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Forex Fundamental Analysis 07/2020


In this Forex fundamental analysis, I will analyze the major financial data that help us gauge the overall direction of the Forex market.

This analysis will help us predict how the central banks and governments are going to intervene through their policies to either strengthen or weaken their own currencies.

US Fundamental Analysis

The US economy is still showing signs of struggle as the GDP growth is still in negative territories with -5% annualized rate, low inflation 0.7%, and extremely high debt to GDP over 107.5%.

The Fed has been injecting money through quantitative easing (QE) to avoid another recession and to keep the stock market “healthy”.

My overall sentiment of the US economy is mildly inflationary. The leading indicators, such as the ISM Manufacturing index and the UMCSI readings are showing mild signs of recovery, which might improve both the labor market and the retail sector.

During the first two quarters, the central government has been monitoring closely the economy. The Fed rates dropped significantly to 0.05% and inflation fell to 0.2%.

The Fed is injecting more cash into the economy through QE, which is impacting the value of the US dollar negatively. The US dollar index (DXY) fell from 98.7 to 96.2.

For the next two quarters, I expect a slow recovery of the economic activity as businesses are expected to re-open and resume their business activities. If the US faces another wave of covid-19, this could threaten the economy and we could see another negative quarter.

US dollar index

ISM Manufacturing Index vs Stock Index

The ISM Manufacturing Index dropped 22.6% between January-April to rise again above 50 points in June to a reading of 52.6. The stock market also fell -8.81% during the same period to gain 5.39% in June.

The ISM Manufacturing Index is highly correlated with the annual returns of the S&P500 index as shown in the chart below:

ism index vs S&P500 annual returns

ISM-NMI Index vs NFP Numbers

The negative impact of covid-19 pandemic on the labor market drove the unemployment rate up to 234% in April. The Nonfarm Payrolls also fell by -13.7% from 152k to 130k during the same period.

We can use the ISM-NMI combined index to gauge future numbers of NFP as they are both positively correlated. The ISM-NMI is considered a leading indicator in the US economy, and therefore, a good indicator to predict future NFP numbers.

The ISM-NMI combined index jumped 31.65% to 54.9, and the NFP rose by 5.38% in June.

ism nmi combined index vs NFP Q3 2020

US Business Cycle

Now let’s take a look at how the US market is doing in terms of real GDP growth. The chart below shows how history tends to repeat itself. The spread in the bonds market is considered a good indicator to predict future growth in the US.

As the GDP percent change drops, the spread between 10-year and 2-year bond yields rises. Now the US real GDP change is at -0.9% and the spread is rising from 0.3% to 0.5%.

This means that the US economy is expected to grow in the next two quarters.

US real GDP change and 10-2 yield spread

US Fed Rate and Inflation

The Fed rate dropped from 1.58% in February to 0.05% in May. Inflation also dropped from 2.5% last January to 0.2% in May.

At the end of the second quarter, inflation rose 0.7% and US Fed rates at 0.08% in June.

US Fed rate and Inflation

The chart below shows the correlation between the 10-2 yield spread and the Fed rates.

When USDJPY drops and the spread in bonds rises, we should expect a hike in the Fed rates. When USDJPY rises and the spread in bonds falls, we should expect a cut in the Fed rates.

During the second quarter of 2020, USDJPY moved sideways and the Fed cut rates to 0.08%.

US Fed rate prediction

Forex Market

USDJPY: Long Bias

As the volatility index (VIX) goes above 25%, USDJPY tends to fall in value. During the outbreak of the covid-19 (January-April), VIX went above 25% and USDJPY fell from 110 to 105.

With the decline of the VIX below 30%, I expect to see a bullish movement to the upside in USDJPY.


Let’s see how the yen is doing compared to the price of Gold. The chart below shows the Gold to yen ratio, which helps us gauge whether the currency is gaining strength over Gold.

Gold is outperforming the yen and therefore, strengthens my views on a bullish USDJPY.

Yen to Gold ratio

The 2-year Treasury bond yield differential between USD and JPY gives a reading of 0.29%. The US 2-year yield is increasing from 0.155% to 0.157% on a weekly basis. For the JPY, the yield decreases from -0.138% to -0.142%.

USDJPY vs 2yr % Spread

EURUSD: Long Bias

In the Euro area, the 2-year yield difference between the euro and the US dollar increased from -2.16% last January to -0.84% in June. This gives us a potential long bias on the EURUSD.

eurusd and 2-year T bond

For the most part, the ECB is monitoring the economy by keeping the interest rates around -0.46% and injecting money into the market by increasing the money supply (M2).

GBPUSD: Short Bias

The GBPUSD 2-year yield differential decreased from -0.23% to -0.26% in June confirming my short bias on GBPUSD.

The major leading indicators for GBP are deflationary despite the effort of the central bank to stimulate the economy through money supply (annualized rate 15.53% in May) and extremely low interest rates 0.06%.

gbpusd 2-year yield %

AUDUSD: Long Bias

The 2-year yield differential between AUD and USD jumped from 0.08% to 0.155% in June. This gives us a long bias for AUDUSD.

The Australian economy is heavily based on exports of commodities to the US and China. Exports of goods and services from Australia dropped 4% month-over-month to a two-year low of AUD 35.74 billion in May 2020.

The leading indicators for the AUD are mildly deflationary with a GDP growth of 1.6% and interest rates of 0.25%.

audusd 2-year yield %

USDCAD: Long Bias

The 2-year yield differential between USD and CAD rises from -0.156% to -0.13%. this gives us a long bias on USDCAD.

The Gross Domestic Product (GDP) in Canada contracted 0.90% in the first quarter of 2020 over the same quarter of the previous year.

Consumer prices in Canada dropped 0.4% year-on-year in May 2020, following a 0.2% fall in the previous month and below market expectations of a flat reading.

usdcad 2yr yield %

Exports from Canada rose 6.7% from a month earlier to CAD 34.6 billion in May 2020, after plunging 29.1% in April. Exports to the US jumped 8.9% to CAD 23.2 billion (mostly exports of Crude Oil).

USDCHF: Long Bias

The 2-year yield differential between USD and CHF is flat +0.8%. This gives us a long bias for USDCHF.

The leading indicators are mildly deflationary with -2.5% GDP growth rate. The swiss national ban is maintaining a rate around -0.7% since 2015.

usdchf 2-year yield %

The VIX is falling below 30%, which confirms my long bias.

usdchf VIX

NZDUSD: Short Bias

New Zealand fundamentals are inflationary with a short bias on NZDUSD.

I expect the central bank to intervene to ease the inflation by changing monetary policy. The overall GDP growth rate is -1.9%, a decrease in money supply by -1.4% annualized rate, and interest rates at 0.25%.

Exports from New Zealand declined 6.1% over a year earlier to NZD 5.4 billion in May of 2020, amid the coronavirus crisis.

new zealand exports

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