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The panic button went off overnight, but the situation has improved now

Forex Signals US Session Brief, March 2 – Markets Settle After Weekend Panic on Data From China

Posted Monday, March 2, 2020 by
Skerdian Meta • 5 min read

Here we are, on a new month for this year, but the problems are the same old ones, a weak global economy and a spreading virus that has scared the hell out of the global population. If not due to the death toll, the impact that it is having in the global economy is surely to be scared about. Over the weekend, we saw the Chinese manufacturing and non-manufacturing PMI indicators dive down to 36.7 and 29.6 points respectively. That set off the panic among economists and central bankers.

That was the deepest dive in both sectors ever recorder anywhere for the PMI indicator. That showed that the effect on the Chinese economy is going to be severe. Chinese government said a while ago that outside of Hubei the situation is OK, but can you trust them? So, this virus might send the Chinese economy in recession and other major economies as well, as it spreads in other parts of the world. Today’s manufacturing figures from Europe showed some further improvement during February, but the effect of coronavirus will be felt this month. EUR/USD on the other hand, has been rallying since last Monday for 350 pips as odds of the FED cutting rates this month increase, but the Euro doesn’t rally have any reasons to rally.

The European Session

  • European Final Manufacturing PMI – Manufacturing weakened considerably in the last two years in the Eurozone, as a result of the trade tensions. In the last several months we have seen a slight improvement and today’s report showed further improvement, although manufacturing still remains in contraction in Europe, apart form the UK. Below are the final manufacturing numbers for February:
    • Italy February manufacturing PMI 48.7 vs 49.0 expected
    • Initial reading for February was 48.9
    • Switzerland February manufacturing PMI 49.5 vs 48.0 expected
    • Initial reading for February was 47.8
    • France February final manufacturing PMI 49.8 vs 49.7 prelim
    • Germany February final manufacturing PMI 48.0 vs 47.8 prelim
    • Eurozone February final manufacturing PMI 49.2 vs 49.1 prelim
    • UK February final manufacturing PMI 51.7 vs 51.9 prelim
  • Russia Doesn’t Want Another Large Oil Cut – OPEC has been trying to convince Russia to cut Oil production again, this time by 1 million barrels/day. But, Russia has been avoiding the subject. Today’s comments show that they are avoiding it again now, so they don’t really like to cut Oil production further. Russian energy minister Novek made the following comments:

    • Russia hasn’t received any OPEC+ proposal for a 1 million bpd cut
    • We are focusing on what the technical committee discussed
  • ECB Remains Ready to Act on Coronavirus – The ECB vice president, Luis de Guindos made a few comments earlier today, showing concern about the effect of coronavirus spread on the Eurozone economy.
    • Virus adds a new layer to uncertainty to global, euro area growth prospects
    • If virus spreads more widely, domestic firms could be more directly affected
    • ECB remains vigilant and will closely monitor all incoming data
    • ECB stands ready to adjust all its instruments as appropriate, to ensure inflation moves towards its aim in a sustained manner
    • The front line of the response to coronavirus should be fiscal policy
  • Trump and Pence Comment on Coronavirus – The concern grows as the virus spreads globally, particularly for the economy. China is in partial lock-down, but if both the US and China would be forced into some semi-lockdown, it would wreak havoc on the global economy. US president Donald Trump and VP Mike Pence made come comments a while ago:
    • Pence expects many more cases of coronavirus
    • US is in the process of resolving virus kits issue
    • Trump tweeted: “I am meeting with the major pharmaceutical companies today at the White House about progress on a vaccine and cure. Progress being made!”

US Session

  • ECB’s Wunsch Worried That V-shape Might Not Happen – The ECB eased the monetary policy back in September, cutting deposit rates to -0.50% from -0.40% and restarted the QE bond purchase programme in November, hoping for a v-shape recovery, after last year’s slowdown. But, now they don’t sound to confident after the coronavirus. Wunsch made some comments a while ago:
    • V-shaped recovery ‘not the only possible scenario’
    • Impact of virus can lower ECB’s growth projections
    • ECB doesn’t have to act on every negative shock
    • ECB needs to be very vigilant
  • Canadian Manufacturing PMI – The manufacturing report from Canada was released a while ago. Manufacturing softned and got close to stagnating in De3cember, but it has improved in the last two months.
    • Canada February Markit manufacturing PMI 51.8 vs 50.6 prior
    • Strongest one-month improvement in a year
    • Highest reading since Feb 2019
    • January stood at 50.6 points
    • Employment highest since Nov 2019
    • New orders 51.7 vs 51.0 prior
  • US ISM Manufacturing PMI – ISM Manufacturing fell in contraction back in August and remained there until December. But, it missed recession just about, as manufacturing activity returned to growth again in January. US ISM manufacturing report has been released and showing that manufacturing activity has slowed again in January, missing expectations of 50.5 points and slipping to 50.1 instead.

    • Prior was 50.8
    • New orders 49.8 vs 51.8 expected
    • Prior new orders 52.0
    • Prices paid 45.9 vs 50.5 expected
    • Prior prices paid 53.3
    • Employment 46.9 vs 47.5 expected
    • Prior employment 46.6
  • Coronavirus Update 

Trades in Sight

Bearish AUD/USD

  • The main trend is bearish
  • The retrace higher is complete on H4 chart
  • The 20 SMA provided resistance
  • The sentiment remains negative

The 20 SMA is stopping the climb for AUD/USD

AUD/USD has been bearish for about two years, when the FED was in the middle of a tightening cycle. Although just like in NZD/USD, we saw a retrace higher in the last few months of 2019, as the sentiment improved on prospects of a partial trade deal between US and China. But, the good times ended with the old year and this year the sentiment turned negative right away, as tensions in the Middle East grew. Then came coronavirus, which has turned the sentiment massively bearish and the data released from China over the weekend showed that the economy has fallen deep in contraction due to the shutdown.

This will reduce the demand for raw materials and other goods from Australia, so the AUD should remain bearish. But, the odds of FED cutting interest rates this month have gone up to 100% and the USD has weakened in recent sessions, mainly shown in EUR/USD which has climbed nearly 4 cents since last week. As a result, AUD/USD has retraced higher in the last few sessions, but the retrace seems complete now on the H4 time-frame chart. The price has found resistance at the 20 SMA (grey) which has done this job before and it is also overbought. Buyers seem exhausted now and a morning star candlestick formed below the 20 SMA, which is a reversing signal. We decided to sell the retrace, so now we are short on AUD/USD.

In Conclusion

Stock markets opened with bearish gap lower this morning, after the horrible Chinese data for February, which was released over the weekend. They continued to slide lower for a while, but the decline has stalled for now. Although, I think that the decline will resume again, as coronavirus spreads across the globe.

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