C&C Market Review


By Darshan Viswanath, Jeet Shah, Ryan Teo Zhi Kai, Gopal Modi, Maria Dupré, Max Trapnell, Oliver Armitage, Anshuman Bhatnagar from the C&C team at LSESU Trading Society


Currencies


EUR/USD


For the week beginning 16/11, EUR/USD started and finished the week within 10 pips of the 1.1850 mark. For the week beginning 9/11, EUR/USD opened at 1.1882 and closed the week at 1.1832.


Over the last two weeks, the pair has continued to respect the trading range of 1.1815-1.1890 which is indicative of an overarching lack of direction in the market. At the start of this week, propped by the optimism of Modern vaccine (95% efficacy rate; storable at normal fridge temperatures) and the dovish tone from the FOMC (no major policy changes/guidance announced) exemplified risk on sentiment as the pair reached its most significant resistance of around 1.1890, before settling in the low 1.1800s on account from the increasing fears of worsening state of COVID-19 cases in Eurozone’s largest countries, Germany and Italy, and the looming possibility of extension to the current lockdowns. Resumption in the US fiscal stimulus talks among Democrats allowed the pair to rally on Thursday, before returning to the current level.


Other factors adding to the lack of clarity or direction in the markets are the US Treasury's decision to not renew emergency Fed lending in the new year; potentially, a weakened Fed to support the economy can be seen as USD negative as it signals weaker rate of US economic growth, or alternatively, it could trigger a rise in demand for havens and therefore be seen as USD positive.


In sum, USD bullish factors like European lockdown concerns versus USD bearish factors such as the vaccine optimism, dovish speak by FOMC and US political uncertainty will continue to be crucial determinants of EUR/USD direction in the future.



Source: Fx Street


AUD/USD


While it was a relatively quiet week for the market, a combination of reassuring RBA (Reserve Bank of Australia) comments, rising commodity prices, and positive coronavirus news has helped the Australian Dollar consolidate its position relative to the US Dollar. AUD/USD is now holding around 0.7300 – a gain of approximately 0.7% across the last week.


While the RBA's continued focus on using asset purchases as a post-coronavirus recovery tool raises markets' inflationary expectations, the market's sentiment towards AUD/USD will have been strengthened by RBA Governor Philip Lowe's pronouncement this week that negative interest is "extremely unlikely" to be introduced. The RBA's commitment to keeping interest rates positive will help to stem markets' aforementioned inflationary expectations and help to maintain the AUD's relatively strong position vis-à-vis the USD going forward.


Surging iron-ore and steel prices will also have helped the AUD strengthen against the USD over the last week. Demand for iron-ore has been stoked of late as Chinese manufacturing and industrial activity continues to uptick as the country’s post-coronavirus recovery continues, while seasonal restocking in China has further increased demand. Simultaneously, constrained iron-ore supply has helped to push iron-ore prices even higher. While Sino-Australian trade relations have become extremely strained of late, as a major exporter of iron ore, markets’ sentiment towards the AUD will have strengthened in response to iron ore’s buoyance


While Pfizer and BioNTech’s announcement of a potential Covid-19 vaccine will likely have boosted USD sentiments more than AUD sentiment (as Australia moves away from coronavirus-induced restrictions), buoyancy around this topic has softened as US restrictions expand and fiscal stimulus talks continue. This is reflected in US Dollar Index Futures falling relatively consistently over the last week. Thus, Australia’s continued ‘opening-up’ post-coronavirus will help to strengthen the AUD’s position relative to the USD slowly. Having said this, while the market remains mildly bullish, the lack of significant AUD/USD gains and market momentum vis-à-vis AUD/USD can perhaps be explained by other factors. Firstly, despite unemployment only marginally increasing to 7% in October and retail sales beating expectations, Australia’s Wage Price Index missed expectations – recording the lowest quarterly increase on record. Similarly, investors will likely still have an eye on Sino-Australian trade relations, which continue to be strained and threaten the AUD’s long-term strength.



Source: Trading 212


GBP/JPY


The GBPJPY pair, affectionately known as Geppy, has experienced significant volatility in the past two weeks (9/11/2020 to 20/11/2020). It recorded a low of 136.0 on 9 Nov before rallying above 140 just two days later – a 400 pip difference (red circle). It is important to note that the rally failed to sustain beyond the 140 psychological level (black circle). However, it caused the previous resistance level of 137 to turn into support. Currently, the pair is trading within the 137.8 and 138.4 range (blue circle).


Source: Trading 212


The pound rally last week was attributed to hopes of a last-minute Brexit deal. The British government suffered a defeat in the House of Lords over a controversial Brexit legislation, which in turn fueled speculations of an imminent deal. Since then, however, talks have largely stalled, with the UK hinting that talks could be extended beyond this week as both sides struggled to agree on key issues associated with fishing rights and common standards. This caused reduced interest in the pound.


In contrast, the yen is traditionally viewed as a safe-haven asset. In recent times, the volatile political climate in the US had motivated investors to turn to the yen as a “safe-haven” substitute to the dollar. Trump’s unwillingness to concede the election to Biden had been a perpetual cause for concern. Positive COVID-19 vaccine news from Pfizer and Moderna had also been offset by the worsening coronavirus situation, with Biden pessimistically claiming that “more people may die” as the Trump transition drags on. Finally, the US had also reported poorer-than-expected US retail sales data on Tuesday (17/11/2020). These reasons have all dampened demand for the dollar.


Looking historically, when this pair last exceeded the 140 psychological marks (early Sept 2020), it was followed by a sharp decline to sub-134 levels, with slight support at 138. Back then, the pound's rally was also based on a positive outlook on a Brexit deal. With both macro and technical factors considered, I believe history shall repeat itself – the GBPJPY is poised to fall to the 134 level, especially if a UK-EU trade deal cannot be reached soon.


Commodities


Gold


Gold has been subject to two opposing forces in the past few days. On the one hand, for the second week in a row gold has been set for a decline, starting from the first COVID-19 vaccine announcement on the 9th of November which generated optimism in the markets. Secondly, the US Treasury’s call to limit emergency loan programs also reduced the attractiveness of gold as a safe-haven asset.

On the other hand, on Friday the 20th of November, the US Treasury signalled that negotiations on the stimulus package are still in the act. This will cause real interest rates to drop (due to higher inflation expectations), hence reducing the opportunity cost of holding a non-yielding asset such as gold, making it more attractive. As a matter of fact, the global near-zero interest rates have contributed to the 23% increase in its price this year. Additionally, given the expectations of a stimulus package, investors have been seeking refuge in gold as a buffer against likely inflation. Overall, however, the optimism prevailed and the price of gold saw a 0.8% decline this week.


WTI


Oil markets have been bolstered by the recent announcements of effective COVID-19 vaccines this week, with hopes for an increase in demand in the upcoming months due to the ease of lockdowns. However, a surge in COVID-19 infections in several countries led to renewed restrictive measures which limit the gains from vaccine hopes. A second boosting factor is the decision of OPEC+ to keep crude oil production under control, in accordance with the 7.7 million barrel per day cuts earlier this year, due to the sluggish demand for oil caused by the resurgence of COVID-19 cases. The production increase of 2 million barrel per day in January 2021 will be postponed by at least three months in order to counter the drop in the mand. As a result, oil prices experienced tree consecutive weekly rise, topping on Friday the 20th of November, with both benchmarks for oil prices, Brent Crude and WTI, increasing by more than 4%. WTI crude gained 19 centra and trading at $42.09 a barrel. The WTI future contract increased as well, by 14 cents and trading at $41.88 a barrel.

Despite the vaccine announcements revived the oil prices after months of lack of demand, concerns are raising with respect to the Libyan oil production. As a matter of fact, after shut-ins due to internal conflict, Libya increased production to its initial level of 1.25 million barrel per day much faster than expected, raising oversupply concerns which could put a renewed downward pressure on global oil prices.


Trade Idea

Short USD/JPY

- Current Price Level: JPY 103.86

- Entry Price: JPY 104.580

- Take-Profit 1: JPY 103.645, Take-Profit 2: JPY 103.04



Source: Trading 212


Technical Analysis


Support

  • Strong support – JPY 100 (Weekly timeframe)

  • Moderate support – JPY 103.69 (4H timeframe)

Resistance

  • Strong resistance – JPY 104.4 (Weekly timeframe)

  • Support turned resistance – JPY 104.07 (1H and 4H timeframe)


The long-term trend of the USD/JPY is expected to be bearish. There is a downward trend in the currency pair after the sudden spike when Pfizer announced its COVID-19 vaccine, from which the Japanese Yen has recovered three-quarters of its losses from the announcement. In terms of the daily chart, there are moderate resistance levels close to JPY 104.07 and JPY104.40, and strong support level close to JPY 103.69 which the currency pair did not break through in the last week.


However, based upon the federal reserve loosening and induced inflows of liquidity in the markets, and Bank of Japan planning to make no such changes to its monetary policies, the USD is likely to break through the support levels to JPY 102.79. Moreover, the 50-day EMA on the daily chart has been around JPY 105 and has been providing a lot of resistance.


The trend of the currency is bearish and has pushed the technical indicators into oversold regions. Therefore, rather than making new sell orders, it is worthwhile to wait for a chance of an upward correction and set buying levels, observing whether the currency pair is able to break through the trendline. If USD/JPY falls after reaching close to JPY104.580 which is the entry price set at the beginning, then it is a good indicator of the bearish trend to continue.


Macroeconomic Analysis


Bearish USD


Following the Biden victory in the 2020 US Presidential Elections, the US dollar weakened to a two-year low and is expected to continue in the downward trend for the following reasons.


Vaccine Effectiveness News


Recently, two US pharmaceutical firms announced the results of phase 3 clinical trials of their respective vaccines, with Moderna revealing a 94.5% effectiveness rate of its vaccine, and Pfizer announcing its vaccine, being developed in conjunction with Germany’s BioNTech, being 95% effective. As people and investors are getting increasingly confident about the vaccine from the recent news on their effectiveness, the demand for safe-haven assets such as the US dollar has been falling, despite the record-breaking rise in COVID-19 cases in the US.


Fed’s Monetary Easing


Furthermore, analysts at Citigroup and Bank of America projected that the US Dollar could fall as much as 20% in 2021. Citigroup mainly based its projections on the Federal Reserve’s monetary easing and the uncertainty in the arrival of a COVID-19 vaccine. The Federal Reserve has been pouring in liquidity in the market with an announcement that it will continue to use all available resources to support the US economy in the following year, mainly keeping interest rates low even if the inflation expectations rise.


Although the Treasury has asked the Fed to return unused funds, the Treasury using those funds for a potentially large fiscal stimulus as proposed by the Democratic Party will also have the same impact on the US dollar. With rising confidence in the economy and the general risk appetite increasing, the demand of US Dollar may fall as it is generally considered as a safe-haven asset.


US Negative Data Results


If the uncertainty in markets continues, analysts expect the US Dollar to plummet against JPY to close to the minimums of this year - 101.747. US Retail Sales, import and export price indexes data announced were below the forecasted levels, and the Core Retails sales (MoM) was 1 basis point lower than the previous month's 1.2%, pushing the demand for US dollar to fall.



US Treasury Bonds Fall


Falling US Treasury yields are also weakening the dollar. The yield on the 10-year Treasury experienced a 15 basis-points reduction from a three-month high on November 10th of 0.972% to 0.826% last Friday.


Bullish JPY


Deflation hits Japan for the first time since 2016


The Japanese Yen has been favoured due to the extremely low inflation in Japan, which is in fact in negative values presently. Even though the Bank of Japan overnight call rate is -0.1%, the national Consumer Price Index (CPI) fell to –0.4% for the year in November, the first outright deflation rate since Sep 2016.


Although the yen is strengthening due to deflation, it poses a massive concern for Japan's economy and the Bank of Japan's future measures. The Bank of Japan, however, remained steady in its monetary policy measures. Nevertheless, the return of deflation in just over three years, accompanied by the effect of the pandemic on a slowing Japanese economy, is certainly a major concern for the future of the Japanese economy.


Record-highs for COVID-19 cases in Japan


Additionally, Japan launched a campaign called “Go To Travel”, a JPY 1.7 trillion initiative to boost the Japanese company through funding up to 50% of travel expenses, including transport and accommodation. The Japanese government subsidizes 35% of the total cost. The remaining 15% is covered by discount coupons of JPY 1000 that can be used at participating facilities covering hospitality, sightseeing and shopping businesses. Although the campaign failed to boost demand for travel initially, Tokyo was reinstated as part of the campaign on October 1 when the new cases daily were 653.


The cases have been gradually increasing since then, and for the past two weeks, the new cases in Japan have reached record-highs, reaching 2426 on November 20. The Japanese government has been considering new measures to hinder the growth of the rapidly rising cases of COVID-19 in the nation, and rising fear associated with this may cause consumers and businesses to shift towards JPY as a safe-haven asset yet again, making its forecast for the short-term bullish.


Potential TPP trade deal could strengthen JPY in the long term


The export-driven Japanese economy needs to emerge from its worst contraction caused due to the pandemic, and Biden's economic package might boost Japanese exports which in turn can lead to an increase in the demand of the Japanese Yen and strengthen it.

Whereas Trump pushed for bilateral deals, Biden is preferring a more multilateral approach to trade despite being unlikely to ease on China. Biden would seek a more active Asian policy, however, not yet making an immediate return to the 11-member Trans-Pacific Partnership as he focuses on domestic US issues such as containing the spread of the virus and boosting the economy.


Japan will need to maintain its partnerships with its two largest trade partners, US and China, balancing its trade relationship with the two. Biden will perhaps find it difficult to promote free trade and TPP when the domestic US issues are critical to deal with presently, but the Democratic party plans to increase fiscal spending is also a positive for the Japanese economy in the short term and is needed for the US economy.



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