The markets have been as interesting as ever. After the Covid-19 lockdown was eased in the major economies, the mid-March recoveries intensified across the major global stock markets and most risk-driven currencies. The Dollar quickly came back to life and closed its second consecutive green weeks for the first time since mid-May. Despite the recoveries amid Covid-19 optimism, investors and traders alike remain concerned about the resurgence of the disease and the current geopolitical tensions that could slow down the global economic recovery.
Last week started with some big actions from the Central banks. All the banks held rates with provision for additional economic easing packages.
- The US Federal Reserve Bank rescued the market after its shocking dovish outlooks in the previous week. The bank announced it would start buying individual corporate bonds worth $750 billion to support market liquidity.
- The Bank of Japan went similarly with a $1 trillion injection through facilities lending.
- The Bank of England held rates as expected with further expansion of its Quantitative easing program by an additional GBP100 billion.
- The Swiss National Bank slashed its inflation and growth forecast after keeping rates unchanged.
- Also, this week, the Reserve Bank of New Zealand held rates and prepared to deliver more stimulus if needed.
The week of the Central Banks: what was the impact?
Stock prices were lifted as risky FX stabilized. Oil prices surged. Investors, although still skeptical of Covid-19 resurgence, maintain the optimism backed by support from the Central Banks.
In the Forex market, major currency pairs tanked. Euro hit 2-weeks low at 1.117 while the Sterling plummeted to 3-weeks low as an upbeat US retail sales data gave the Dollar an advantage over its peers. Meanwhile, commodity currencies – Australian Dollar (AUD), New Zealand Dollar (NZD) and the Canadian Dollar were less affected, despite disappointing NZD GDP and worse than expected AUD employment data. CAD maintained a bullish week but the previously strong Yen shed some profits.
In the commodities market, Gold closed around 1745 after a bullish breakout while oil prices stayed firm with Brent & WTI closing at over 8% weekly gain.
Covid-19 second wave, Geo-political tension raising concerns
Despite the support from the banks, the markets still appear vulnerable as geo-political tensions and the Covid-19 second wave reeled investors’ confidence. Although the market held firm last week, it has started to show signs of cracks this week with downside effects limited for now. Major geopolitical events have started to hit the headlines including the following:
- Covid-19 second wave: Coronavirus is not over – far from it. Many countries are still in the middle of the pandemic outbreak as global cases never stopped rising. Also, the countries that eased lockdown have started to see rising daily reported cases. Cases have accelerated in China and the US with some states reaching new daily highs. There are reports of fresh lockdowns – partial or total. This is starting to gain more attention this week and reflecting in the market with slumps across global stocks and Riskier FX like AUD, NZD & CAD while the Dollar and Gold are gaining an advantage as risk-haven instruments.
- US-UK/EU & US-China trade tensions: Trade relation is getting worse between the US and the EU/UK as President Trump threatened fresh $3.1 billion tariffs on European exports. Also, the January trade agreement between the US and China hit a rock as the power-tussle between the two world’s largest economies gets worse. Starting from putting Covid-19 blame on Beijing to the recent bid to intervene in the maltreatment of the Uighurs minority tribe in China, Washington is not ready to surrender this game of power. Trade wars, especially between giant economies, are known to usually have negative impacts on the general market mood.
- President Trump’s Presidential Campaign: Trump is trailing Biden by 14% in the presidential poll. Perhaps he might get more aggressive on the trade fronts ahead of elections in November. This is expected to be another risk factor.
How the markets move this week
In the Forex market, the dollar is recovering this week’s early losses following significant recoveries in the two weeks prior. A worsening market mood will push the greenback higher. Meanwhile the Euro and Sterling react in the other direction with bearish pressure toward their lowest prices in June. Riskier FX – AUD, NZD & CAD have fallen under pressure in the second half of the week as well. Safe-haven Japanese Yen is closing the week weaker than the dollar.
In the commodities market, Gold is breaking new highs – almost hit 1780. However, the bullish run slowed down on Wednesday to 1754. Oil prices on Tuesday and Wednesday dipped by nearly 9%. Brent & WTI trade at $39.8 and $37.6 respectively at the time of writing this report.
What traders should expect next week
Risk sentiments will remain the market’s biggest driver next week although the US employment report – second since lockdown- could cause significant short-term moves at the end of the week. Traders need to watch for developments on the Covid-19 second wave. If fresh lockdowns are announced, we would see a further decline in stock prices and risk-driven currencies like AUD, NZD, and CAD. Also, the dollar & yen will strengthen across the board. On the trade front, US-China & US-EU/UK trade concerns would add extra motive for the bears especially if situations get hotter than expected.
On the other hand, the bearish run should be restrained by the Central bank’s promise of unlimited support. Fed Chair Powell and his counterpart in the UK will speak at important events next week.
In the forex market, the Dollar should continue the recovery. Dollar Index (DXY) should shoot at the 98-99 resistance zone. EURUSD should thus decline further to 1.11 while Sterling will most likely plummet to 1.22. USDCAD recovery should continue as Oil prices fall under pressure. The currency pair should hit the neckline of mid-April to mid-May triangle pattern at 1.38-1.39 and even higher to the 1.4 psychological level. USDJPY should recover toward 108 before the next slump. Meanwhile, AUDUSD and NZDUSD will fall toward a fresh June low if the market mood gets more gloomy. Aussie to 0.67 and the Kiwi to 0.63 most likely.
For commodities, safe-haven Gold will most likely hit 1800 next week after the current dip. Demand for the yellow metal is expected to surge as money flows from risky assets. On the other hand, Oil prices are set to plummet further with Brent and WTI likely to fall to $36 and $34 respectively.