Primus Weekly - 30th November

Hi Everyone,

As we are heading into the final month of the year, we are looking back on 2020. The year of many unprecedented events taking place.

2020 has truly been a year of challenges and tests. We have witnessed a number of unprecedented events, from the global pandemic to unemployment. But also, violent market crashes and subsequent recoveries. At the center of attention have been the central banks. Namely, the Federal Reserve Bank of the U.S., the Bank of Canada, the Bank of Japan and the European Central Bank. The quantum stimulus in the form on quantitative easing and ultra-low interest rates has been astounding. The Fed’s balance sheet from buying U.S. government debt has expanded to 33% of U.S. GDP, BoC’s stands at 27% of Canada’s GDP, BoJ’s is at 130% (!) of Japan’s GDP, and the ECB is at 60% of Euro Area GDP. Central Banks are buying up their respective government debt and other instruments to increase money supply and thereby attempting to increase money velocity and economic activity. This round the central banks have taken it a step further, and on top of buying government debt, they also started purchasing corporate debt when credit markets started showing signs of distress in March. BoJ has not shied away from entering equities market and now owns 60% of JGB market and around 6% of equities ETF market (the latter added US$ 50 billion capital gain for BoJ last quarter from rising equity markets!). This means that central bank actions are creating price distortions not only through ultra-low rates and search for yield, but also directly in the public markets domain by pushing asset prices higher. Also, central banks are in charge of determining the level of the base interest rates. Base rates (EURIBOR in Euro Area) are used by all financial institutions in that jurisdiction and are really the base of financial system. Most central banks have committed to keeping interest rates at the currently levels, which is near 0%, for the foreseeable future. Hence, it’s safe to say that central bankers have a fair share of impact on our daily lives, whether we realize it or not.

Economic data is showing signs of freezing as we are nearing the coldest months of the year. A number of data points last week indicate that economic activity is slowing down. French manufacturing PMI contracted from 51.3 to 49.1 which is the worst print since June. Euro Area PMI Composite also declined from 50.0 to 45.1, whilst German and Japan remained expansionary but lost momentum (respectively 57.9 vs previous 58.2 and 48.3 vs 48.7). PMI, or Purchasing Managers’ Index, offers visibility on how businesses on the ground gauge their industry trends and activity. It’s a diffusion index and based on survey across 19 industries. It’s an important leading economic indicator as it’s directly from the people who have their skin in the game. Movements in PMI data often give an early heads up about the health of the economy, and hence can be used to build a view about currency markets. Weak data from the Euro Area is concerning as Europe, or at least some member states, have the risk of facing double dip recession. ECB has already expressed their concern about this outcome and is expected to announce new measures, or re-calibrate their instruments, on December the 10th at their next meeting. We can expect more bond buying and cheap loans which potentially might weaken Euro.

Markets have been muted after post-election euphoria – S&P500 was down 1.5% last week, while Nasdaq100 ended the week flat. Gold lost 7 basis points and USD, measured by DXY, shed 7 basis points.

Have a great trading week ahead!

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In The Spotlight

Friday USD 2nd Presidential Debate

 

 

DateCurrencyEventPrevious Consensus 
MondayCNYNon-Manufacturing PMI56.252.1
MondayCNYNBS Manufacturing PMI51.451.5
MondayEURGerman Consumer Prices-0.5%-0.5%
TuesdayCNYCaixin Manufacturing PMI53.653.3
TuesdayAUDRBA Interest Rate Decision0.1%0.1%
TuesdayEURGerman Markit Manufacturing PMI57.958.0
TuesdayEUREuro Area Consumer Price Index-0.3%-0.2%
TuesdayUSDMichigan Consumer Sentiment77.077.0
TuesdayUSDISM Manufacturing PMI59.357.5
WednesdayUSDADP Employment Change0.36 *0.42 *
ThursdayUSDInitial Jobless Claims0.78 *0.77 *
ThursdayUSDISM Services PMI56.556.0
FridayUSDNon-farm Payrolls0.64 *0.52 *

*In USD millions

Impact

  • Euro Area Consumer Price Index

Inflation measures the rise in consumer prices in an economy over a certain period of time. Higher inflation means that consumer

prices have grown compared to the previous period. Higher than expected rate may be both positive or negative for EUR as the

market does not like inflation expectations too far off from consensus. Euro Area has been struggling with deflationary environment,

therefore a slightly higher than expected inflation can be bullish for EUR, indicating an increased consumer activity. Generally, both

high and negative inflation are bearish for currency, while positive and low inflation, in line with expectations, is bullish.

 

  • Non-farm payrolls

Non-farm payrolls measure the number of private sector jobs added outside of agricultural sector. Payroll data has started showing signs of slowing. Higher than expected jobs added are generally bullish for USD, while lower than expected are bearish.

Market Sentiment

EURUSD has taken off from the range-bound levels and is testing now swing high of 1.2000 as the price is trading near 1.1970. Momentum indicators are bullish – Moving Averages are stacked and they are directionally moving higher. Stochastic is near overbought levels of 90.3 but RSI is neutral at 67.1. DMI+ of 22.6 indicates that a bullish trend is in place but ADX is weak at 11.5. Once 1.2000 resistance is broken, we can expect the next resistance near 1.21 levels. The price is currently supported by 8-day Moving Average near 1.1911.

Support: 1.1911
Resistance: 1.2000

The pair is marched higher since late September, trading near 1.3333, and being supported by 8-day Moving Average. Short- and long-term Moving Averages are stacked in a bullish manner. The next resistance level is near 1.3500. RSI of 61.1 and Stochastic of 67.4 are both neutral. DMI+ is 22.9 and ADX is 28, signaling that there is still strength in bullish momentum.

Support: 1.3311
Resistance: 1.3500

  • USDJPY

USDJPY recovered somewhat last week, trading near 104.26 but was stopped by 21-day Moving Average near 104.41. Previous support level near 104.00 has stopped the price from falling lower but Moving Averages are stacked in a bearish fashion, indicating that the price might continue to move lower. RSI of 45.1 and Stochastic of 44.8 are both neutral.

Support: 104.00

Resistance: 104.38

  • NZDUSD

The pair has reached a high of 0.7031 not seen since April, signaling a risk-on sentiment in global markets. The price has broken upper Bollinger Band resistance near 0.7000 and hence may potentially move back to 21-day Moving Average level. Moving Averages are stacked in a bullish manner and both Stochastic of 91.3 and RSI of 77.0 indicate overbought levels. DMI+ is currently at 33.1 and ADX is 46.5, signaling the momentum is strong.

 

Support: 0.6864

Resistance: 0.7063

Kaia Parv, CFA, is an experienced Portfolio and Investment Manager with exposure to both public and private markets. Before joining FXPRIMUS, Kaia was a Senior Investment Associate at EFA Group and a Vice President in Bank of America Merrill Lynch.

Any opinions, news, research, analyses, prices or other information contained here are provided as general market commentary and do not constitute investment advice. FXPRIMUS does not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.

Risk Warning: Trading on margin products involves a high level of risk , which may result in the loss of all invested capital.

Risk Warning: Trading on margin products involves a high level of risk , which may result in the loss of all invested capital.

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Risk Warning: Trading on margin products involves a high level of risk , which may result in the loss of all invested capital.

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