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Coronavirus

5 forex pairs making big moves this week

Sean MacLean
Sean MacLean
Research Strategist
May 4, 2020
The US dollar squeeze is easing but markets remain volatile as the world’s largest economy the USA approaches peak virus.

The global outlook hinges on just how long the virus outbreak lasts and an oil price war that could take crude prices to US $20 per barrel. With this background in mind, here are five forex pairs making some compelling moves this week.

AUDUSD

The Australian dollar fell below 60 US cents last week and considering its role as a global risk proxy, it probably belongs below the 0.6000 handle until there’s evidence the virus is being contained. The AUD had a run above 0.6000 Wednesday late in the Asian session before European and American trading pushed it lower again.

AUDUSD daily chart

"Daily chart: AUDUSD has found resistance at the 0.6000 level. The asian session on Wednesday tried to give AUD a run higher but the European and American sessions later in the day drove it lower again."

Key levels:

0.6000 resistance - A close above this level would be expected as global risk appetite improves, and would signal a move higher.

0.5700 support - A close below here would indicate a move lower towards 0.5500 and beyond to the 2001 lows.

0.50675 support - 2001 lows.

AUDUSD closed above the 20-day EMA (blue line) Tuesday for the first time since 9 March as the USD squeeze eased and risk aversion cooled a touch after markets warmed to the US Fed’s QE unlimited. The forex pair looks ready to move below the 20 EMA again after a failed run above 0.6000 level in Wednesday’s session.

I’ve previously stated the AUDUSD’s role as a global risk proxy means it probably belongs below 0.6000 until we’re through the CoVID-19 outbreak. Resistance at the 0.6000 level looks happy to hold, and AUDUSD could be eyeing a re-test of 0.5500.

Pressure will remain on the Australian dollar for a few reasons. Domestically, Australia’s virus cases are yet to peak. They will likely peak mid April, meanwhile more severe lockdown measures are expected and although necessary will further stall the economy.

Then on an international level, the Australian dollar reflects global risk adversity, notably moving lower with struggling emerging market (EM) currencies. There’s also the strong US dollar, which only adds to the Aussie’s woes. While cases escalate in the USA, where NYC has become a global hotspot, investors will continue to seek safer assets, and global risk aversion will hold the Australian dollar low. A circuit breaker here would be a slowing rate of spread in the world’s largest economy but that could be weeks away yet.

We must also consider the correlation between AUDUSD (white) and USDCNH (purple, inverted). China is Australia’s biggest trade partner and buys a considerable amount of Australia’s iron ore, coal, and gas. If China gets back to work, ramps up production, and reduces downward pressure on the yuan, perhaps the AUD will find a bid up as well.

AUDUSD bonus chart

"AUDUSD is driven by moves in USDCNH (inverted). Source: Bloomberg"

EURUSD

It’s been a rollercoaster for EURUSD price action recently. The euro climbed late February in a safe haven bid before facing a sharp sell-off as global markets raced to hold US dollars. Eurozone Markit PMI data confirmed the collapse in business activity we all knew was coming, while the ECB looks prepared to do whatever it takes to support the shared currency.

EURUSD 4hr chart

"4-hr chart: EURUSD breaks above the downtrend that started 10 March. Is the euro ready for a move higher?"

On the four-hour chart, the euro has closed above the downtrend that started 10 March. This is a bullish sign that the euro has found a bid higher despite the virus outbreak getting out of hand in hotspots Italy and Spain, with 70k and 47k cases respectively. So where is the euro finding a bid higher?

Firstly, the rush to US dollars has calmed, which has let the euro find its feet again. But importantly, markets have found support in the European Central Bank’s (ECB) no-limits commitment to eurozone price stability. The €750bn emergency bond-buying package was only temporary relief last week, but further consideration of the ECB’s most powerful bond-buying tool, Outright Monetary Transactions (OMT), is another promising sign. OMT was designed in 2012 under then ECB President Mario Draghi’s ‘whatever-it-takes’ approach. The yet unused policy would give the ECB power to purchase unlimited amounts of government debt. The ECB is also considering the issuance of one-time ‘coronabonds.’

Markit PMI data for March revealed on Tuesday what markets knew was coming: a deep contraction and dismal outlook for Q2. The Flash Eurozone PMI Composite Output Index collapsed from an expansionary print in February of 51.6 into contraction for March at 31.4, the worst in its history.

Despite the low print, the euro closed higher on the day. Markets had already priced in a dire situation ahead, including a downbeat Q2. The outlook for the euro hinges on Q3. If it looks like Europe can contain the virus in time for Q3 and we see life getting back to normal, the euro should move higher. Otherwise if lockdowns and mass business closures persist into the second half of the year, we’ll see another round of selling, not just of the euro but also its share markets.

Across to the US, weekly jobless claims numbers tonight look set to print worse than expected, with one million claims this week in California alone. Even though moves in the USD are currently more related to the global than domestic outlook, the magnitude of the jobs claim blowout could dampen the USD a touch and boost EUR in return.

USDNOK

USDNOK is cooling after the Norwegian Krone took a double hit last week, which pushed it to an all-time low against the USD, closing painfully on Friday just below the 12.0000 handle. Both the global rush to US dollar as well as low oil prices caused considerable Nokkie weakness.

USDNOK 4hr chart

"4-hr chart: USDNOK is moving tightly along the downtrend as the NOK regains strength after last week\u2019s all-time low."

The four-hour chart shows USDNOK respecting the downtrend as the USD cools, oil prices pull a touch higher, and the NOK regains its strength. This should be a nice trend to ride lower in the short-term.

The Norwegian krone is a petro-currency, with oil accounting for more than 20% of Norway’s GDP and half its exports. It’s the country’s most important industry, so sharp changes in oil prices can move the Scandinavian currency.

The oil price war between Russia and Saudi Arabia is expected to last a few more months, with supply expected to ramp up significantly in April to the point there’s concern the world won’t have enough barrels to store the biggest ever surplus. If this eventuates, it’ll be another blow to global oil prices and we could see WTI crude fall below US $20 per barrel. This would also be a blow for petro-currencies, the NOK included.

USDCNH

The USDCNH cross is a fascinating trade between China (CNH), where the outbreak began, and the USA (USD), which looks to be the new outbreak center. The forex pair is making some large swings as markets remain volatile and virus uncertainty lingers.

USDCNH chart

Key level:

7.1680 resistance - The October lows during US-China trade war tensions held as a resistance level despite last week’s USD strength.

USDCNH upside (CNH weakness) will persist while volatility remains high and the US dollar maintains strength in a bid against a global downturn. Despite the surge for USD last week, USDCNH respected resistance from the October highs.

The world is watching closely as China approaches getting back to work after months of severe lockdown measures. If they manage to ramp up production and avoid a second wave of virus infections, China’s economy will begin to look really good relative to the rest of the world who will continue to struggle with the virus. That sort of good news should boost the CNH (USDCNH downside).

USDMXN

USDMXN has started a correction lower after emerging market currencies were smashed last week by risk aversion and USD strength. At such high levels, the pair is expected to remain volatile. On Thursday, USDMXN is trading 22% higher than the February close.

USDMXN daily chart

"Daily chart: USDMXN weakness persists even as risk appetite returns and the USD cools."

That steep uptrend in USDMXN that ended Monday shows how sharply the Mexican peso (MXN) weakened in such a small amount of time, and reflects a broader trend across emerging market (EM) currencies like the South African rand (ZAR) and the Thai baht (THB). The cooling US dollar has provided some relief, but EM weakness persists.

Emerging market currencies reflect global risk appetite, and current EM weakness shows just how risk averse global investors are. So when does risk appetite return and support emerging markets? I think attention turns to the US here, particularly New York City which has fast become a virus hotspot. A slowing in cases in the world’s largest economy would be a major circuit breaker for the global downturn right now. But uncertainties linger over how effective containment measures will be, especially as President Trump talks about relaxing controls as soon as Easter.

If the US can’t get a lid on the virus the coming weeks, concerns rise about Q3, risk aversion ramps up, another wave of selling kicks in, and emerging markets are dealt another painful blow.

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