May 092020

It’s been quite a few months since all this roller coaster ride started. And while we try to apply experience and logic into our trading, we sometimes find ourselves wondering why our expectations aren’t met.

Is the market bullish or bearish? Are we really in a recession?

The answers to those questions are not really important. What is important is to know why the market is now behaving the way it is and how we can take advantage of it. More so if we understand how it’s behaving now, we can forecast better.

First, the popular equities market.

For the past few weeks to a month, I have been expecting another round of sell off to revisit the lows last March. That, I can right now say is getting far from possible as each passes. Only WW3 would bring us to those lows or perhaps a back-to-back pandemic scenario. It’s about time we expect and say that the equities market is now well supported.

With the concerted action by all central bankers world wide as well as liquidity injection by fiscal planners, the market is awash with cash. This is the reason why the correction of the market has been more shallow than deep.

Accept it.

Next, in the currency and commodities market, we are seeing Gold as the clear winner here. During risk-off scenarios, it climbs. During risk-on scenarios, it corrects but easily gets supported. $2000/oz. is the target.

When gold moves, CHF and AUD moves in correlation with it. While we would normally tie AUD to China’s economy, it’s actually not the case this time. If you observe the chart below, AUD was decoupled from gold for a long time. Then on the beginning of March 2020, it seems that Gold and AUD went to church and had their marriage vows. They are now inseparable.

Screen Shot 2020-05-08 at 23.40.29

AUD and NZD are correlated. AUD is stronger than NZD.

AUD, NZD and CAD are all commodity currencies. CAD gets a sympathy play with AUD and NZD. With the possible bottoming out of crude oil, CAD’s correlation to the other two commodity gets more traction.

Screen Shot 2020-05-08 at 23.48.17

EUR is just moving sideways with USD. Check again below.

Screen Shot 2020-05-08 at 23.46.58

GBP is just slightly stronger than EUR but both are just moving sideways.

JPY is still a safe haven but here comes the strange part. JPY is evidently strong against EUR, GBP and USD but can’t seem to beat AUD, NZD and CAD. It’s strange because during times of uncertainty, JPY should be acting as a leader especially against risky commodity currencies.

How about KING Dollar? He’s asleep. USD is weak and will remain weak because US is badly hit by COVID19. The reliability of USD will remain to be seen.

As a summary, here are the key take away points:
1. As far as uncertainty is concerned, Gold is the leader as a safe haven.
2. AUD is following Gold. AUD, NZD and CAD are correlated as commodity currencies.
3. AUD and NZD could be leading not only because of Gold but these two countries have done a better job in the COVID19 crisis.
4. JPY is only strong against EUR, GBP and USD but not the commodity currencies.
5. Equities will go through shallow corrections because liquidity has been guaranteed.

Moving forward, knowing the current scenario of our market, what is there for us to expect?

I believe the impact of COVID19 has been priced in the market. There’s no point of wishing the worse just because we have our shorts or we have positions on safe haven assets. The status quo of the market is clear: Gold, AUD, JPY.

In the event when fear strikes again – the revival of US-China Trade War or a second wave of COVID19 pandemic, I am most certain status quo remains – Gold, AUD, JPY.

As many would put it, our society will have to adjust to the new norm because of COVID19. The same with the market. The new norm is – Gold, AUD, JPY as the safe haven.

On a speculative note, here are some questions to ponder:
1. Will Trump reignite US-China Trade War in exchange of his election bid?
2. Will Trump get reelected given the mishandling of COVID19 pandemic?
3. Will there be some sort of aggressiveness from both US and China after COVID19 is resolved?

Trader H

TraderH is a foreign currencies trader and a former Certified Securities Representative in the Philippine equities market. All posts herein are personal views and are not endorsed by any organization whatsoever. It is important that you practice due diligence in your trade plans. This website and its authors will not be held responsible nor liable to any of the reader's losses.

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