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EURUSD Avoids Bearish Break, The Economic and Human Toll of Virus Spread Rises

EURUSD Avoids Bearish Break, The Economic and Human Toll of Virus Spread Rises

2020-02-12 02:29:00
John Kicklighter, Chief Currency Strategist
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EURUSD, S&P 500 and British PoundTalking Points:

  • While the Dow and S&P 500 gapped higher on Tuesday's open, the traction faltered quickly to once again undermine conviction in risk trends
  • Coronavirus fears continue to circulate through the headlines and markets, but speculation seems to downplay even tangible cost analyses
  • EURUSD ended a six-day tumble just as support came into view despite ECB and Fed speak, is the Kiwi due the same disappointment?

Risk Appetite Remains but Recognition of Value Gap Still Throttling Intent

There was relatively little in the way of unvarnished, positive updates for speculative reach this past session but that didn’t stop the S&P 500 from leading US indices in probing fresh record intraday highs. Speculative appetite continues to show more deference for the mere presence of progress and what momentum can be mustered than the rationale of value itself. While the S&P 500 and Dow were unable to generate follow through on their session’s robust opening, there are nevertheless record highs to discuss. It seems much of the momentum to the bullish side of late comes from the basis of pullbacks rather than any appeal of new highs. That is mirrored for the reference between US markets versus global counterparts (like the VEU rest of world ETF) and comparison to other ‘risk assets’ that I follow, such as the emerging markets, junk bonds, carry and especially growth-sensitive measures (crude, copper and US Treasury curve). Even within the US stock market, preference for the momentum-driven tech sector fosters a strong divergence between the Nasdaq and Dow.

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Chart of Nasdaq to Dow Ratio Overlaid with S&P 500 to VEU Ratio (Daily)

EURUSD Avoids Bearish Break, The Economic and Human Toll of Virus Spread Rises

Chart Created with TradingView

Where the warm comfort of complacency ends, market participants are seeking a more objective foothold to justify further reach. Fundamentals are where the questions really arise. The concern around the spread of the coronavirus continues to regularly cycle through the top headlines whether both in general terms and financial perspective. Below is the global Google search interest filtered for financial queries in ‘virus’ relative to other more standard market terms. Fear has eased back from its peak a few weeks ago, but it remains elevated relative to even traditional growth and yield interests. Meanwhile, the financial toll that this human disaster is exerting continues to register among key groups analyzing its effect. Among a few new evaluations, Standard & Poor’s warned that the coronavirus could inflict a 0.3 percentage point loss in global GDP this year, while China faced a 0.7 percentage point throttling that could push the pace of expansion down to 5.0 percent. When will this pain finally convert into repricing? Will it? That isn’t clear, but the risk of fallout should it occur continues to build.

Google Trends Search Ranking of ‘Virus’, ‘Growth’, ‘Yield’ and ‘Volatility’

EURUSD Avoids Bearish Break, The Economic and Human Toll of Virus Spread Rises

Graph from Google Trends

EURUSD Abides October’s Swing Low as Powell and Draghi Weigh In on Policy

The same lack of conviction at a critical technical level was apparent with EURUSD this past session. Having slid for six consecutive trading days through Monday – and at a relatively fast clip – the October swing low around 1.0875 was coming into view. While the benchmark pair extended its drop through Tuesday trade, the pair wouldn’t tag the relative extreme nor would it even close lower for seventh session. With a major support in sight, momentum was looking for a more traditional fundamental foothold to push the market beyond the threshold. Yet, that barrier would not be overtaken by the end of the day.

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Chart of EURUSD with 100-Day Moving Average (Daily)

EURUSD Avoids Bearish Break, The Economic and Human Toll of Virus Spread Rises

Chart Created with IG Trading Platform

When looking for a fundamental catapult to drive the markets beyond a technical barrier, the most prominent spark was the scheduled testimony from ECB President Christine Lagarde before the EU Parliament and Fed Chairman Jerome Powell to the House Committee. In the case of the former leader, her evaluation walked a familiar line without committing to a dovish or hawkish course adjustment in the foreseeable future. However. She did reiterate a concern that is growing inside both policy and trading circles that central bank stimulus cannot be the only game – and implied that we are destined to hit the limit if that is what the world is relying on. As for the Fed Chair Powell, his grilling elicited very familiar responses on topics ranging from views on growth, policy options to external risks. I was most interested in the pressure that US President Donald Trump attempted to exert by Tweeting that the Dow was up 125 points before the central banker started to speak and was down -15 points not long into the testimony.

Graph of the Perception of Effectiveness in Monetary Policy

EURUSD Avoids Bearish Break, The Economic and Human Toll of Virus Spread Rises

Chart Created by John Kicklighter

A Broad Data Mix Finds the Pound Default to Range, Will the New Zealand Dollar Do the Same?

While the coronavirus headlines and central bank rhetoric were prolific fundamental offerings this past session, the sheer volume of opportunity around the Sterling was unrivaled. On the data front, there was quite the mix. The 4Q GDP update was the most prominent release with a tepid 0.0 percent quarterly change that was in-line with expectation but December’s figure was more impressive than anticipated at 0.3 percent growth over November. Industrial and manufacturing activity took a beating (-1.8 and -2.5 percent respectively) but the visible trade balance posted an unexpected surplus of 845 million pounds. Earlier in the day, the BRC warned that supply issues would be an economic burden to bear come January 2021 if the government did not substantially change infrastructure – keeping the Brexit drum reverberating. What was surprising was the lack of impact that BOE Governor Mark Carney’s testimony generated. He would warn that further easing may be necessary if the post-election recovery didn’t materialize, yet the Sterling didn’t respond. Perhaps there is a belief that the outgoing head of the group doesn’t accurately reflect the institutional view. Ultimately, the Pound advanced modestly on the day, though there was little pace to the bounce.

Chart of GBPUSD with 100-Day Moving Average (Daily)

EURUSD Avoids Bearish Break, The Economic and Human Toll of Virus Spread Rises

Chart Created with IG Trading Platform

Ahead, the scheduled event risk thins out noticeably. While the second day of Powell testimony and Eurozone industrial production are fundamentally important, the threshold for market influence is likely very high. This is particularly true with scheduled event risk like the Germany 4Q GDP and US consumer confidence survey (University of Michigan) just over the horizon on Friday creating a sense of anticipation. If the interest is in event risk that can more readily connect to the target currency – meaning a lower sense of complication from systemic matters aligned to liquidity – than the RBNZ rate decision on Wednesday morning and Mexican Central Bank decision on Thursday (expected to be a 25bp cut) are more weighty in that more localized perspective.

Chart of NZDMXN (Daily)

EURUSD Avoids Bearish Break, The Economic and Human Toll of Virus Spread Rises

Chart Created with TradingView

If you want to download my Manic-Crisis calendar, you can find the updated file here.

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