The global equity market sells off
Global stock indices registered the worst trading week since August 2019, erasing all of the January's gains. The main driver for such a dramatic sell-off was the panic related to the spread of coronavirus from China. Many industries and global businesses are expected to get a hard hit from travel restrictions around the globe. Dozens of companies close their offices and shops in China, while airlines cancel regular trips. The death toll and the number of people infected with the new type of virus grow rapidly despite the efforts of governments and international organisations. The pandemic has already started affecting the global economy and the total negative impact is still unknown. All those factors influence the strong selling pressure on the equity market.
So the S&P 500 benchmark dropped -2.03% to 3229.6 points, the lowest weekly close rate in 6 weeks. There were two attempts you recover from daily losses on Tuesday and Thursday, however, buyers failed over on the level of offers from investors rushing into safe-havens. NASDAQ composite shed - 1.33% to 9009.2 points with the largest daily loss since August 5 (-2.41% on Friday). The Dow Jones Industrial Average declined by -2.42% to 28295.5 points.
Overseas stock indexes were vulnerable to an even tougher pace of the sell-off. Japanese Nikkei 225 plunged -5.62% on a weekly basis after charting a huge weekend gap on the weekly time frame. German Dax 30 lost - 4.38% of its value, while French CAC 40 dropped by -3.62%. The British FTSE 100 was trading with a dramatically bearish bias as well (-3.82%).
The U.S. Dollar index drops, high-risk currencies plunge
Although the U.S. dollar index measuring the volume-weighted basket of 6 major currencies declined by -0.53% after 3 weeks of solid growth, the demand for the greenback wasn't smooth across the board. European currencies and the Japanese yen gained strength but the high-yield currencies including commodity and emerging markets currencies were sold off on the general risk aversion. Such unusual capital flows created and shifts in the foreign exchange market, especially in the cross-rates.
For example, EUR/USD added +0.63% to the exchange rate while the AUD/JPY cross-rate plunged incredible - 2.84%. A surprisingly optimistic performance was noticed for the British pound which gained strength versus the Australian (GBP/AUD +3.07%) and New Zealand dollar (GBP/NZD +3.21%) but remained almost flat versus the Japanese yen and the Euro (GBP/JPY +0.17% and EUR/GBP -0.38%).
The Japanese Yen reflected the strong demand for safe-haven assets, dramatic sell-off in equities and repatriation flows. The USD/JPY currency pair charted the second consecutive weekly candlestick in the red, declining by 0.84% and finishing the trading week at 108.36, below several significant technical support levels. After such a bearish performance, the long-term uptrend for USD/JPY might come to an end.
The Canadian dollar weakened on the back of negative processes happening in the oil market. USD/CAD breached the psychological resistance level of 1.3200 and closed the week at 1.3236, the highest level in 8 weeks. Emerging market currencies were sold off like the asset class with the highest level of risk. For instance, USD/ZAR soared incredibly +4.28% or 618 pips (four-digit quotes).
Commodities lose the ground
The price of gold renewed they highest weekly close in almost 7 years on the back of safe-haven rush. The yellow metal added +1.16% to the price of $1589.69 per ounce. The largest spike of interest for saving instruments in the financial market was registered in U.S. Treasuries. So 30-year Treasury yield dropped below a critical mark of 2%, while 10-year securities' yields dropped -10.68%, reaching the lowest level in 4.5 years. The price of WTI Crude oil continued its freefall for the fifth consecutive week and dropped below an important technical support level of $52.23 per barrel, closing the week at $51.55, the lowest close rate in 13 months. Even Palladium the fastest-growing precious metal extended the bearish retracement, losing almost 6% of the price.
GBP/NZD weekly technical analysis: Extremely Bullish
One of the most significant shifts in the technical sentiment was noticed for the GBP/NZD cross-rate as major pairs GBP/USD (+1.02%) and AUD/USD (-2.03%) were moving in different directions. As a result, the British pound added +3.21% or 635 pips to the exchange rate versus the New Zealand dollar amid a huge cash flow from a high-yield environment back to safety. The weekly candlestick reflected the largest growth since October 2018, while the close rate was at the highest level since May 2016. On top of that, GBP/NZD breached several crucial technical resistance levels including the psychological mark of 2.0400 NZ dollars per pound. Such a strong spike in the demand caused major shifts in the long- and short-term technical outlook, promising further dramatic action for the week ahead.
The long-term weekly chart below shows the GBP/NZD has a growth potential of 650 pips more for the near future. Two parallel trend lines highlight borders of the ascending channel started after the bullish reversal in October 2016. Although the exchange rate is above the 89-weeks simple moving average since the bullish breakout in September 2019, the explosive growth has started just recently and it was driven by fundamental triggers. The MACD trend indicator is still bearish as the lagging and slow mathematical formula takes into account negative performance. The histogram is in negative territory but growing rapidly. Both lines of the indicator are still placed in the correct order to proceed with the selling pressure but they are extremely close to performing the bullish crossover, which might happen as early as in the week ahead. Fast and sensitive RSI oscillator has already reacted to the recent bullish swing. The indicator bounced off the middle line and headed towards the overboard territory, leaving more room to go North.
In case if the overall fundamental environment kept the selling pressure on high-risk currencies in general and the New Zealand dollar in particular, then I would notice a sustainable bullish continuation with a similar piece of growth as in the past week. The most attractive trading strategy in this environment is a mean reversion approach because the uptrend is strong and it is likely to continue. Therefore, traders should monitor shorter time frames in the scope of counter trend price action and bearish whipsaws to join the party and open new long positions, targeting the magnetic level of 2.1000.
AUD/JPY Weekly technical analysis: Extremely Bearish
Although the general bearish scenario could have been predicted for the AUD/JPY cross-rate, the speed of the past week's decline was surprising. The reasons for such a dramatic sell-off are similar to the currency pair described above but technical details are completely different. As the weekly chart below shows, the recent upswing, which started in August 2019 after AUD/JPY bottomed out, was nothing but technical replacement of the long-term downtrend. The largest achievement was a test of the Ichimoku's Cloud bottom band, which acted as their resistance level. Since the pair failed to continue the bullish movement, they selling pressure resumed and the exchange rate dropped back below the cloud. On top of that, the leading span maintained a negative surplus.
In the past week, AUD/JPY breached significant technical support level of Ichimoku Baseline, the brown curve on the chart. The only concern for the bears in the long-term perspective is that both Ichimoku lines did not cross each other yet to confirm the new downtrend. The graphical analysis of the chart highlights a huge descending triangle with the middle dashed line dividing it into two parts. The rate is currently testing the median line, an if breached, the downtrend could accelerate the price action towards the lower bottom of the formation coming at around 70.430 yens per Aussie. There is also an intermediate horizontal support level at 71.185, the lowest weekly close rate in 2019. So a consolidative price action could take place around that support before continuing the march southwards.