All About The Corona Virus As Risk-Off Settles In
Ivan Delgado | Jan 27, 2020 04:28AM ET
Be on high alert as this is one of those weeks when, as traders, there may be a a higher-than-usual number of opportunities up for grabs as the coronavirus keeps spreading like wildfire in China with more cases popping up around the world. Risk off has settled in and the usual suspects (JPY, CHF, Gold, USD) are faring quite well. If you are interested in getting more detailed insights, keep reading the report...
Quick Take
The threat of the Corona Virus hitting much harder than thought the Chinese growth prospects, and as a consequence, the global GDP outlook this first semester, is a reality that the markets are starting to decisively account for, as demonstrated by the sharp falls in equities globally or proxies for China such as the Aussie, Kiwi, the Yuan itself, or the appreciation of safe-havens the likes of Gold, the Yen or seeking out protection by buying fixed-income (bonds). Originated in China, the virus is now thought to have infected more than 100,000 people in China, and is now spreading to other countries such as Japan, India, Hong Kong, the US, France, Australia and more.
Aside from the BOE policy decision this week (50/50 chance of a rate cut), the virus spreading news is going to dominate the proceedings. Even the FOMC or Aussie CPI may prove to be just small hiccups in volatility as opposed to the movements that the coronavirus developments may produce. The markets are in clear risk-off mode and if the virus continues to get worse, there may be great plays on the horizon this week with a marked improvement in volatility to be expected, even if sadly, it’s for the wrong reasons.
Be on high alert as this is one of those weeks when, as traders, there may be a lot of opportunities up for grabs. At this stage late in January, the best performing currencies continue to be the USD, CHF, GBP and the JPY, with the latter appreciating very rapidly as the coronavirus topped the headlines. On the other side of the spectrum, the AUD and NZD are the two stand out losers, with the outlook for the EUR and CAD not looking good at all from an index technical perspective.
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Risk-off as coronavirus tops the headlines: The rapid spread of the coronavirus, not only within China, but with more cases popping up across the world, the market keeps understandably taking notice by depressing the valuation of risk assets, within a context of hefty levels, while the Yen is the main beneficiary. On the flip side, the Aussie and Kiwi are the currencies most negatively affected as these act as the most direct play to reflect one’s view on China as synthetic instruments in Forex.
The coronavirus keeps spreading like wildfire: The number of China coronavirus virus cases is estimated to have risen to nearly 100,000 according to a social media and reported by the NY Post, and the death toll is now approaching the 100 mark. The market is very worried, as clearly reflected in the price action of not only forex but also equities and bonds, that the Chinese and potentially global growth outlook may take its toll in the order of 1% to 2% this quarter.
More than 50 million people are in lockdown situation: The fact that China is looking to contain this epidemic by all means possible since pretty much day 1 was already a major red flag telling us that the risk levels appeared much higher. By now, China’s measures have resulted in more than 50 million people in lockdown and unable to leave cities as the order to shut down of more than a dozen cities continues to be in place.
Lockdown of Chinese cities too late? One important piece of information not to underestimate is the fact that prior to Wuhan going on full lockdown, over 5 million residents left the province headed to their respective homes in motives of the Chinese new year celebrations, according to the mayor Zhou Xianwang. The South China Morning Post reports, citing the Health commission, that battling the epidemic is becoming more complicated as the Chinese State Council extends the Lunar New Year holiday to February 2.
Virus carries high reproduction and mortality rate: But there is more evidence of the bleak outlook for the short-term containment of this disease. According to various sources citing research papers out there, the basic reproduction number of this virus, which essentially means how many people each person passes the virus to another on average, stands at a scale of 2.5 to 3.5, when aggregating most findings. The higher it is, the more countries will struggle to quarantine the spreading of the virus. Besides, other papers estimate the mortality rate to be dangerously highs at about 15%.
Infection estimates not looking good: According to UK virus researchers, the estimate is that 250,000 people in Wuhan will have coronavirus in 13 days, spreading to nearby cities and countries next. This data points projected seem to be in line with the current actual numbers revealed by the whistleblower. If these estimates on the transmission parameters for the Wuhan coronavirus prove to be accurate, the outlook for the health situation and the Chinese economy overall looks very bleak near term. Dr Jonathan Read said an explosion in the number of cases is less than two weeks away. By February 4, he writes that "our model predicts the number of infected people in Wuhan to be greater than 250,000 (prediction interval, 164,602 to 351,396)." The paper makes the observation that “these projections make strong assumptions.”
US embassy in Iraq attacked by rocket: Weighing further on risk dynamics is the news that the US embassy in Baghdad was hit with a rocket. There have been no casualties but one hit the US Embassy, according to al-Sumaria. It is thought that all these attacks continue to be orchestrated by the Iranian government as a means of retaliation to force the US military forces out of the region after the death of Iran’s highest-profile military commander by the US. The Iraqi PM condemned the attack.
Green shoots out of Germany, Eurozone continue: There were a number of positive takeaways in last Friday's Germany and Eurozone January flash manufacturing PMIs, both coming above expectations. To make it more encouraging, the beat occurred in both the manufacturing and services prints, even if these recoveries are still happening in the context of contraction readings below the 50.00 mark. It’s positive to see that the drag from the decline in manufacturing activity is receding and that the contagion into services was not as bad as some had feared. However, the coronavirus out of China is certainly a major threat to this more constructive outlook as growth is likely to stagnate.
BoE in focus amid improving UK manufacturing data: One even that will command the attention of the market this week is the BoE policy setting decision, with the chances of a cut in rates a 50/50 show at this point. The latest economic news out of the UK came in the form of the UK January flash manufacturing PMI, which saw a decent beat at 49.8 vs 48.8 expected as the post-election sentiment continues to improve. The report outlined a marked improvement in business sentiment after the election, with the services and composite are at their highest level in sixteen months. Markit notes that: "The survey data indicate an encouraging start to 2020.”
Recent Economic Indicators & Events Ahead
Insights Into FX Index Charts
The euro index offers no change in its well-anchored bearish outlook from a daily perspective with the breakout of its range structure allowing further leeway until the 100% proj target. My expectation is for the EUR down-cycle dynamics to remain unperturbed for the tiime being. All the visual cues via the smart money tracker moving averages hint the same bearish bias. The move lower in the EUR is in line with the negative seasonals outlined since the start of January.
The GBP index continues to be a market that, based on technicals, shows the risk of being bought up on weakness as the price structure and the smart money tracker moving averages align in the same bullish direction. Barring any major surprise by the BOE on Jan 30 this week (a rate cut this week is a con flip with 50/50 priced in), technicals reveal that an extension of the buy-side campaign until the 100% projected target is the base case for me, which would produce a gain of circa 1.35% from the current levels. The stubbornness of the Pound not to fall on bad news this month was a powerful hint that this market remains overall bullish.
The USD index keeps revealing bullish flows as the recent consolidation pattern is on the cusp of breaking out to the upside in what would cement even more the bullish directional bias. The equilibrium found at monthly highs for a number of days was always a strong positive sign f a market accepting the new higher valuations, a prospect backed up by the price structure following the breach of the prior highs, and coupled with the smart money tracking moving averages all pointing higher. All these developments indicate a powerful technical combination that communicates the risks are clearly skewed to the upside. The long bias is what I’ve subscribed to since the beginning of the year and I remain holding this view, with such stance backed up by forex seasonals in the month of January, the best month of the year for the USD.
The CAD index retains a bearish outlook after finding a minor point of support in the form of a key swing low in the chart, in what’s thought to have been aggressive profit-taking and bargain hunting following the momentum-led play post a dovish BOC last week. The breakout of its range has led to adopt a sell on strength bias as the base case in line with the price structure and the set of moving averages tracking the smart money directional flows. The seasonals for the CAD are positive in January, but the BOC decision easily trumps these statistics.
The JPY index appears to have further upside room until faced with the next level of resistance, which is not far overhead, and the next logical area to struggle. As long as the market is caught up in this risk-off phase driven by the coronavirus, the JPY market becomes the currency to flock off to in order to seek protection away from the deleveraging of financial conditions. Even if the trend is still not backed up by a shift in price structure to bullish, the rest of moving averages that most accurately define the directional bias by the smart money have all turned bullish. This is a market not yet dominated by bulls from a slow money standpoint, and so far, opportunities are arising in the context of the fast money taking control of timeframes below the daily.
The AUD index is not finding any respite to the sell-side pressure, with the macro support at the bottom of its broad range not acting as an area where AUD-long inventory is building up in away meaningful way amid as the coronavirus crisis keeps spreading in China. The fall in the Aussie is a clear statement of intention by the market that the currency is one of the most susceptibles to the prospects of slower growth in China. All technical indicators as well as the market structure portrays the adoption of selling on strength as the sensible strategy to stick with.
The NZD index remains trapped in a short-term range that must first break in either direction before a cleaner directional call can be made. The risks are building up for the resolution to be to the downside if risk aversion continues to pick up. Don’t forget, the resilience by the NZD has been impressive as bets for lower rates by the RBNZ have been priced out. Being a buyer at support or seller at resistance within the range has paid good dividends as of late.
The CHF index trades in between two key inflection points. To the upside, the bullish momentum stalled at the symmetrical 100% proj target where supply pockets via market makers, profit-taking activity and contrarian traders emerged. To the downside, the index has bounced off a key horizontal support line. I wouldn’t be surprised if a range gets created out of these two edges. Note, however, that the bullish trend is still in play with the measurements of smart money flows and the price structure all aligning to the upside.
Important Footnotes
- Market structure: Markets evolve in cycles followed by a period of distribution and/or accumulation.
- 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.
- 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% projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100% 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.
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