Daily Market Pulse

USD lower as traders move to risk-on trades

8 minute read


Monday was an interesting trading day as both the USD and the equity markets showed trading gains. However, those USD gains were short-lived and the greenback is back under pressure against the EUR, GBP, and CAD as traders move back to a risk-on mode. Chicago Fed President Evans was quoted saying the current recession is “unique in its swiftness, severity, and scope”, without modern precedent. He also said that not all businesses will survive after the virus subsides and new policies will be required to help those affected through the downturn. Yesterday’s correction in the USD was not surprising, as the currency had fallen for seven straight weeks and a short-term technical bounce was expected. DOW Futures are higher this morning, rising over 280 points, pointing to a strong, positive opening of the equity markets later today. The move higher in equities comes after local news agencies reported the Russian President Vladimir Putin has claimed his country had given regulatory approval for the world’s first Covid-19 vaccine. Putin announced that the vaccine “works quite effectively, it forms a stable immunity and has passed all the necessary checks.” He also said one of his daughters had taken the vaccine. According to the World Health Organization, there were 26 candidates in the clinical evaluation stage, including the one that was developed by Russia. Look for the equity markets to continue their rally this morning and the USD to once again remain pressured as investors continue to grapple with the uncertain fate of further coronavirus stimulus aimed at supporting Americans struggling during the pandemic. Treasury Secretary Steven Mnuchin said Monday the White House is open to resuming coronavirus aid talks with Democrats and putting more relief money on the table to reach a compromise. 


EUR/USD is trading higher this morning after the German ZEW Economic Sentiment came out at 71.5 points in August, above expectations, and rising from the 59.3 number reported in July. The Current Conditions figure, however, fell to -81.3, worse than expected, and below the -80.9 reported in July. Economists at ZEW are concerned that poor expected earnings in the banking sector for the next six months could affect the overall economy. Traders seemed to rally the EUR on the good news and ignore the bad. Technically the single currency looks to be in a consolidation mode, as moving averages are converging. EUR/USD has technically formed a “double top” and failure to break through that resistance area could see selling pressure emerge. RSI is currently at 61. As the USD looks vulnerable today, we may see a higher trading EUR.


GBP/USD is trading higher this morning taking advantage of traders looking to add risk. The moving averages have also converged and a breakout higher looks quite possible. RSI is relatively calm at 59. Overnight, Bank of England Deputy Governor Ramsden was quoted in an interview with The Times that the BoE “still has significant headroom to do more QE if we see a much weaker recovery.” He added that the pace of QE could accelerate if there are signs of market dysfunction. He also stated that he was confident that there would not be further quarterly contractions moving forward, but that the labor markets hold the key. He also said that some companies may go under and some jobs are going to be lost. The pound continues to remain “better bid” overnight even though it was reported that trade talks between the UK and Japan had hit an impasse. The UK is looking for a better trade deal with Japan than the one that was agreed upon with the EU, but Japan refuses to do so. 


USD/JPY is moving higher as traders move towards risk-on trades and Japan returns from their one-day holiday. The 50-day moving average has crossed the 100 and 200-day moving averages, and at present, the currency pair is testing resistance levels. If those levels are broken, we could see a further move higher in USD/JPY. The RSI level at the moment is at 55, so there is plenty of room for an upside move. Japan's current account surplus narrowed to the lowest level in five years in June as exports took a hit due to the coronavirus-induced reduction of global demand conditions. The current account surplus was JPY 167.5 billion ($1.58 billion), the smallest monthly surplus since January 2015, a finance ministry official said on Tuesday, according to Reuters. While the actual figure was better than the median forecast for a JPY 110 billion surplus, it marked a significant deterioration from the JPY 1.177 trillion surplus in May. The current account has posted monthly surpluses for six straight years. Exports fell 25.7% in June from a year ago, having declined by 28.9% in May, while imports dropped an annual 14.4%, following a 27.7% annual fall in May. 


USD/CAD is trading lower this morning, after rejecting resistance levels overnight and on higher oil prices. Despite USD strength yesterday the Canadian dollar has pushed higher as oil prices rise with traders expecting a stimulus package to be agreed upon in the next few days. Technically, the loonie is the best-performing currency on the G6, but RSI figures have dropped below the 30-level currently trading at 27, so there could be “oversold” conditions occurring. The sell-off of USD/CAD has been fast and furious as support levels have been taken out in the last trading hour. Brent crude futures rose $0.22 to $45.21 per barrel, while West Texas Intermediate crude rose $0.32 to $42.26 per barrel. Besides expectations of a stimulus package agreement in the US, Asian demand for oil as economies re-open has helped push oil higher. The USD/CAD may continue to move lower as any pull-back due to profit-taking would give traders new opportunities to sell.


Mexico's health ministry on Monday reported 5,558 new confirmed cases of the coronavirus infection and 705 additional fatalities, bringing the total in the country to 485,836 cases and 53,003 deaths. The government has said the real number of infected people is likely significantly higher than the confirmed cases. President Donald Trump is considering a measure to block U.S. citizens and permanent residents from returning home if they are suspected of being infected with the new coronavirus, a senior U.S. official confirmed to Reuters. The official said a draft regulation, which has not been finalized and could change, would give the government authorization to block individuals who could reasonably be believed to have contracted COVID-19 or other diseases. Reuters had reported in May that U.S. government officials were concerned that dual U.S.-Mexico citizens might flee to the United States if the coronavirus outbreak in Mexico worsened, putting more stress on U.S. hospitals. Mexico's peso fell half a percent as investors braced for a likely interest rate cut by the central bank on Wednesday, to the lowest level in four years.


According to Yi Gang, the head of the People’s Bank of China, (PBoC), China will continue implementing the phase-one economic and trade agreement with the US while measures announced to open up China's financial sector will continue. He was also quoted as saying, “no matter how the international situation changes, the most important thing is to get our own things done and to firmly deepen financial reform and opening-up.” The South China Morning Post reported that Vice-Premier Liu He is expected to hold a video conference this week with US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin to discuss the trade deal. He was quoted as saying, “Beijing’s intention to continue honoring the trade deal, which requires China to significantly increase purchases of US goods and services and to enhance intellectual property rights protection, reflects the Chinese government’s efforts to keep US-China ties from sliding further into direct confrontation.”


The Brazilian real traded higher on Monday after two consecutive sessions of declines as data showed signs of improvement in China's factory activity, helping to ease worries around Sino-U.S. ties. BRL rebounded from recent weakness following the Brazilian central bank's move to cut its benchmark lending rate to an all-time low last week. Market participants are hoping for a pick-up in Latin American currencies in the second half of the year on higher commodity prices. Surging COVID-19 cases in the region and U.S.-China tensions have made investors cautious. China is one of the biggest importers of agricultural commodities and metals from Latin America.


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