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  • Risk-off markets here to stay as coronavirus threat strikes back with vengeance. 
  • Yen de-coupling from risk-off flows and the weekly close above 110.31 to confirms the break.
  • EUR/USD in profit-taking and reaching out for rescue towards 38.2% Fibo retracement. 
  • US dollar heading into key US data, a potential minefield for the bulls. 

The coronavirus remains front and centre of the theme for forex at the start of this week. Friday’s close leaves a consolidative tone for today’s open, if not a risk-off bias which could continue to fuel a bid into the greenback which gave up some marginal gains in a 23.6% retracement of the early Feb rally.  

The week, on Wall Street, ended on a sour note, with the tech sector suffering on the fear of a global recession with Shares of Microsoft Corp, -3.16%  Apple Inc. AAPL, -2.26% and Intel Corp. INTC, -1.70%  being weighed by the potential fallout from the coronavirus (COVID-19) outbreak – more on that here. For a quick recap of the closing events for Friday, see here: Forex Today: Fears to keep leading the way

Key themes in the FX space

Yen: Risk-off is seeing a potential paradigm shift in the yen which has fallen for day’s on end, despite the growing concerns over global growth pertaining to the threat of the coronavirus. In Chart Of The Week, we see a bullish bias painted on the charts following an upside test of the symmetrical triangle and note the lack of volume towards a 138.2% Fibonacci resistance and the 118 handle. Still, there is plenty of resistance ahead, but the fact that Japan could be considered an unsafe investment should be compelling for forex traders.

A number of factors could be blamed for the de-coupling to risk-off, and not least with the recent Gross Domestic Product miss in a -6.3% contraction as the economy faces a potential virus pandemic with its closest trading partners in Asia, (2019’s total Japanese export: China: $134.7 billion (19.1%), South Korea: $46.3 billion (6.6%), Taiwan: $43 billion (6.1%), Hong Kong: $33.6 billion (4.8%) and Thailand: $30.2 billion (4.3%)). 

In recent figures, Japan has been reported to have the third-highest domestic number of coronavirus cases and investors are concerned, expecting the Japanese authorities to face some tough decisions ahead following the recent sales tax hikes which have potentially back fired. The Bank of Japan will likely become a keener central bank meeting for forex traders in anticipation of additional easing. It will also be interesting to monitor the relationship between the US stock market and the yen, for it could be that Japanese pension funds will seek out alternative holdings, other than the yen, at times of risk-off.

With the Japanese tax-year coming up, seasonality should be noted as March is traditionally a month when forex traders need to be extra careful in selling the currency because Japanese exporters will be placing big yen bids ahead of their financial year-end. However, while repatriation obviously still takes place, it may not be too surprising if the yen continues to weaken despite the seasonality considering how much manufacturing now takes place overseas and if the recent data has anything to go by, obviously there has not been much in the way of manufacturing and exports in any case. 

US dollar: A host of tailwinds continue to support USD denominated assets, and the USD has been gaining ground since early January. The bulls had been mounting on a daily basis throughout this month so far, and there seemed to be no let-up, until Friday’s close where profit-taking took place due to dismal US data. However, so long as the risk-off theme remains intact, the dollar should continue to attract overseas investment. This week will give us more to go on from the economic data side of things with the Federal Reserve’s preferred inflation measure – PCE Inflation. 

CPI and PPI data point to an above-trend 0.3% m/m rise in the core PCE index; we estimate 0.28% before rounding. The YoY change likely rose to 1.8% from 1.6%, due in part to base effects, with more risk of 1.9% than 1.7%. (Core prices rose just 0.04% m/m in January 2019.) Even so, the pace remains below the 2.0-2.5% range that Fed officials appear to be aiming for “for a time,”

Analysts at TD Securities explained. 

For more insight on the US dollar, see here: US Dollar Strength: About more than the coronavirus’ contagion

EUR: The euro has been on the back foot vs the greenback as a slide in risk appetite coupled with growing concerns over the eurozone economic performance have taken their toll. The euro area remains burdened by low growth, weak inflation dynamics and underperforming financial assets. The European Central Bank is stuck between a rock and a hard place and it would appear that the eurozone nations are reluctant to provide the fiscal stimulus for which the ECB has been seeking.  

With the coronavirus outbreak on their doorstep, (Italy’s confirmed cases surged from three on Friday morning to more than 130 by Sunday), the lack of monetary policy space means the ECB will be constrained when reacting to any downturn in economic growth. Moreover, political risks remain in play. We have a possible breakdown in Germany’s grand coalition, Brexit trade talks between EU and UK  and the lingering threat of US tariffs on the European auto sector will all pose a risk to its recovery, and that’s what the markets are factoring in. There is scope from here for an extended recovery, perhaps to test the 1.09 handle as a key confluence area on the charts where buy stop liquidity is likely located, before further selling.  For the week ahead, the Flash Inflation (Feb, YoY) and Headline HICP will be a focus. 

  • EUR/USD: Corrective advance could continue up to 1.0900