Tiomarkets Daily Commentary 21 Feb. 2020

It’s Friday and the markets continue to focus on every Coronavirus headline. There seems to be little evidence thus far that the number of new cases is peaking and in the case of South Korea, the prime minister has declared an emergency with 2 cities being declared special care zones. However the big unknown is the long-term effect on the global economy. Trying to forecast that impact is almost impossible. Yes, China is going to be severely affected but so too are its major trading partners. Tech companies like Apple, who are heavily reliant on China to produce parts have already warned of an impact. Yet stock markets, while volatile, continue to make new highs and shrug off the potential impact. Even St Louis Fed president James Bullard, while speaking with CNBC, claimed there was a high probability that the Coronavirus will ‘blow over’.

So what would Friday bring? More of the frantic USD buying we have seen during the week? More traders rushing to buy XAU? The day would begin with some UK data. The biggest impact would come from a better than expected Manufacturing PMI number which saw GBPUSD rally from 1.2890 to 1.2950. Elsewhere USDJPY would start the day with a quick 50-point drop from 112.00 to 111.50 but by the time the US day began, had recovered back to 112.00. Gold would continue to build on recent gains and yesterdays break of the important 1.616 level making new 7-year highs at 1,643. EURUSD would once again try to bounce over 1.0820 but was back to 1.0800 by the time NY got going. Wall Street opens with the DJ immediately dropping by 200 points and extending to down 300 points by mid morning. US Manufacturing and Services PMI data comes in much weaker than expected sending the USD sharply lower. A market already sitting short of EURUSD sees a spike from 1.0805 to 1.0865. USDJPY would head down to 111.55 from 111.95. AUD, NZD and CAD would all benefit from the sudden USD reversal. AUD would squeeze to 0.6638 while USDCAD would drop to 1.3202. Better than expected Existing US Home Sales did little to cushion the impact for a market caught woefully long USD from the weeks moves. Gold would continue its spectacular run higher, extending the day's rally to as high as 1,649. However, as is often the case on a Friday, markets slowed to a crawl early. The weak data coupled with the Coronavirus fears had the DJ close down 227 points or 0.78%. The Nasdaq fared even worse ending down 1.79%. The end of a week full of USD gains and records for US equities comes to a crashing halt.

So EURUSD rallies on the back of some weak US data, the market is caught short from a steep downtrend from the beginning of the month and the naysayers will cast a cloud of doom and gloom over the whole move. Not for me to say whether that’s true or not but I will attempt to balance that argument. Firstly EURUSD came a long way in a short period of time – that was a steep move for what is the most liquid and traded pair in the FX world. Some big levels were broken on the way down some of which I have highlighted on this chart, not to mention the intra-day tops from the move lower on the month. Yes if you’re a bear its frustrating. But there are a lot of important levels for EURUSD to break back above before I would say this move is over. And keep in mind (not shown here) the 50% retracement of the move lower on the year from 1.1240 to 1.0780 comes in at 1.1010. So still plenty of room to fade the rally if that’s your view. If you're the other way, 1.0775 is now the level that needs to hold.