Bank of America recently broke resistance area lying between the key resistance level 24,00 (top of the pervious correction (ii) from March) coinciding with the 50% Fibonacci retracement of the previous downward impulse A .
The breakout of the resistance level 24.00 should accelerate the active short-term impulse wave (i).
Bank of America is likely to rise further toward the next strong resistance level 26.00 (former multi-month low from August of 2019 and the forecast price for the termination of the active impulse wave (i)).
AUDUSD recently broke through resistance zone lying between the resistance level 0.6200 (which stopped the previous wave A in March) and the 61.8% Fibonacci correction of the previous sharp downward impulse 5 from last month.
The breakout of this resistance accelerated the active impulse wave C from the start of April – which belongs to ABC correction (2) from March.
AUDUSD is likely to rise further toward the next resistance level 0.6430 (former monthly low from February and the target for completion of wave C).
The American currency declined this month across a wide range of markets, and this is good news. The dollar index is almost 5% below its peak on March 20. However, this retreat of the American currency should not be associated with a high number of cases of coronavirus disease.
Neither it is a reflection of the world’s largest economy weakness. In general, it has a high chance for growth due to the ability of the U.S. Treasury to borrow money at near-zero interest rates.
The current wave of dollar weakening is a sign of the beginning of the world’s recovery. For sure, it is too early to give a final verdict. However, the markets are seeing cautious purchases of assets that have fallen in price but are still relatively healthy.
There is a fundamental difference between market growth in mid-March and now. At that time, it was a bounce after the markets collapsed. Later, in late March and early April, the markets were balancing, waiting for further signals. There have been more positives:
– The world as a whole has managed to stabilise the spread rate: it has been declining for several consecutive days, as well as the number of new deaths; – governments and central banks of developed countries have announced unprecedented injections into national economies; – some countries in Europe are already beginning to lift the restrictions gradually.
The Fed fulfilled the market’s demand for dollars in the form of extreme asset purchases. Now the question is different. Where will these “printed” trillions of dollars and billions in cash checks distributed to millions of people go?
The experience of 2008 suggests that at the first stage, this money comes to financial markets. It affects the prices for commodities.
Whether this will accelerate the overall inflation rate is an important question. This did not happen after 2008, as consumers put new income to reduce the debt burden and increased savings.
Now it is more likely that the new money will accelerate inflation, which will further erode the value of the dollar. Besides, the dollar will be “spent” from world reserves.
And this can be considered as good news because periods of moderate weakening of the dollar are often associated with the accelerated growth of the world economy, increased demand for oil and metals and recovery of high yielding currencies, which collapsed in the first three months of this year.
Futures for S&P500 added 2.5% on Friday after Index increase 0.6% on Thursday. The growth momentum for stocks gave the US quarantine relief plan. The VIX volatility index fell back below 40. DAX is up 3.4%, CAC40 + 3.7%, FTSE100 +2.9%.
DXY is losing 0.3% today after rising 0.5% on Thursday. The dollar recedes to many currencies, especially to commodity-linked ones. Within the day, GBPUSD trading is concentrated in the range 1.24-1.25, for EURUSD – in 1.08-1.09.
Gold sold sharply on the return of buyers to stocks, having received support only in the recession under $1685. Now the tug of war has moved to the $1,700 area.
Brent does not depart from $30.5. May futures for the American WTI fell to 17.27 (-12.3% intraday), bouncing up to $18 at the time of writing.
Markets support news about quarantine weakening plans in some European countries. Still, they continue to frighten the scale of the economic downturn, which is outlined by outgoing statistics.
Important events for April 20, GMT (Exp.): 22:45 NZ !!! Consumer Price Index (1Q20, 2.3% y/y) 23:50 Jp !! Trade Balance (Mar) 10:00 Ge !! Bundesbank Monthly Report
GBPAUD recently reversed up from the support zone lying between the support level 1.9400 (which also reversed the price at the start of March), lower daily Bollinger Band, support trendline of the daily up channel from 2019.
The upward reversal from this support area is likely to create the daily reversal pattern Hammer – if the pair closes today near the active levels.
GBPAUD is expected to rise further toward the next resistance level 1.9800 (which reversed the earlier short-term corrective wave (ii) earlier this month).
Aussie recovery and suspicious weakening of the franc
April 28, 2020 @ 11:38 UTC
The world markets started trading session on Tuesday with a dive into the red zone. However, they managed to return to growth in the wake of news about the spread of coronavirus. Growth in the number of cases on April 27 was the lowest in more than a month. Besides, the number of recoveries is increasing, and the number of patients in critical condition is falling. Australia, which has avoided a significant spread of the disease and many deaths, is beginning to ease restrictions for businesses.
This news spurred demand for risk assets and helped the Australian currency to rise to a 6-week high, recovering three-quarters of its decline from the peak levels of March.
The positive dynamics of the Australian currency may be a manifestation of a broader business recovery process in the Asia-Pacific region, which was the first to suffer from the new coronavirus. Also, in 2008 AUDUSD reversed towards growth shortly before the beginning of a broader markets reversal. Then the driver for the Australian dollar was an extensive stimulus program in China. Now there are many smaller programs, but they are supported by softening of credit conditions from the People’s Bank of China. So the experience of 2009 may well apply to the current situation, making AUDUSD an indicator.
Elsewhere there is an interesting turn in the European currency market. EURCHF in the previous two weeks found its “bottom” near 1.05. Considering the nature of the movement, it was managed by the Swiss National Bank. SNB may use ceiling for EURCHF in attempt to stop the strengthening of the franc above 5-year highs against the euro. Earlier, on March 9 the USDCHF also turned sharply up from the lower bound of its 5-year trading range.
EURCHF rose yesterday by 0.8% as speculators may act on the SNB side selling the franc along with the markets. However, with tightening credit conditions on the markets, a fundamental stream may push EURCHF down again, forcing the central bank of a small country to protect its economy from an excessive strengthening of the franc.
It is interesting to know how many monetary authorities of other countries will perceive direct interventions at a time when everyone would like to push the competitiveness of their exports through currency depreciation.
GBPAUD recently reversed down from the resistance zone located between the key resistance level 1.9510 (former strong support from March and April) and the 38.2% Fibonacci correction of the earlier downward impulse from the start of April.
The downward reversal from this resistance zone stopped the previous short-term corrective wave (iv).
GBPAUD is expected to fall further toward the next support level 1.9290 (former monthly low from March).
Weekly US Jobless Claims data looks the most timely estimate of the labour market. And this assessment can hardly be called optimistic. Last week, there were 3.169 million people claimed for unemployment insurance. The wave of the end of March is smoothly dying out. And the keyword here is “smoothly.” Over the week to April 25, the number of continued weekly claims reached 22.65 million compared to the expected 19.9 million. Such a rapid growth suggests that people who have lost their jobs or are on forced leave are still unemployed. More precisely, over the six weeks of booming unemployment, 30.3 million people applied for benefits initially, 70% of which are still without work. Short-term forced vacations are increasingly turning into job cuts. More and more companies are announcing plans to cut staff. From tomorrow’s Payrolls, market analysts expect a 21 million decline. However, according to our estimates, recent weekly data, NFP decline may be closer to 23 million.
In the EURUSD, traders’ attention now focused on the support area. Close to these levels (1.0780), the pair have been getting for support since February but is increasingly pushing for it. Frightening US data can return the demand for the dollar and Treasuries as a safe-haven during the storm. Moreover, the powerful “vacuum cleaner” of the US Treasury turned on fully, intending to attract $3 trillion from the market in the second quarter. On the other hand, the ECB has to overcome the resistance of Germany, which has become an open opposition to the current form of QE. Without such an essential buyer in markets like the ECB, such a money market “cleaner” in Europe will not work on its full capacity.
SNB stops CHF’s growth and breaks it as an indicator
The Euro rose to two-week highs against the Dollar. Surpassing 1.0930, the common currency is close to restoring its losses from the beginning of the month to the Dollar. In this case, more than 1.2% growth in a day is probably due to the Swiss National Bank, which protects the Franc from strengthening.
The Swiss Franc against the Euro rose by 4.5% since December last year, showing equable growth during the first four months of this year. However, about a month ago, the EURCHF found its bottom in the area just above 1.05. This is slightly below the 2017 low. The last time such levels were observed about five years ago.
There are several reasons behind the appreciation of the Franc to the Euro. The economy of the European region started slowing down right after the first volleys of trade wars. The currency market reacted even earlier, beginning to sell the Euro right after the first Trump threats. In two years, the Euro lost 12.5% to the Franc. The decline accelerated after the ECB started to soften the policy. At the same time, the SNB remained in the same positions, keeping a profoundly negative rate.
Earlier, from September 2011 the SNB introduced a ceiling for EURCHF at 1.20, which was abolished only in January 2015. Back then, this benchmark formed a pattern of behaviour of traders who bought EURCHF, earning on the interest rate difference and having the SNB as an ally on their side.
This story ended tragically for many traders and some brokers when the SNB suddenly gave up this peg. This time it operates without declaring precise support levels, but more and more traders seem to have caught the new pattern.
These SNB interventions also have other consequences. The Swiss Franc is often an indicator of demand for protective assets, showing growth at a time of high uncertainty in the markets. Extension of the Euro against the Franc pushes up the single currency, which in normal conditions corresponds to an increased demand for risks. Now, this indicator looks broken. The current rebound of EURCHF from 1.0500 to 1.0650 may be due to the favourable market dynamics, as well as purchases of Euro and Dollar for the Franc by the country’s central bank. And it is weakly combined with the period of healthy and free moving markets, causing doubts that the markets have finally turned to growth.
The rally of world markets continues, and the dollar is rapidly losing ground. Very often, the weakening of the U.S. currency goes hand in hand with the strengthening of purchases on world markets. With a few exceptions, this is a normal state of healthy markets, which makes one believe that this trend will continue.
The single currency reached 1.1200, having recovered its losses since the beginning of the year, showing growth during the eighth trading session in a row. After sharp fluctuations in March, EURUSD still managed to turn back to growth and shows signs of breaking the two-year downtrend.
An additional positive sign is Australian dollar dynamics, which was approaching 0.7000 earlier in the morning, and as euro, almost completely restored its decline so far this year.
It is also fascinating that the ECB, is expected to expand its asset purchase program later this week, which is a negative factor for the currency. Australia reported today a decline in GDP in the first quarter, and the government is talking about a present recession as the economy shrinks rapidly in the second quarter.
Meanwhile, the markets are optimistic, suggesting a V-shaped economic recovery as we can see on the charts of stock indices and AUDUSD pair. Currencies of large emerging countries follow the suite: the Russian ruble jumped by 12% over two months, while the South African rand – by 10%.
And at the moment investors are faced with the vital question, which is right, markets or economists and policymakers? The latter group are looking to the future with anxiety and are considering new measures to support the economy. So far, there is a feeling that the markets are too carried away buying on the rebound and have gone too far, offsetting the March collapse.
We saw the same thing earlier this year when the S&P 500 climbed to new heights in January amid a burgeoning epidemiological disaster. The same can be said about the currency market, where technical indicators show that the dollar is oversold compared to a vast number of currencies from AUD, EUR and CAD to RUB and ZAR. This week we will see U.S. job data for May, where it is expected that more many millions decline in employment and rise in the unemployment rate to 20%. This release may sober the markets, bringing back the idea loss of employment can trigger a downward spiral, where spending cuts lead to job losses and new spending cuts. And not for weeks anymore, but many months.
The S & P500 index managed to reverse the pressure of the bears, formed on fears of the second wave of the spread of coronavirus, within the day. Futures on the S & P500 within the day lost more than 2%, but at the time of writing, they were able to almost completely clear out intraday losses and close the gap at the start of trading that can be a crucial manifestation of buyer’s power.
It is with great caution to look at this intraday recovery. SPX closed last week below the 200-day average that a sign of the sentiments of institutional investors and banks: they are not ready to believe in a further bullish market turn.
Usually, in the middle of the day, applications from mutual funds are executed on the American market, and retail investors are activated. They have pulled markets up in previous weeks and are determined to buy out the recent drawdown. However, at current levels, there may be no shortage of sellers.
The interest of retail investors is a very volatile thing. People willingly join the game when they see positive dynamics, but are very quickly disappointed without seeing positive changes in the account.
Separately, it is worth remembering that retail customers are much more limited in the use of borrowed funds. And the new capital (separately from paper profits) is entirely in doubt with unemployment jump. Also, the fundamental reasons for buying stocks are in question, because in the long term neither the inflationary threat nor the growth of dividend yield can be seen.
The weakening of the dollar on Monday made a threatening turn, triggering a wave of stop orders, exacerbating the situation. Very often, such sharp growth impulses are followed by reversals.
EURUSD seems overbought
During the day, the pair’s rate jumped by more than 1.2% to 1.1780, the highest level since September 2018. On Tuesday morning, however, the pair rolled back by 0.5% from yesterday’s peaks, settling down around 1.1720.
On the daily charts, the RSI moved above 80 yesterday, reflecting the extremely overbought area. As a rule, such high values coincide with the peak of the surge, followed by either extensive correction or reversal.
All fundamental assumptions that have pulled the dollar down in the last few days remain in force. However, on the daily charts is easy to see that the pressure wave of weakening has gone too far. Further retracement of EURUSD from the current level can cause it to return to the 1.1550 area.
On Tuesday morning, it seems that buyers of the American currency have returned. It is a relatively small move, but it managed to strengthen USD against a wide range of currencies, including so-called ‘safe’ JPY and CHF and ‘risk-sensitive’ GBP and AUD. The currency market is often the first to give trend reversal signals, and today may be one of them.
Gold hasn’t reached above $2000
As the dollar antipode, gold rose yesterday to $1945. During the Asian session, the wave of stop-orders pushed the price above $1980 for a short time. However, without support from the currency market, this impulse has quickly exhausted. Gold soon returned to $1935, erasing all early gains.
Technical analysis suggests that the correction of the eight-week rally can cause a price drop to $1860 an ounce. If the dollar recovery turns out to be stable and stretches out for the next few days, you should look at the stock indices with caution. Firstly, dollar purchases may be fueled by a stock sale. Secondly, very often, the powerful growth waves of the American currency are accompanied by a suspicious sentiment in the markets.
• EURCAD reversed from key resistance level 1.5975
• Likely to fall to 1.5655
EURCAD recently reversed down exactly from the key resistance level 1.5975 (which stopped the sharp uptrend in the middle of March, as can be seen below). The resistance area near the resistance level 1.5975 was strengthened by the upper daily Bollinger Band.
The downward reversal from the resistance level 1.5975 created the daily Japanese candlesticks reversal pattern Dark Cloud Cover.
EURCAD is expected to fall further toward the next support level 1.5655 (former monthly high from the end of March).