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Andreas Zanin
Analysis | November 10, 2020

KTM FX Weekly: EUR crosses offering better trade setups

  • Tail risk remains
  • Vaccine optimism
  • Massive risk-on

After the dust settled, Biden was victorious, and the financial market is reacting to his victory. I am not providing commentary on the long innings of the US election outcome. There is plenty of coverage in the major television networks and social media. Now we look beyond US politics.

 Tail risk

First and foremost, the fiscal package is the key driver in the near-term market concern. But we expect a fiscal stimulus is still likely.

Paul Donovan at UBS said, “There is uncertainty over what policies US President Trump may pursue before the inauguration. Trade policy falls under commander in chief powers and is an obvious focus. Economic policy questions focus on fiscal policy (with US Senate leader McConnell pledging action) and regulatory policy in the face of a divided Congress”.

Heads up

The highlight last night was the press release from Pfizer. As per media sources, Pfizer’s early data Shows Vaccine is more than 90% Effective. An astonishing 90% success rate triggered a massive risk-on sentiment.

https://www.pfizer.com/news/press-release/press-release-detail/pfizer-and-biontech-announce-vaccine-candidate-against

In the official press release, Pfizer said, “Vaccine candidate was found to be more than 90% effective in preventing COVID-19 in participants without evidence of prior SARS-CoV-2 infection in the first interim efficacy analysis”.

The current wisdom seems to be that the markets have risen because investors are expressing relief at the prospect of a more stable Biden presidency while at the same time welcoming the likelihood that a Republican Senate will be a handbrake on any “anti-business” policies, media source.

  • ING cited “Welcome news, but challenges remain”

Massive risk-on

Vaccine news raises the risk-on sentiment on a massive scale. The magnitude of over night’s financial assets movement could reveal how big the vaccine news was.

Following the vaccine news, 10-year US Treasury yields jump above 0.96%, the highest level since March 2020. In Europe, 10yr Bund yields up +11bps at -0.51%.

There is a lot in the markets now. Much clarity on the US political landscape, latest vaccine hopes, and easing of Covid death fear are the key factors that are driving the markets. The latest news also brought forward the V share recovery theme.

Economic forecast

Last week the European Commission published its latest Economic forecast. Germany’s GDP in 2020 is expected to fall by -5.6% before rebounding by 3.5% in 2021 and 2.6% in 2020. Please see the table below for the full autumn 2020 forecast.

Overall, EU GDP is forecast to contract by about 7½% this year before rebounding by 4% in 2021, which is less than previously forecast, and by 3% in 2022. and to remain broadly unchanged in the EU. Insert EC image

Looking at the data points from last week, services activity down in October and recorded the lowest reading since May and indicated a second consecutive monthly decline in inactivity.

IHS Markit cited, “Eurozone economy stagnates at the start of the fourth quarter.”

  • The Eurozone Manufacturing PMI continued its upward climb in October, reaching 54.8 (Sep – 53.7) to record the most robust growth since July 2018. Flash Eurozone Services PMI Activity Index at 46.2 (48.0 in September). 5-month low.
  • October’s Eurozone Services PMI fell to a level of 46.9. According to IHS Markit, all countries registered a fall in service sector activity, albeit to varying degrees. Germany registered the weakest decline, with the rate of contraction marginal. In contrast, Spain recorded the sharpest rate of contraction for five months.
  • The Sentix overall economic index falls by 1.7 points to -10 points in November. This negative value still means an economy in contraction mode. However, the announcement by the ECB, which has announced further monetary policy measures to support the economy at its next meeting, may also have had a positive effect on investors. The Sentix Theme Barometer sub-index “Central Bank Policy” thus remains clearly in positive territory.

 

Looking ahead, today we will see German November ZEW Economic sentiment, Industrial production for France and Italy. Latest this week, we hear from ECB President Lagarde and Fed Chairman Powell.

 TECHNICAL OVERVIEW

The latest vaccine news triggered a massive risk-on sentiment with the stock market rally around the world. In our subject continent, European benchmark indices rallied more than 4%. In FX, the safe havens CHF and JPY ended lower, growth-sensitive currencies rallied higher (AUD, CAD, and NZD). The common currency rallied a percent against the Swiss Franck and 1.50% against the Yen. However, sharply lower against the dollar.

EURUSD failed to handle the 1.1900 levels, which was the previous swing high. Twice the price rejected and shifted the EURUSD’s landscape into a tight range between 1.1790-1.1900.

As we noted in our Friday’s article, the price rallied to our target of 1.1880, now waiting for fresh clues. Last week the price traced out a double bottom on the chart and Monthly too. Buy on dips” favor the longer term.

The daily 14 periods RSI is placed at 54, and this has more room up to 75, suggest a bullish movement. The overall chart pattern indicates more new highs in the coming weeks. The upside targets to be watched around 1.2450-1.2500 if the price closed above the August 2020 high. But the same trend was not seen in the EUR/ crosses. The current risk-on sentiment favors bullish sentiment on EURJPY and EURCHF. For EURJPY, a weekly close above 125 needed to rally towards 127 and 130 levels in the medium term.

For all the Scandian lovers, watch the EURSEK monthly chart closely. At a higher trendline, the price lost the eight-year uptrend trendline this week. But the immediate support exists at 10.00.

It is important to always keep in mind the risks involved in trading with leveraged instruments.

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