It was a strong risk-off reaction in the European morning, which has now extended into the later part and end of the trading day. The trigger for the sell-off was the discovery (or rather the news of the discovery) of a new strain of the COVID-19 virus, which scientists think emerged as a result of several mutations. 

The new variant, named “Nu”, is believed to have originated in South Africa but has already been found on other continents, with Israel, Hong Kong, and Belgium so far reporting confirmed cases of this mutation.

Experts are yet to assess the true dangers, but the news has already put many countries on high alert, banning travel to affected territories and imposing stricter lockdowns at home. The news that authorities are freaking out about the Nu mutation caused markets to freak out too, and well... dump risky assets hard.

But, we must note that the thin market liquidity during the Thanksgiving holiday yesterday and Black Friday today (very) likely exacerbated the market reaction here. Another factor contributing to the big sell-off was the overbought condition on many risky assets like stocks or USDJPY in Forex. So, a lot of traders simply closed their open positions (many of them profitable), which is enough to trigger a big sell-off when markets are overbought. 

Whether the Nu Covid variant will turn out to be a false alarm or not remains to be seen. Nonetheless, the damage has been done, and risky assets will open on a sour note next Monday.

In Fx, the JPY and CHF are the top performers, while the US dollar is somewhat lagging, though that’s understandable given its sharp appreciation recently. While the new situation may be reversing the established trends in Fx, the dollar rally is unlikely done at this point. A correction was expected after the big rally, and with the safe-haven status, the USD won’t feel much heat in a risk-averse environment. 

The oversold EURUSD and GBPUSD are recovering today, but there are hardly any signs here to call this a reversal. If anything, it is still a correction within the trend, though this one may last for longer (think a few weeks). For instance, there is the Nonfarm payrolls report next Friday (December 3) and the Fed meeting on December 15 that markets will closely watch. Some consolidation across the Fx market going into these two events seems appropriate at this stage.

Our short EURUSD and GBPUSD trades reached their 2nd targets this week, while the long USDCHF trade was closed around 0.93 amid today’s hard sell-off, thus reaching only the 1st target. We’ve now closed all our positions and are sitting on our hands, screening for new opportunities. Ultimately, USDCHF is still likely to move up over the coming months, but given that EURCHF broke below the 1.05, this may have to wait for some time (increasingly looking like next year). 

Finally, speaking of the current Fx sell-off, we want to draw your attention to the NZDUSD pair, which is approaching a big support area. The chart is below.

As can be seen here, the 0.67 - 0.68 area in NZDUSD is a big confluence support area on the monthly and weekly charts. Three major factors are creating this support area:

1. Lower (support) trendline of channel formation, connecting back 10-11 months
2. Past major highs/lows that go back to 2019 or earlier
3. 200 and 100 weekly moving averages 

No doubt, this support is solid! Some reaction seems very likely, especially that NZDUSD is approaching oversold levels on lower timeframes. Whether we can hope for a full reversal here and a new bullish leg is another matter. It will now almost completely depend on the overall global risk sentiment and developments with the Covid pandemic. But, if I were looking to go long NZDUSD, certainly this 0.67 - 0.68 area would be the place to do it.