements must keep taking draconian measures on the fiscal front to mitigate the social unrest that is to come as the job is now to assert minimal decent living conditions as the ramifications in terms of job losses and bankruptcy is very ugly as the black swan of COVID-19 engulfing the whole world in a state of fear plays out. What does this backdrop mean for currencies? Well, same old dynamics, with a massive run towards the USD, which keeps its status as King of Forex. The JPY, CHF, and EUR, are also part of this group of beneficiaries, even if none is able to keep up with the fortitude in the USD. In stark contrast, Oceanic currencies and the Pound are being punished severely as the market behavior so far appears to be in strict resonance with movements in currencies from the last ‘liquidity event’ from back in 2008 when the GFC unraveled. Lastly, the CAD has been holding up firmer, but with such a perfect bearish storm in the background, still remains relatively expensive.

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!

USD liquidity crunch at play: The volatility in the currency market has gone up a few notches as the scramble for US Dollars, a liquidity event I’ve documented extensively in previous reports, stays on a steady course. AUD and NZD both broke through 0.60, hitting the lowest levels since April 2003 and May 2009 respectively. The GBP has been destroyed sub 1.15 to levels not seen in over 30 years. A similar picture can be found against the CAD, about to break into its highest since 2003.

Expensive USD an added problem: A rising USD is a major headache for the world economy as we live in times where the world’s reserve currency is more integrated than ever in the global payments system. Therefore, the higher it goes, the more stress it creates for businesses and govements to serve their dollar-denominated debt. This blow is especially acute in emerging markets. The outperformance of the USD against its peers as the Fed deploys all its bazooka is the ultimate signal that the need for USDs has far outweighed the negative impact of Fed policies. Bloomberg carries a thorough article that delves deeper into this hot topic at play.

Equities recover from lows: US stock indices managed to recoup half of Monday’s severe daily losses, with the S&P up more than 6.0{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} from its bottom. However, the VIX still exchanges hands in the hefty 75s following its highest close ever by NY close on Monday. Oil, industrial commodities, metals, continue to implode as everyone and their dog is piling into USD amid an acute USD liquidity crunch.

Desperate fiscal measures rolled out daily: Govements worldwide are adapting on the fly and have so far acted as a minor stabilizers of the stock market bloodbath seen. However, this comes at a time when social distancing expands globally, and more borders get shut down as each country looks to mitigate the virus expansion. With projections of extending lockdowns from a short 2 weeks into at least one month if not more, this is absolutely devastating for the proper functioning of an economy.

Chopper money as temporary patch: In the US, the term ‘helicopter money’, which essentially means handing out cash to citizens of about $1,000 to cope with the financial distresses that will surface in the short-term is gaining traction. This will be a very minuscule path that won’t do much to eradicate the core issue at play, which is that the world needs a vaccine and control the number of cases/deaths, but nonetheless can obviously help to delay the inevitable social chaos. The way these cash handouts work is that central banks print cash and give it to the govement to spend.

Commercial Paper facility re-opens: The Fed and the BoE, in more desperate measures to provide a backstop to the cascade of possible defaults that are to come, announced the re-introduction of Commercial Paper (CP) funding programme. Top Central Banks around the world are under extreme pressure to re-activate the US Swap line facility the Fed has made available at lower rates, while the Bank of Japan yesterday keeps pumping money into the local money market.

ECB announces emergency measures: The ECB has launched a EUR 750 bln pandemic emergency purchase programme (PEPP) of private and public sector securities to counter the serious risks to the monetary policy transmission mechanism and the outlook for the euro area posed by the outbreak and escalating diffusion of the coronavirus, COVID-19, the ECB announced.

Trump to invoke wartime act: As Trump scrambles to address the global crisis due to COVID-19, as Reuters reports, “U.S. President Donald Trump moved on Wednesday to accelerate production of desperately needed medical equipment to battle the coronavirus pandemic and said an estimate that U.S. unemployment could conceivably reach 20 percent was a worst case scenario.” Trump said “we’re going to defeat the invisible enemy.” Trump als decided on Wednesday to close the border with Canada. “We will be, by mutual consent, temporarily closing our Northe Border with Canada to non-essential traffic. Trade will not be affected.”

It’s happening… White House economic adviser Kudlow is the first one to start speculating about the US govement potentially considering to buy stocks. Larry Kudlow said “equity positions could be part of coronavirus aid.” I’ve argued left and right that as part of a circuit breaker for stocks, either market closures are enacted or the Fed/govement acts as the ultimate buyer of both equities and corporate bonds in what would be a bold move into uncharted waters.

Spooky GDP forecasts: We are starting to see banks finally providing new updated estimates. The numbers by JP Morgan put into perspective the damage this Weste-hemisphere lockdown is having on the outlook for the economies. JPM sees US Q1 GDP at-4{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6}, and-14{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} in Q2 GDP. In China, the numbers are way worse with Q2 -41{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6}, Europe Q2 GDP -22{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} and -30{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} in the UK. These figures are certainly a reality check to further drill in everyone’s mind how dire things look near term.

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.

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

  • RORO (risk on, risk off) conditions remain extremely depressed at a macro level.
  • On the bright side, fixed income was sold after the draconian measures by the Fed.
  • The S&P 500 recouped more than half its post crash losses by the end of NY.
  • The industrial commodity complex (CRB index) is in free-fall.
  • Oil is en-route to $20/barrel as the rout resumes after brief consolidation last week.
  • Gold priced in USD hammered as run to cash (dollars) keeps playing out.
  • The EUR index weekly chart shows price entering decade long resistance.
  • This resistance aligns perfectly with the 50{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} retrac from last decade’s sell-off.
  • The correlation between risk-off flows and EUR remains firmly positive.
  • The levels of vol in the EUR expected to keep increasing based on historical standards.
  • The GBP index on the weekly shows GBP has further room to fall based on GFC analog.
  • GBP tends to underperform G8 FX indices in a global crisis as the one seen unfolding.
  • The last GFC and Brexit precipitated the GBP index into a 20{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} depreciation.
  • Now that vol structure broken, if the same patte follows, only half way done.
  • Ongoing run to cash out assets into USD on the notion that liquidity/funding channels are not functioning properly with all Fed measures so far not addressing the issue.
  • The fact that the Fed failed to make any difference in depreciating the currency is the ultimate clue that the outlook for the currency is unambiguously bullish.
  • The USD index has only completed a small portion of the forecasted gains that is set to achieve in the next 3 months based on the analog behavior from the GFC.
  • The levels of vol the currency has hit are akin to the GFC, with everything sold against the USD in what fully validates a ‘liquidity event’ not seen for 12 years.
  • The world now holds a much larger USD-denominated debt that back in 2008, therefore, the scramble to get hold of USD to serve debt could be greater than in the GFC.
  • The CAD index is surprisingly still within the consolidation parameters from its last 4-year range despite the perfect bearish storm hitting the currency.
  • The CAD, which has the characteristic of a growth/commodity currency, is poised to be one of the most exposed to the economic downtu to come.
  • A resolution of the long-held range to the downside opens up the doors for an additional 8{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} fall in months to come in what I still perceive as an expensive currency.
  • The JPY index has broken its weekly price structure, which implies the next macro bull phase is well and alive until the ultimate target circa 15{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} higher.
  • Even if the JPY only appreciates half in magnitude relative to the moves seen in the GFC, this final target I point at below would still be met.
  • Note, the target selected that may represent a potential top in the JPY aligns perfectly with the highest JPY valuations in 2008 + 100{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} proj target.
  • Moves in the JPY, in terms of vol, are still poultry compared to the 2008 GFC, hence the JPY remains a risk of a significant pick up in vol as it appreciates.
  • The market shows no mercy to the AUD despite the area it has reached is the most relevant level of support it has traded since the last GFC.
  • In fact, as I type, the valuation in AUD when cross checked vs G8 FX basket has never been this low before as far as I can tell by the index chart.
  • The level of support reached is a major confluence as it includes the 100{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} proj target from last decade’s most active bracketed area + support line.
  • Should the supply in the AUD stay unabated, a much more dire scenario that will come into play is that the Aussie may keep falling towards its next 100{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} proj.
  • The NZD index has shown more resilience than the Aussie, but in a world with a reset of global economies, I think NZD has more catch down to do than the Aussie now.
  • This pessimism in the NZD finds resonance in the bullish outlook in AUD/NZD as it tests the parity level, which has been an absolute line in the sand forever.
  • This gloomy outlook in the Kiwi is backed up by technicals, with the breakout of structure now validating an ultimate target 18{c55dae091e2f4b96c42546a5edb68ce9f701c78980adb8fd55b74e573b5f59f6} lower from the breakout point.
  • If the acceleration in the NZD losses eventuated, the low that would be put in would come in complete alignment with the low reached during the GFC in 2008.
  • Just as the AUD index pierced its GFC low, the CHF is following a complete opposite course of action, breaking through its previous GFC high.
  • In times of risk aversion, the market has a preference to resort to the Swissy, with technical snow confirming that the sky’s the limit.
  • There is very little the SNB (Swiss National Bank) can do about it (slow down the appreciation via intervention, but largely irrelevant amid the capital heading into CHF).
  • As in the case of the JPY, the vol realized so far in CHF has been tepid relative to the GFC, therefore, I wouldn’t be surprised that we see a pick up in vol moving forward.

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

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