22-Apr-2020

1) EUR/USD Continued with Its Two-Way/Directionless Price-Action on Tuesday
2) Dollar Hits 2-Week High as Selloff in Oil Price Triggers Safe-Haven USD Buying
3) Oil Implodes, Currencies Next?

1) EUR/USD Continued with Its Two-Way/Directionless Price-Action on Tuesday

The EUR/USD pair continued with its two-way price action near two-week lows and remained confined well within the 1.0800-1.0900 trading band on Tuesday. The shared currency found some support following the release of better-than-expected ZEW survey, showing that the Economic Sentiment in Germany and Euro zone improved to 28.2 and 25.2, respectively. However, deteriorating global risk sentiment – further weighed down by a free-fall in crude oil prices – extended some support to the US dollar’s perceived safe-haven demand against its European counterpart.

This comes amid expectations that the world economy will remain weak for some time, even once the lockdowns are eased. Market concerns continued underpinning the greenback’s status as the global reserve currency and kept a lid on any intraday attempted recovery. The pair finally settled nearly unchanged for the day, forming a Doji candlestick pattern on the daily chart for the second straight session. This marks indecision over the pair’s near-term trajectory as investors preferred to wait for additional clues that the COVID-19 virus may be peaking before placing any directional bets.

The pair struggled to gain any meaningful traction and remained depressed through the Asian session on Wednesday. In the absence of any major market-moving economic releases, either from the Euro zone or the US, the pair seems more likely to extend its subdued/range-bound trading action ahead of Thursday’s flash Euro zone PMI prints. In the meantime, developments surrounding the coronavirus saga might continue to play a key role in influencing the market risk sentiment and produce some short-term trading opportunities.

From a technical perspective, nothing seems to have changed much for the pair and the near-term bias remains tilted in favour of bearish traders. However, it will be prudent to wait for a sustained break through the recent trading range before traders start positioning for any firm near-term direction. A convincing break below the 1.0800 round-figure mark, leading to a subsequent weakness below the 1.0770-65 regions will reinforce the near-term negative outlook and prompt some aggressive technical selling. The pair might then accelerate the slide towards testing sub-1.0700 levels before eventually dropping to multi-year low support, around the 1.0635 zone.

2) Dollar Hits 2-Week High as Selloff in Oil Price Triggers Safe-Haven USD Buying

Although the greenback rose in Asia and Europe due to risk-averse trading on continued negative impact stemmed from coronavirus pandemic as well as selloff in U.S. crude oil futures and global stocks, dollar pared its gains in New York on Tuesday on unwinding of long USD positions but later rebounded in afternoon trading as U.S. stocks fell (Dow and S&P %00 fell 2067% and 3.07% respectively).

Versus the Japanese yen, although dollar recovered to 107.79 at Asian open, price met renewed selling and then fell to session lows of 107.29 on active safe-haven JPY buying due to plunge in oil futures and global equities as well as selloff in the U.S. Treasury yields. However, the pair erased its losses and rose to intra-day high of 107.89 in New York morning due to recovery in U.S. yields and then moved sideways.

The single currency met renewed selling at 1.0871 in Australia and dropped to 1.0827 in Asian morning on risk-off trading and then ratcheted lower to intra-day low of 1.0817 in New York morning. However, the pair then rallied to 1.0880 on long liquidation of USD and later moved sideways.

In other news, Reuters reported European Union leaders meeting are on Thursday expected to defer a final decision on how to finance the bloc’s economic recovery in the aftermath of the coronavirus pandemic, diplomats and officials said. The 27 national leaders have already clashed over responses to the outbreak across a range of issues, from how to share out medical equipment to ways of cushioning the economic hit.

The European Commission told national leaders’ envoys on Monday that it wanted to finance the recovery fund via increased headroom in the bloc’s joint budget for 2021-27, the sources told Reuters on Tuesday.

The British pound went through a volatile session due to risk-averse trading. Cable initially fell from 1.2447 in Australia to 1.2390 in Asian morning and despite recovering to 1.2421 in European morning, price then tumbled to 1.2268 in New York morning on USD’s strength before rebounding in tandem with euro to 1.2336 but only to weaken again a 2-week low of 1.2248 on cross-selling in sterling before staging a recovery on short covering.

3) Oil Implodes, Currencies Next?

The June oil futures contract for WTI closed above $11 today from a low of $7, one day after the May contract collapsed to an unprecedented negative $40.30. As for Brent oil, it hit an 18-year low of $17.51. Questions arise whether Brent will find the same fate as WTI, despite less challenging geographical considerations regarding its supplies. The difference from yesterday is that US indices began to feel the hit from oil, falling 3% across the board. A story that fell through the cracks was the RBNZ leader saying he was open to debt monetization. The big question right now is whether central banks and governments can counteract the demand shock. US coronavirus deaths topped 45k on Tuesday, doubling in a little over a week as total cases exceeded 800k.

We have warned repeatedly for weeks that supply of crude outstrips demand and, unlike some other commodities, crude is very difficult to transport and store. That means excess oil is a nuisance and you can find yourself in a position where you need to pay someone to take it away.

Even knowing all that, a plunge to -$40 is beyond shocking. A few cents negative would have been understandable, but this was a sign of leveraged longs forced to liquidate in an illiquid market. The drop extended further out into crude on Tuesday and June crude fell to $6.50 as the USO ETF tried to pare down holdings that exceeded 30% of open interest at the start of the day.

Stimulus sums right now are astronomical and on Tuesday the US Senate passed another $500B bill with the President saying that even more is in the works.

It’s the same story everywhere and no one is even offering a pretense at how it will be paid back. On Tuesday the RBNZ said out loud two words we once thought we would never hear: “debt monetization”. He said he was open minded on directly monetizing debt. The reality is that there is no other way out of the fiscal holes that governments are digging; it’s more a matter of the mechanics of it. But however it’s done it’s undoubtedly good for hard assets and precious metals.

USD bulls may see fewer reasons for concern if oil’s implosion means prolonged deflationary powers. And if deflation does become a problem, would it be a fear factor for gold? Is thet even possible when desperate central banks are monetizing governments’ debt?