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


The EURUSD had experienced a steady and consistent upward climb throughout the past two weeks. At the time of writing (2/12/2020), the pair was approaching the 1.21 level, a 31-month high. Prior to this, the pair experienced resistance at the 1.20 mark, as indicated by the small circles in the chart below. It rejected this price twice before finally breaking resistance early this week (01/12/2020).


Source: Trading 212


Technical Analysis


Looking at the MACD, we can see the MACD Line (In blue) currently exceeds the signal line (In yellow), indicating a buy-signal. The MACD can be read with the Relative Strength Index, which measures overbought and oversold conditions. In spite of the sustained upward climb of the pair, the RSI for the pair never exceeded the 70 mark, a level traditionally deemed to indicate overbought conditions. Thus, the price of 1.21 is not deemed to be overvalued. This gives us an indication that the appreciation of the Euro against the dollar could stem from fundamental macroeconomic factors.



Source: Trading 212

Macro Analysis


This sustained breakout past the 1.20 mark is due to a combination of factors that resulted in greater interest and demand for the Euro, and a distinct move away from the dollar.


  1. Vaccine Optimism

Several Big Pharma Companies, including Pfizer, BioNTech and Moderna, had reported high efficacy in Phase 3 Coronavirus Immunization Trials. On 2/12/2020, the UK became the first country in the world to approve the Pfizer/BioNTech coronavirus vaccine, paving the way for mass vaccinations in the country. With other countries following suit in the near future, many investors have viewed this development as the "light at the end of the tunnel" of the COVID-19 crisis, consequentially increasing risk appetite and thus resulted in reduced interest in traditional safe-haven assets such as the dollar.


  1. Opposing Effects of Expansionary Monetary Policy by the EU and US

Both the European Central Bank and the Federal Reserve in the US are set to expand their bond-buying schemes. Chief Economist of ECB, Phillip R. Lane, cited "worrying signals" that financial conditions for banks and small businesses are tightening, fuelling speculations that the bank is set to inject greater amounts of stimulus. This stimulus has been seen to support the Eurozone's recovery, boosting demand for the euro. Contrastingly, expansionary monetary policy by the Fed had instigated a risk-on mood for investors, reducing demand for the dollar.


Short-and-Long-Term Price Projection


The potential for a price correction in the short-term is high. Since the 1.20 mark signified strong resistance previously, it will turn into a strong support due to the breakthrough. A short-term sell-off of this currency may be recommended. In the long-term, however, the pair is projected to be bullish, perhaps to the point of the April 2018 high of 1.2413.



USD/CNY


USD/CNY has been consistently falling since June 2020. The consistency of the decline over the last few months raises suspicions that China's customary involvement in its own currency market could be driving the price action. Yet Chinese authorities strive for a devalued Renminbi and competitive exports. Moreover, the authorities had made visible their efforts to slow down the soaring Renminbi. On Monday, October 12th, the People's Bank of China (PBoC) announced that they were scrapping the 20% settlement cash reserve needed when purchasing forward contracts, making it less costly to short the renminbi. Yet since a high of 6.76 on Oct 13th, the USD/CNY has continued to fall despite the action taken by the PBoC, now stabilising at just under 6.58. However, how much of this 2.7% decline can be attributed to a weakening dollar? Looking at stable counterpart pairings of the USD, the USD/JPY has weakened by 1.2% since Oct 13th, as has the USD/SGD by 1.26%. Clearly, it is not just a weakening dollar that has moved the USD/CNY downwards.


Whilst many countries struggled to contain residual outbreaks of Covid-19, the authoritarian containment methods of the Chinese government have kept the economy relatively corona-free. Investors, noticing this and China's recent net export boosts (due to PPE, medical equipment etc) have treated China as a new safe haven. Moreover, the supply of renminbi has diminished as outbound tourism from China has ceased, whilst lower commodity prices mean less renminbi is sold on FX markets when acquiring raw inputs for manufacturing. China is set for the largest net current account surplus relative to GDP in over a decade. Moreover, most of China's rate cuts are being reversed and Chinese treasury bill yields will be far above other major markets. Combining all these factors, it seems as though the CNY will continue to strengthen as it attracts money from investors worldwide. As the recovery of other economies may steal some investors from China, we may not see a continued decline as rapid as these last few months, but forecasts predict the CNY reaching support of 6.2/6.3 in 202.


Source: Investing.com


GBP/JPY


For the week beginning 23/11, GBP/JPY, nicknamed the "dragon", started and ended the week within 1000 pips of the ¥138.78 mark. For the week beginning 30/11, the pair opened at ¥138.54 and closed the week at ¥139.93.


Over the second half of this two week trading period, the pound has rallied significantly against the yen and has broken above the resistance of ¥140 level- a very bullish sign as the pair broke above the long-term moving average (610 ma) for the first time seriously since 2015. This could indicate a larger uptrend as the market has attempted to price in the Brexit deal heading into the weekend.


Nevertheless, as the market is very sensitive to risk appetite and JPY is perceived as major "safety currency", if things sour (i.e. Brexit deal is not negotiated or if there's further political uncertainty), demand for the JPY will increase. This will then lead to a fall below the ¥140 level and we can expect further resistance to be exhibited at the ¥140 mark. Indeed, according to a statement issued by EU Brexit Negotiator Michelle Barnier that "conditions for an agreement had not been met" indicating that issues pertaining governance and fisheries persists. Further, this situation is exacerbated by the strong stance of the French, in particular, who have vociferously made it clear that will "veto any deal" if any more concessions are made from the EU side; naturally, this will tame any GBP upside when/if the deal is announced.


In sum, the crucial determinants of the GBP/JPY direction are the outcome of the Brexit negotiations and whether the UK has to make further concessions to get through a deal that is amenable for the French.


Commodities


Oil


Following the agreement between Russia and OPEC to increase production by 500,000 barrels a day beginning in January 2021, oil prices this Thursday were on track to reach their highest levels since March this year. From their current cuts of production by 7.7 million BPD (barrels per day), this move shifts the cuts in production to 7.2 million BPD (7% of the global demand).


Although this move has pushed the Brent Crude and WTI benchmarks to their highest levels since March, OPEC+ producers have yet to compromise deals on longer-term talks and production amid the new waves of COVID-19 infections.

The international benchmark, Brent crude, rose to $49.03 a barrel, while the US benchmark, West Texas Intermediate rose to $46.03. Certainly, the positive news of a potential vaccine and the OPEC+ supply agreement pushed the oil prices to a nine-month high, but importantly, this rally was supported by a weaker dollar as well. Holders of currencies other than the USD find it cheaper to purchase commodities such as oil when the dollar weakens, hence, pushing the demand for oil up and consequently the price as well.


Not only did the climbing of oil prices and energy stocks push the US stock market to records, but they also contributed to a 0.9% increase in London's FTSE 100 index, which gives heavy weightings to oil producers, miners and commodities traders.


Gold


Despite gold futures observing their lowest settlement prices since early July on Nov. 30th following the announcements of major Covid-19 vaccine breakthroughs, gold futures rebounded over the first few days of December, with gold up around 4% this week.

While the potential roll-out of Covid-19 vaccines across the world (and the economic benefits this is induce) remains a central narrative holding back gold markets, renewed hope over the implementation of a Covid-19 relief programme in the US has caused the gold market to recover as USD markets stumble.


On Tuesday, a bipartisan group of US senators proposed the implementation of a $908bn Covid-19 stimulus programme which sought to find a compromise between the Democrat's recent $1.4bn proposal and Republican's original $300m proposal. Such a proposal will have increased inflationary expectations and expected real interest rates, thus reducing the opportunity cost of holding (and increasing the price of) non-yielding assets, such as gold – an effect also discussed in last week's column. The softer than expected US non-farm payrolls release on Friday – indicating a slower US economic recovery - seemed to have little effect on gold prices.


However, despite initial gains, gold prices observed resistance later in the week, holding around $1,842-1,847. Several macro-factors may have contributed to this resistance. Firstly, while the proposed bipartisan Covid-19 relief bill maintains significant bipartisan support (including that of President-elect Biden), the bill was met with resistance from some Republicans later in the week who are focused on continuing negotiations over the size of the bill. Secondly, the scheduled rollout of Covid-19 vaccines in the UK next week may be providing markets additional hope that regulatory approval for vaccines is near in other major economies, thus providing hope of accelerated international economic recovery in the near future.



Source: Investing.com


Trade idea


Short USD/CAD


- Current Price Level: 1.2801

- Entry Price: 1.2920

- Stop Loss: 1.2929

- Take-Profit 1: 1.2730, Take profit 2: 1.2673



Source: Trading 212


The figure above depicts the 4-hour movements of the USD/CAD in the past two weeks. The chart doesn't show disproportionate bearish candles, except for the decline from 1.3040 to 1.2977 in the afternoon of the 29th of November, and from 1.2913 to 1.2872 on the 3rd of December. Therefore, there is no reason to assume that the downward trend is not sustainable.


This trend shows a significant change of direction from the spring's figures. At the end of March, the drop in demand for oil, which also led to negative prices of the WTI futures, pushed the exchange rate as high as 1.4352. The progressive decline in the exchange rate has led to USD/CAD reaching pre-crisis levels in November, continuing until the current value of 1.2801.


Technical Analysis


In the 4H timeframe over the past two weeks:

  • Support 1.27968

  • Resistance 1.3142

The long-term trend of the USD/CAD is expected to be bearish. After the announcement of effective Covid-19 vaccines by Pfizer and Biotech, Moderna and AstraZeneca, the Canadian Dollar has enjoyed an increase in its value relative to the American Dollar, a significant improvement from the all-time low experienced in March as oil prices dropped.

The strong resistance level of 1.3142 was only tested in the morning of the 22nd of November, after which the exchange rate continuously declined, finding support at 1.2797 On the 4th of December. Additionally, given the Federal Reserve's commitment to keeping interest rates low during the Covid-19 crisis, the USD/CAD is set for a decline and we can expect it will break through the support in the upcoming weeks. Therefore, it is worth shorting the currency pair once the exchange rate is sufficiently high, and exploit the bearish trend to take profit.


Macroeconomic Analysis


The currency pair's decline is supported by a combination of both the CAD strengthening and the USD weakening. Let's explore some macroeconomic events confirming the bearish trend of USD/CAD.


Bullish CAD:


Economic Recovery


The Canadian Economy quickly recovered over the summer, hitting an annualised growth of 40.5% in the third quarter, with the factory sector experiencing significant improvements as containment measures were lifted. However, a surge in Covid-19 cases in September and October set the recovery to a lower growth path. Despite this drawback, according to the Bank of Canada, the economy is still set for a protracted recuperation phase, leading to the prevision of a return to pre-pandemic GDP levels by the start of 2022, and the gap between potential and actual output closing in 2023 at the latest.


Effective Vaccines Announcements


The announcements of vaccines with around 95% effectiveness rates becoming widely available in the upcoming months boosted investors' sentiments. Canadian health authorities could approve Pfizer and BioNtech's vaccine as early as next week and start distributing it at the beginning of 2021, stimulating economic growth. Additionally, the commodity-linked currency strengthened significantly against its US counterpart as the optimism in the markets increased the demand for oil, pushing prices up. Being Canada the world's leading exporter of oil, this improvement positively reflected in the value of the CAD.

Bearish USD:


A surge in Covid-19 cases impacting the economic recovery


According to Fed Chair Jerome Powell, despite the fact that the US was set for a solid recovery path, the surge in Covid-19 cases over the autumn could negatively impact the US economy. In November, new cases increased at a record rate, which is six times the rate of June, and in some areas, hospitals have been reaching full capacity. For this reason, new restrictions are beginning to be imposed by both State and local governments. People began losing confidence in the fact that it is safe to go out again, reducing consumption, as proven by restaurants reservation falling for the fourth week in a row. The USD, as a consequence of the economy slugged by the fall in demand, has weakened against a basket of peer currencies.


Low-interest rates


Following Biden's victory in the Presidential Elections and in order to continue supporting the US economy, liquidity is being injected in the US market. Firstly, the Senate's proposal of a $908 stimulus package is finding growing support within the Congress, despite the inflation threat. The pressure to promote the package is putting downward pressure on interest rates. In addition to the package, unemployment benefits have been increased and the Payroll Protection Program, whose objective is to facilitate funding by providing forgivable loans, has been extended. Biden has signalled his willingness to keep interest rates low and facilitate borrowing by nominating former Fed Chair Janet Yellen as Treasury Secretary. Mrs Yellen's supports a 25 basis point cut in the interest rates. Such a measure aimed at keeping lower-for-longer rates is to be combined with expansionary fiscal policies increasing government spending, in order to boost US demand and support the economy. The combination of these factors, contributing to keeping interest rates low, is weakening the USD against the CAD.


Less demand for safe-haven assets


If on the one hand, the announcement of highly effective vaccines contributed to increasing demand and reinforced the relative value of CAD due to its link with commodity prices, the news comes as a threat to the USD. The wave of optimism in the markets, combined with an increased risk appetite has lowered the demand for safe-haven assets. In the past few months, uncertainty has driven demand for the USD; as people become more confident the demand for the USD, traditionally considered a safe currency, has fallen causing a loss of value relative to the CAD.



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