Coronavirus and markets in the week from 19/5 – 25/5/2020

Fundamental analysis

The total number of the coronavirus infections as at May 25, 2020 is more than 5,550,000 cases. Since last week, the total number of coronavirus infections has increased by 680,000 cases. Since April, the daily rate of infection worldwide has ranged from 75,000 to 107,000 cases.

•  
• The epicenter has moved to Brazil, where there are currently 367,000 cases (an increase of 121,000 cases since last week).
• In Russia, the number of cases rose to 353,000 (last week 291,000).
• The largest number of 1,698,000 cases is still in the United States (1,543,000 last week). There is a slowly declining trend of new cases, currently, the daily increase is in the range of 18,000 to 27,000 cases
•  In total, more than 2,333,000 people recovered from the disease.

We select the following reports from last week macroeconomic data:  

 

• The US reported a further increase in claims for unemployment benefits. Last week, 2.4 million unemployed people in the United States applied for the insurance. In total, more than 38 million unemployed people have applied for insurance since March 19, 2020.
•  German data show improved sentiment. The ZEW indicator for May reached an optimistic value of 51 (previous figure 28.2). Investors and analysts, therefore, believe in a quick restart of the German economy, despite the fact that the German economy is officially in recession as GDP in 1Q 2020 reached -2.2% (previous quarter 0.0%). 
• CPI in the euro area reached 0.3% on year on year basis, which is negative news for the euro.
• CPI was also low in Canada, which fell to -0.2% on a year-on-year basis (previous month (0.9%)).
• PMI in services in Australia improved from the previous value of 19.5 to 25.5. The manufacturing PMI fell from 44.1 to 42.8.
•  PMI data improved in the euro area, where the manufacturing PMI rose from the previous value of 33.4 to 39.5. PMI in services rose from 12.0 to 28.7.
• The auction of 10-year bonds in the USA reached the value - 0.47% (previous month 0.68%). This value continues to signal uncertainty in the markets. However, the USD has so far benefited from the status of a safe currency and therefore has not weakened too much.
• Retail sales in Canada in March fell by -10% on a month-on-month basis (the previous month was an increase of 0.4%).
• As expected, the Bank of Japan left the interest rate at -0.10%. BoJ Governor Kuroda said the central bank was ready to do anything to stabilize the economy. It is essential to maintain market stability so that the recovery of the Japanese economy can begin once the pandemic subsides.

 

The COT Report

Let's look at how large traders react to the situation and what the market sentiment in selected instruments is. The data is based on the COT report, which is presented regularly every Friday and shows the number of positions of large speculators in the futures markets in New York and Chicago. 



Table 1: COT report - position of large traders

Instrument	Data as at  22.5.2020	data as at 15.5.2020	data as at  8.5.2020	data as at  1.5.2020	data as at  24.4.2020	Sentiment
Euro	72 600	78 100	76 300	79 700	87 200	Bullish
Japanese yen	27 500	27 900	27 200	32 300	26 000	Bullish
Australian dollar	- 39 600	-35 400	-33 500	-37 700	-34 800	Bearish
Canadian dollar	- 35 100	-32 200	-32 100	-29 000	-23 900	Bearish
USD index	17 300	16 500	16 400	16 100	15 600	Strong bullish

Technical analysis as at May 25, 2020

The moving averages used in the charts are EMA 50 (orange line) and SMA 100 (blue line).
 

The EURUSD currency pair

 

The EURUSD has been moving in a declining trend for a long time, see Figure 1, which is confirmed by moving averages, as EMA 50 is still below SMA 100. The upper trend line CE was broken last week, so it is no longer valid. The lower trend line of BD still functions as a support.

The key to further development of the euro will be whether the agreement between Macron and Merkel to create a € 500 billion EU rescue fund, presented on May 18, 2020, will be approved by other EU-27 members. If so, the euro could strengthen strongly.
 

Figure 1: The EURUSD currency pair on a daily chart

The nearest support area is at the level of 1.0850 - 1.0870. Here, there is a hidden gap on the candle formed on May 18, 2020.  Another support is in the range of 1.0730 - 1.0780. Supports are also formed by the lower trend line BD.

The band 1.0978 - 1.1020 can be considered as the first resistance. Another resistance is in the zone 1.1140 - 1.1160.

Strong resistance is also SMA 100 moving average.

 

The USDJPY currency pair

 

The USDJPY strengthened slightly last week and stopped at the resistance we identified in the last article. At the same time, the pair is moving at a moving average of EMA 50. The USDJPY currency pair has been moving in a declining trend for a long time. Also from the perspective of the last month, the price is moving downwards, gradually creating a lower low.

The US dollar is currently benefiting from being considered the world's No. 1 reserve currency, and the Japanese yen, which is also the world's reserve currency, has so far lost slightly in the battle. The Purple Extreme indicator is overbought and so the USDJPY might start to fall, especially in the case of another batch of weaker economic data from the USA.
 

Figure 2: The USDJPY currency pair on a daily chart

The nearest support is in the range 106.75 - 106.95, where there is a hidden gap on the candle formed on May 11, 2020. However, since this gap has already been filled, it is possible to expect a decline to the next support at 105.90 - 106.10.

The nearest resistance is in the range of 107.90 - 108.30. There is a hidden gap in this zone formed on a candlestick on April 13, 2020. The next resistance is then in the zone 109.20 - 109.50.

 

The USDCAD currency pair

Since March 31, 2020, the Canadian dollar has been moving in the zone of the descending triangle defined by the trend lines EF and CD as you can see in Figure 3. Both lines were tested several times. Overall, the pair has been moving in a rising trend from February 20, 2020 and the price is consolidating in the triangle pattern. The development of the price in the oil market, which the Canadian dollar correlates with, will be essential for further direction. Oil prices are currently rising. This, along with optimistic sentiment for a rapid economic recovery, could support the Canadian dollar strengthening.

It is possible to trade a given consolidation in such a way that the trader would speculate on the reaction near the trend lines of the current triangle. If the trader entered a short price of 1.4080 with a target price of 1.3870 with a volume of 0.05 lot, then if successful, the transaction would bring him a profit of EUR 68. The stop loss could be at 1.4179 which in case of failure would mean a loss of EUR 31. 
 

Figure 3: The USDCAD currency pair on a daily chart

Resistance 1 is in the range of 1.4200 - 1.4340.

The nearest support is at the level of 1.3830 - 1.3870, where Fibo 61.8% is.
 

The AUDUSD currency pair

This currency pair has been moving in a strong upward trend throughout April, as did the US stock indices with which it currently correlates. Now the situation seems to be that AUDUSD is moving in a growing channel, which is defined by points CE and BG. However, tensions between the United States and China in response to China's efforts to introduce a national security law in Hong Kong could have a negative effect on the Australian dollar as Australia has very close trade relations with China.

We have seen in the past that the US-China trade war has led to a weakening of the Australian dollar. The question now is who might be interested in escalating tensions in the current economic climate of recovery from the coronavirus pandemic. China may also decide to wait 6 months for the result of the next US presidential election so there is a possibility that the situation may calm down.
In any case, in the case of a strong movement in a growing channel, such as the example shown in Figure 4, it is risky to speculate on a price decline if the price is at the lower trend line of the channel. For short speculation, it would be more appropriate to wait until the price breaks through the lower trend line and only then look for places to enter trades on the short side. 
 

Figure 4: The AUDUSD currency pair on a daily chart

The nearest resistance is in the range 0.6650 - 0.6700.

The nearest support is 0.6475 - 0.6500. Here, there is a hidden gap on the candle dated on May 18, 2020. Another support is in the zone 0.6370 - 0.6400.




 

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