US equities have just experienced their fastest ever “correction”, 6 days to fall 10%.
The Coronavirus’ spread to Italy is the biggest risk to markets now as the EU’s free flow of people will see it spreading quickly through the continent. This has changed the landscape as to how the virus will impact the global economy. It will be classified as pandemic, it’s just a matter of when. Safe-haven trading has really only just begun.
Global GDP forecasts are been slashed left, right and centre and will be cut further. The IMF joined major investment banks in seeing global growth at 2.8% in 2020 from the December consensus of 3.4% forecast. As hard as this is to say, a global recession is now a possibility, something that was unfathomable less than 3 months ago.
FX flows are all moving one way; to the USD – DXY is up over 2% since the coronavirus outbreak begun and although it dipped slightly on the news the US is now monitoring 8,200 people suspected of having the virus. The USD will attract FX flow over all other G10
Interestingly enough other safe-havens such as JPY and CHF are not seeing the same level of flow particularly JPY as Japan is experiencing a higher level of exposure to Covid-19.
If you compare G10 currencies the USD it is becoming the ‘only option’ in this environment due to its size and safety. You only have to look at the movement in US rates markets with the US 10-year bond yield hitting a new record low and is still falling. Bond markets are showing the way of FX flows some I expect will accelerate.
Any initial rebound in risk-facing currencies has hit buying fatigue and are seeing solid reversals. Case in point is the AUD and NZD. I continue to see the AUD with the most downside risk as the China economic fallout is laid out over the coming months. However, it’s the EUR that is the most interesting from a trade perspective.
EURUSD is likely to see the largest level of volatility over the coming period as the virus spreads. The pair tested the strong support level of $1.078 but failed to break it. I suspect it will test this level again in the near future, a break would see the pair heading to $1.053 which is the ‘shoulder’ of the head and shoulders pattern that formed over the December 2016 to March 2017 period.
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