Friday February 28, 2020 - 11:58:22 GMT
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EURUSD: Keep Dancing Until the Music Stops
During times of crisis the US dollar tends to benefit as a safe haven. This time around, with the coronavirus concerns driving equities sharply lower, the EURUSD has been an outperformer, including vs the dollar, not as a safe haven but for other reasons:
1) Investors tend to repatriate money home when markets go into panic mode. This benefits those currencies in countries running current account surpluses.
2) The EUR has been a favored for carry trades where investors borrow a currency with low (or negative) interest rates and convert it to another currency to invest in other assets, such as equities. Unwinding of carry trades as stocks meltdown has created demand for EUR.
(EUR demand has also come from a sharp rise in EURGBP amid concerns over a hard Brexit as early as June 30 as PM Johnson takes a hardline on trade talks with the EU.)
How long this dance continues will depend on how long the coronavirus concerns go on. This is hard to predict as markets are anticipating a pandemic and selling risky assets first and worrying about what comes next later.
In a global world where manufacturing has been depressed and consumers have been driving growth, anything that impacts the latter will raise concerns over corporate earnings and economic growth. Add to that disruptions in supply chains and there is a perfect storm for equity markets meltdowns.
I wish I had a crystal ball to predict when virus concerns will ease and markets will stabilize and bounce back. Such talk seems premature and why I say keep dancing until the music stops.
To keep it simple, use EURUSD 1.10 as a barometer of sentiment as it will likely set the tone going forward.
Personally, all I can do is tell you how I approach trading. I view forex trading as a series of episodes more than trends. It is all explained in my Ladder Strategy using the Amazing Trader. In it I say “there is no reason to look to pick a bottom or top until there is a reason to do so.” As the 4 hour chart shows below, EURUSD has been in an up ladder as indicated by the red ladder rung lines and came close to a target at the blue Amazing Trader line (1.1957), which is the bottom of a resistance zone to 1.1095.
In this regard, I use the Amazing Trader with the logic of the Ladder strategy as a guide. It will tell you when the music is about to stop. Until then market will likely keep dancing to the current tune until there are signs the current episodes are running out of steam and reversing/correcting, keeping in mind that crises tend to have a short trading shelf life. However, the current virus concerns are likely to place a cloud over markets for some time. In this regard, I strongly suggest getting access to the Amazing Trader (Ladder strategy is currently free with a one month subscription).
Note the Amazing Trader includes not only most fx pairs, gold and silver but S&P (SPX 500 and US300), DJIA (US300), DAX snd Bitcoin. It can add any pair or asset upon request.
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