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Forex Signals US Session Brief, March 4 – The BOC Follows the FED, Delivering A 50 BPS Rate Cut

It seems like the panic from coronavirus has shifted from financial markets to central bankers now. Stock markets have stopped declining, after tumbling down for two weeks. They opened with a gap higher today and are a bit higher right now, but they are not exactly turning bullish. but at least, the decline has stopped. So, markets have been calmer today, but the panic seems to be transferring to central banks now.

Yesterday we saw the RBA cut interest rates by 25 bps, while today RBA member Debelle let us know that besides cutting rates again next time, they might as well start a quantitative easing (QE) programme. This should keep AUD/USD bearish for months, but the Jerome Powell also panicked and delivered a 50 bps rate cut. Thing is, they might not be done and cut again in the meeting later this month. The Bank of Canada followed the FED today and also cut rates by 50 bps, from 1.75% to 1.25%. The Bank of England is also thinking about cutting interest rates soon as well, and i think they will do that. So, everyone is panicking mostly due to the effects of the virus outbreak on the economy. But, I don’t know how cheaper loans/money will persuade people to risk their lives, if things get out of control.

The European Session

  • Chinese President Xi Trying to Calm Waters – The construction sector had fallen in contraction in the UK since early last year, which turned into recession. The decline bottomed out at 43.1 points in June and has been improving since then. But, this sector remained in recession until January, as the future of the UK was quite uncertain. But, now that we know where the UK is heading, the situation has improved and today’s PMI report showed that this sector jumped out of recession last month, coming at 52.6 points, up form 48.6 in January and beating expectations of 49 points.
  • Eurozone Services PMI – The services report from the Eurozone was released earlier this morning. As seen from the numbers below, services remain pretty much unchanged in February. They softened a bit in Germany due to coronavirus fears, but expanded in Italy, where the coronavirus has broken out of control.Eurozone Services PMI Report
    • Eurozone February final services PMI 52.6 vs 52.8 prelim
    • Composite PMI 51.6 vs 51.6 prelim

    German Services PMI Report

    • Composite PMI 50.7 vs 51.1 prelim
    • Germany February final services PMI 52.5 vs 53.3 prelim

    French Services PMI Report

    • France February final services PMI 52.5 vs 52.6 prelim
    • Composite PMI 52.0 vs 51.9 prelim

    French Services PMI Report

    • Italy February services PMI 52.1 vs 51.3 expected
    • Prior 51.4
    • Composite PMI 50.7 vs 50.1 expected
    • Prior 50.4
  • RBA’s Debelle Hints at Further Rate Cuts, As Well As QE – The Reserve Bank of Australia (RBA) delivered a 25 bps rate cut yesterday in the Asian session. Markets were totally anticipating it, as coronavirus wrecks havoc in the global economy, especially in China where we saw a deep recession for February.Australia is closely connected to China, since it is one of the major exporters of raw materials to China and exports are expected to fall considerably. RBA’s Debelle spoke a while ago on the situation and he is hinting another cut in interest rates. Below are some of his  main comments:
    • Drop in services exports due to coronavirus would cut about 0.5% of GDP in Q1
    • Estimates that Australia’s services exports would fall by 10% in Q1
    • Still thinks that monetary policy is effective
    • Will take into account expected fiscal stimulus in future monetary policy decisions
    • We have capacity to cut rates one more time, beyond that we will have to consider QE
    • January core CPI +1.1%UnK February Service PMI – The service sector fell in contraction in October, but in January it came out, falling flat at 50.0 points. The sector left behind contraction in February, as the initial reading jumped to 53.3 points. Today’s final reading was expected to tick lower to 53.2 points and it did just that.

US Session

  • US ADP Employment Change – The ADP employment report came in pretty strong last month, showing a 2890k jump in new jobs. But, that was revised lower today. The numbers for February came in better than expected, but January’s revision took the shine off this report.  February employment +183K vs +170K expected
    • February employment +183K vs +170K expected
    • Prior was +291K (revised to +209K)
    • Estimates ranged from +120K to +250K
    • Goods producing jobs +11K
    • Service-providing jobs +172K
  • EU Commission Expects Lower GDP and Probably Recession – The European Commission commented a while ago on the impact of coronavirus on the Eurozone economy. Expectations look dim. Below are some of their comments:
    • EU expects virus impact more than in recent forecasts
    • Says it may have to downgrade forecasts
    • Economic recovery from virus may not be V-shaped as assumed
    • Italy and France face risk of technical recession
  • US ISM Non-Manufacturing Index – US ISM non-manufacturing index has been performing the best during this turbulent time, since early last year. It was expected to show a cool down in February, but it jumped even higher. Below is the report:
    • US ISM nonmanufacturing index for February 57.3 versus 54.9 estimate
    • employment 55.6 versus 53.1 last month
    • new orders 63.1 versus 56.2 last month
    • business activity index 57.8 versus 60.9 last month
    • prices paid 50.8 versus 55.5 last month
    • backlog of orders at 53.2 versus 45.5 last month
    • supplier deliveries of 52.4 versus 51.7 last month
    • inventory change 53.9 versus 46.5 last month
    • inventory sentiment 59.3 versus 54.9 last month
    • new export orders 55.6 versus 50.1 last month
    • imports 52.6 versus 55.1 last month
    • Highest level since February 2019
  • Coronavirus Update 

Trades in Sight

Bearish AUD/USD

  • The main trend is bearish
  • The retrace higher is complete on H4 chart
  • The 100 SMA is providing resistance
  • The sentiment remains negative

The 100 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. Yesterday ther FED delivered a surprise 50 bps rate cut, which sent this pair 70 pips higher. 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 100 SMA (green) 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 again opened with bullish gap higher this Wednesday morning, but they have traded mostly sideways, as the European session progressed. Although, I think that the decline will resume again, as coronavirus spreads across the globe. The CAD has just delivered a 50 bps rate cut as well, so the rate who cuts more is non now.

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Skerdian Meta
Lead Analyst
Skerdian Meta Lead Analyst. Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank's local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.
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