Trading Currencies: Hope and risk matching up

25 May, 2020

As discussed over the past 4 weeks risk is surging "hope". Even the slightest glimmer is causing spikes. Last week’s news that US biomedical firm Moderna had registered an immune-system response that could fight COVID-19 from its experimental vaccine was a trigger for FX risk buying. The spike in all things G10 ex USD JPY and CHF is a clear example that markets are looking for ways out of this crisis. 

However, the results from Moderna are from a small first-stage trial and was completed with volunteers rather than random sampling, it was, therefore, criticised for sampling effects. But again the risk is looking for any signs the globe is edging toward a way out and the possibility of ‘normality’ returning in the foreseeable future.


Breaking down the moves

  • EUR/USD finally broke through $1.09 since our last note and moved rapidly to and through $1.10, however, this break was short-lived and trade on Thursday showed how fast seller will back this resistance. We still feel the EUR has a bit of room to move with the EU starting to return from lockdowns. If $1.10 is tested, broken and held above would be looking to $1.12 as the next level. 
  • GBP/USD continues to battle it out for which was the weaker partner in the pair. But with London reporting no new cases at the end of last week and with the GBP’s risk profile it lost this battle which saw Cable back at $1.22 and a trend that likely continues as the UK starts to recover. 

There is a large caveat here – Bank of England. The BoE is getting ever closer to negative rates with 4 different members now publicly stating the board is considering it. A policy move to negative rate will likely see Cable at $1.20 rather than $1.24 if it happens. 

Need to highlight the commodity currencies.

  • NZD/USD is back above $0.60 and even pushed through $0.61, however, there is strong resistance at $0.616. NZ is opening up faster than most other nations and signs the NZ economy could start to snap back may be the catalyst for the pair to really test this level. 
  • The AUD/USD made a 7-week high on the risk sentiment but also the surge in iron ore which breached US$100 a tonne for the first time in years. AUD/USD touched the start of the crisis (March 5) level of $0.661 very briefly, couldn’t close above $0.66 which is a buyer’s strike signal. But the pair showed that ‘risk’ is firmly ‘on’ and it is likely that the pair will test this level again in the coming period.

Source  
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