German government and Fed deliver stimulus, DAX30 bulls still in trouble
Source: Economic Events Calendar March 16 – 20, 2020 - Admiral Markets' Forex Calendar
The last week of trading started with a "Black Monday." In addition to fears and panic around the Coronavirus, global financial markets were hit by another risk-off wave after oil prices collapsed due to Russia resisting Saudi Arabia's push for deeper production cuts at the OPEC meeting in Vienna.
With oil prices dropping more than 25%, further losses to be expected, and many US oil companies from the fracking industry threatened by a potential bankruptcy (which could then mean a significant negative impact on the banking sector), global equity markets dropped massively with the DAX30 CFD seeing temporary losses of more than 10%.
That said, the monetary stimulus from the ECB last Thursday didn't come as a big surprise, even though the bullish impact was clearly limited, as the DAX30 CFD and market participants were more concerned about US president Trump's (surprising) travel ban from Europe, and the DAX dropped significantly below 10,000 as a result.
On Friday, the German government made a first step towards fiscal stimulus by announcing billions of Euro in support to cushion the economy, and plans to set up a safety net for companies and no limit on credit programs for companies.
As a result, the DAX stabilised, but failed to regain 10,000 points into the weekly close, in fact, gave back all of its gain in the hours later – a clear sign of further weakness to come in our opinion. The DAX30 CFD likewise rallied sharply, gaining as much as 9% on the day, but gave back all of its gains in the hours later that day - a very weak sign.
On Sunday evening, the Fed took a massive step, too, cut rates to 0.0%-0.25%, launched a massive QE program of USD 700 billion, announced swap lines with global central banks to make sure that enough USD are available and cut reserve ratios for banks to 0.
Unfortunately, these extreme measures failed to lift the market, too, the DAX opened on Monday morning below 9,000 points.
As it seems, similar measures from other governments, especially European ones, are probably needed and also expected and thus Short positions should be taken very cautiously, even though the overall advantage stays on the Short-side.
That said, the mode in the DAX30 CFD stays Short, with the drop below 10,000 points in the days to come being a serious option and the region around 8,700/800 points being a first potential target.
A short-term bounce and recapturing 10,300 points would short-term loosen the bearish grip a little, activating 11,450/500 points as a potential target.
Source: Admiral Markets MT5 with MT5-SE Add-on DAX30 CFD Daily chart (between November 28, 2018, to March 13, 2020). Accessed: March 13, 2020, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.
In 2015, the value of the DAX30 CFD increased by 9.56%, in 2016, it increased by 6.87%, in 2017, it increased by 12.51%, in 2018, it fell by 18.26%, in 2019, it increased by 26.44% meaning that after five years, it was up by 34.2%.
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After the latest wave of risk-off, induced by the collapse in oil prices last week, US Treasury yields saw a massive drop and astounding volatility over the last days, too.
After 10-year US yields dropped temporarily below 0.3%, yields bounced back over the next days, nearly tripled by then closing the week around 0.9%. As a result, the USD Index Future dropped significantly below 96.00 points after seeing a sharp reversal, still interrupting the bullish mode to neutral now.
This seems especially true after, on Sunday evening, the Fed took another massive step by cutting rates to 0.0%-0.25%, launched a massive QE program of USD 700 billion, announced swap lines with global central banks to make sure that enough USD are available and cut reserve ratios for banks to 0.
The impact on Equity markets was short-lived since the emergency cut was kind of a drop in the bucket and didn't calm down financial markets at all. So, we expect further monetary stimulus from the Fed, additional fiscal stimulus from the US government being announced shortly.
With that in mind, we expect the US dollar to stay under pressure and if the situation around the Coronavirus not only gets worse in Europe with Germany potentially being hit similar hard as Italy, but the virus to spread in the US with a very negative impact not just on the daily life of US citizens, but also the US economy, US yields should stay under pressure and thus the selling of the US dollar should continue.
Technically that means that we see room on the downside in the USD Index Future down to minimum 93.00 points:
Source: Barchart - U.S Dollar Index - Weekly Nearest OHLC Chart (between January 2017 to March 2020). Accessed: 13 March 2020 at 10:00 PM GMT
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Last Thursday, the ECB disappointed: the ECB did not follow the Fed, BoC, and BoE by cutting rates, keeping rates unchanged at 0%.
Still, the European Central Bank increased their current QE with a temporary envelope of additional net asset purchases of €120 billion until the end of the year, ensuring a strong contribution from the private sector purchase programmes.
After this, the Euro performed bearish, potentially driven by an overall uncertain outlook for the European economy in general, also triggered by the announced travel ban from President Trump last week on Wednesday evening.
The tide in the Euro could turn again if the fear that the coronavirus outbreak and pandemic among European countries will spark an economic downturn in Europe similar to the 2008 financial crash would be countered by massive fiscal stimulus.
In fact, last Friday the German government made a first step towards fiscal stimulus, delivered billions of Euro in support to cushion the economy, plans to set up a safety net for companies and no limit on credit programs for companies.
The Euro didn't respond bullish at all, at least not against the US dollar which saw heavier demand by stabilising and rising yields into the weekly close.
Still, longer-term and with us expecting the yield differential between US and European bonds to continue to converge, a push above 1.1500 and EURUSD probably taking on bullish momentum up to 1.2000, seems a serious option:
Source: Admiral Markets MT5 with MT5-SE Add-on EUR/USD Daily chart (between January 14, 2019, to March 13, 2020). Accessed: March 13, 2020, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.
In 2015, the value of the EUR/USD fell by 10.2%, in 2016, it fell by 3.2%, in 2017, it increased by 13.92%, 2018, it fell by 4.4%, 2019, it fell by 2.2%, meaning that after five years, it was down by 7.3%.
Given the massive volatility in US yields and knowing about the high positive correlation between US yields and the USD/JPY, the high volatility in the currency pair does not come as a big surprise.
In fact, we expect volatility to stay very high, seeing US yields under further pressure and thus favour the Short-side in USD/JPY.
This seems especially true after the Fed on Sunday evening took another massive step, cut rates to 0.0%-0.25%, launched a massive QE program of USD 700 billion, announced swap lines with global central banks to make sure that enough USD are available and cut reserve ratios for banks to 0.
The impact on Equity markets was short-lived since the emergency cut was kind of a drop in the bucket and didn't calm down financial markets at all. So, we expect to the further delivered monetary stimulus from the Fed, additional fiscal stimulus from the US government being announced shortly.
In combination, this seems to be a solid "cocktail" for a serious push as low as 100.00 and probably even lower.
Still, we get more and more cautious in regards to overly optimistic USDJPY Short engagements, reason: the Bank of Japan will probably very aggressive in regards to a strengthening JPY given recent very bad economic data in regards to the Japanese GDP growth in Q4 and given the damaging impact on exports a too strong JPY might have.
Probably we already saw a massive BoJ intervention over the last week, given the massive bounce against 101.00. That said, traders should be cautious and expect nearly any time verbal intervention from the BoJ, openly expressing concerns over instability in Japanese financial sector and economy, warning between the lines that an intervention from the BoJ might be on its way and keeping USDJPY solidly above 100.00.
Source: Admiral Markets MT5 with MT5-SE Add-on USD/JPY Daily chart (between January 4, 2019, to March 13, 2020). Accessed: March 13, 2020, at 10:00pm GMT
In 2015, the value of the USD/JPY increased by 0.5%, in 2016, it fell by 2.8%, in 2017, it fell by 3.6%, in 2018, it fell by 2.7%, in 2019, it fell by 0.85%, meaning that after five years, it was down by 9.2%.
While the picture in Gold, given the recent developments around the Coronavirus, collapse in oil prices and the massive monetary stimulus from the Fed already on Sunday, stays mid- to long-term clearly bullish and a run above 2,000 USD seems only a question of time, short-term the picture stays way more complex.
In fact, last week of trading Gold bulls failed, again, to sustainably push the precious metal above 1,700 USD and gain further bullish momentum despite volatility staying high and equities staying pressure.
While we could certainly argue that this is a result out of the sharper bounce in US yields after its short-term drop below 0.3%, this seems only half the truth.
In fact, recent data from the Commitment of Traders Report underlines the point that the drop in Equities resulted in margin calls which led larger market participants to reduce their Gold Long exposure to meet these.
In addition to that, traders should also recall the drop in Gold during the financial crisis in 2008 where a deflationary shock resulting out of the credit crunch back then, had a negative impact on the yellow metal with dropping and taking on momentum from 2010 onwards.
This time, this could be similar, meaning that despite elevated volatility, dropping US yields driven by risk-off tendencies, Gold fails to profit and sees a drop, going hand in hand with a dropping USD and dropping Equity prices.
Still, mid- to long-term and also technically short-term, the mode in Gold stays bullish as long as we trade above the daily trend support which can still be found around 1,535/545 USD:
Source: Admiral Markets MT5 with MT5-SE Add-on Gold Daily chart (between December 12, 2018, to March 13, 2020). Accessed: March 13, 2020, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.
In 2015, the value of Gold fell by 10.4%, in 2016, it increased by 8.1%, in 2017, it increased by 13.1%, in 2018, it fell by 1.6%, in 2019, it increased by 18.9%, meaning that after five years, it was up by 28%.
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