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Texas, Florida, some smaller mid-west U.S. states and now parts of China are starting to see larger daily increases of virus case. The second wave is now a real possibility.

We have been pointing out that the biggest caveat in FX over the past 3 months was a possible second wave and here we are. The question the market is not waiting to find the answer to is: will the US shut down again to combat a possible second wave? Its President certainly doesn’t want it either, but China has already begun to lock itself down again.

For the past 12 weeks, since the March low, risk buying has been on a tear in the case of the AUD/USD. It completely retracted its ‘shutdown’ collapse while EUR/USD and GBP/USD have been brought up on the optimism. Things may not be as bad as originally forecasted.

Therefore, with risk being the ‘in’ thing that USD has not been, DXY had been testing 100 as EUR/USD, USD/JPY and GBP/USD continued to shift in the direction of risk-on. The test of the 100 mark was rejected technically but has now been double blessed by the fundamentals and risk-off, and it has started to pick up stream.

We note that DXY’s favour currently was the statements from the Federal Reserve which was much more dovish than expected.

These notes were the most telling: "[while] financial conditions have improved, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses”

On the pandemic: "[It will] weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term."

But the biggest impactor on risk was the downgrades to its economic forecasts for GDP with the Board now expecting U.S. GDP to be between -7.6% and -5.5% in 2020. It stated it would maintain Bond purchases “at least at the current pace”, and discussions on yield curve control were continuing and have in fact started as of this week.

Big, fat, reality check for markets and traders alike, the globe is no way near over this issue both on the health and economics front. If the second wave does become a reality, the March trends will become everyone’s trading playbook.