European stock exchanges are trading in the red zone, losing an average of 3 to 5%. There is strong growth in demand for bonds, oil is falling, gold is growing – all the signs of panic are obvious.
The scale of what is waiting for the world economy can be understood if you look at the statistics from China. Since the virus became active in China earlier than in Europe or the United States, the data for February reflects the depth of the problem. And they are as follows: retail sales -20.5%, industrial production -13.5%, foreign investment -8.6%, foreign trade fell by 11%, and for the first time in recent history, China has a deficit of -7.09%.
Italy will lose 100 billion euros a month from the shutdown of production due to the virus. But Italy is just the locomotive of coronavirus in Europe, not the final stop. Nordea Bank points out that the situation in Spain and the Netherlands already looks worse than in Italy, and in the United States, the epidemic is rapidly gaining momentum. Treasury Secretary Mnuchin believes that the quarantine will last until the beginning of June. The national guard is involved to help the most affected States, but the chances of success remain low. The Wall Street Journal believes that the approaching economic downturn has no analogs in history, tens of millions of jobs will be lost, which will end in the collapse of the economy.
The loonie stabilizes after testing the resistance of 1.4685 from 2016. It is too early to hope for a downward rebound, given the slowdown in economic activity, but a technical pullback may well take place.
Despite the fact that technical oscillators indicate a strong overbought pair, a fundamental look at USDCAD does not show any deviations from the calculations. The fair price for the Canadian is close to the spot price, the price is directed up, and there are no signs of a reversal.
The combined short position for the Canadian, according to the CFTC, has increased, and weak oil and problems in the US, which have paralyzed retail trade, do not allow us to hope for any stabilization of exports.
So the reason for the growth of the USDCAD is not only that the demand for the dollar has increased sharply, and not only in the price of oil – the entire export industry of Canada, including the one that has an indirect relationship to oil, is under threat. The massive liquidity injection undertaken by the six largest central banks helped to stabilize the situation.
This week, the rate of the loonie will be determined mainly by the following factors. First, it is likely the onset of paralysis of the retail trade in the United States. Second, a sharp increase in unemployment. Third, news on coronavirus – any positive signal can serve as a trigger for an increase in demand for risky assets, which are currently monstrously oversold. Fourth, the increased threat of another emergency meeting of the Bank of Canada, which currently holds a significantly higher rate after a number of other central banks lowered it.
To date, the most likely scenario is to retest 1.4685 and consolidate above this area.
The Bank of Japan has so far refrained from tough measures to support the economy, although formally there are grounds for this – consumer inflation, instead of the expected growth, showed a fall to 0.4% in February, and deflation is just around the corner.
The calculation of a fair price for the yen hints that as soon as the US Federal Reserve throws the promised trillions into the market, the pair will go down sharply. Its growth in the last week was provided solely by the lack of dollars.
The Bank of Japan still intends to carry out previously planned operations. On March 25, the measures to promote corporate finance adopted at the meeting on March 16 will be announced, as well as possibly expanded purchases of ETFs and J-REITs. While none of the board members has spoken out about the deterioration of conditions, we should not wait for active actions.
The USD deficit implies an increased probability of testing 112.19, but in the long term, we need to wait for the pair to turn down. Accordingly, sell on growth to return to the zone of 106/107.
The material has been provided by InstaForex Company – www.instaforex.com