The panic and commotion seen in risk-oriented assets, over the past few weeks, have lessened somewhat since the on-set of the crisis and after implementation of the global quarantine. However, this tranquility in financial markets may be feeble and soon coming to an end, as investors continue to monitor the pace of COVID-19 infections in the United States, which are only a few days into the most painful phase of the pandemic.
On a more hopeful note, Europe appears to be plateauing in new cases. Since this is a good sign for the Eurozone, financial analysts may now shift most of their concern to the United States, and remain on edge until the US begins to display signs of stabilization as well. Unfortunately, the US has yet to enter the middle of the peak stage, and when it does, it could still last for weeks, which will cause risk aversion to tarry for much longer. As for this week of trading, markets will primarily be focused on the US Weekly Unemployment Claims, and developments from this week’s OPEC+ meeting.
As infection rates soften in most of the worst-hit countries, this has created some relief among investors, since this could prove that the lockdown measures are actually bearing fruit and could forecast the possible ending of this viral outbreak. Sadly, the US has not adopted some of the harsh and draconian mitigation measures that other nations have implemented to slow the spread of coronavirus, which means that a viral peak in the infection rate could be weeks away.
As global governments intervene with robust spending packages and central banks cut interest rates to near zero, along with massive QE (Quantitative Easing) programs to cushion the global economy from falling into a depression, financial markets appear to be opening this week with less fragility. However, it remains to be seen how long this “tranquility” will last. Most of this fiscal and monetary stimulus is already priced into the market, and as investors attempt to front-run the recovery in global markets, will this risk sentiment linger when horrifying economic data hits the newswires, along with skyrocketing unemployment numbers, and near zero or lesser corporate earnings. It’s also worth noting that the quarantine can still be extended, and companies could possibly default as they will be unable to meet their debt obligations.
For there to be a true bottom in the stock market, traders will need to see a clear timeline on when economies will begin opening up, and also when US virus cases has reached its peak level. Until these two issues are addressed, a legitimate stock market floor will not form for some time. This would imply the need for a stronger US Dollar, when you consider that it has behaved like a safe haven asset for most of the crisis. As a matter of fact, the greenback has been the world’s preferred safe haven within the spot forex space, and has even appreciated when poor US economic data is released, due to panic-based buying, which was seen during last Friday’s gruesome US Non-Farm Payroll figures.
The most important economic release for this new week of trading will be Thursday’s US Initial Jobless Claims. Since this data reading will be more recent and reflective of real-time market conditions, any disappointment in this reading will send the dollar rallying higher and contribute to stocks selling off deeper. The next most important indicator for the week will be the University of Michigan Consumer Sentiment Index, which is also released on Thursday, and will provide a view of how bad the US consumer has been hit. For this week, there will also be the release of last month’s FOMC meeting minutes on Wednesday, and US CPI data on Friday, which some analyst may consider to be out-dated indicators given the recent turn of events.
The Canadian currency has once again become a strong proxy for crude oil, as the correlations between both instruments tighten during the global lock down. Crude prices have been collapsing lower due to a remarkable drop in oil demand, which is the cause for a supply glut. As for the loonie, the Bank of Canada (BOC) has slashed its interest rate to near zero and activated their own Quantitative Easing program on last week, to cushion themselves from the fallout of lower energy exports and falling oil prices. Since Canada heavily relies on energy exports, this oil rout may have deepening effects on the economic health of the Canadian economy.
Since the BOC is almost depleted of monetary policy measures to stimulate their economy, the next main driver for the loonie will be movements within the energy space. While economic readings such as the Canadian Jobs Data on Thursday, could shake the Canadian Dollar, the real trend catalyst for the currency will be crude oil prices. Also, we must take note that the jobs data will be an out-dated economic reading, since the survey was conducted in the second week of March, prior to much of the major COVID-19 mitigation procedures and global lockdown. With that being the case, the real-time Canadian Jobs data is actually worser than the values that will be reported on Thursday’s announcement.
On the oil front, things are looking grim too. Even though we saw a sizeable rebound lately, after President Trump said that Saudi Arabia and Russia will cut 10-15 million barrels from their production, those gains look fragile. The Kingdom said it’s willing to cut its own production only if many countries – beyond Russia and OPEC members – also cut theirs.
Moreover, the size of the proposed cuts is extremely large. Even if everything goes smoothly with this production deal and everyone chips in, which is a big assumption, it’s still difficult to imagine any cut bigger than 5 million barrels, and that would do next to nothing to balance an oil market that is about to see 20-30 million barrels in demand wiped out. In other words, even if this deal happens, there’s a good chance markets will be disappointed by its size, which makes the latest recovery look quite vulnerable.
Marvin Perry has been an active trader within the Forex market since 2010. He attended the University of Illinois in Urbana/Champaign, and graduated in 2002 with a double major in Cell and Structural Biology and Chemistry. He currently serves as an FX instructor & Quantitative Analyst for the Forex Anatomy Private Trading Community called "The Lab", where he conducts live weekly trading webinars & instruction on Fundamental Analysis & Inter-Market Interpretations of dynamic asset classes and their influence on currencies.