As the market reacts to the FOMC meeting and weekly jobless claims, where are we headed? After initially moving positively to the Fed announcement, equity markets ended the day with mixed reactions with the DOW and the S&P lower and the NASDAQ gaining. The USD is trading mixed against the major currencies as traders continue to assess the actions of the Fed. So now we look towards the latest jobless claims data. Filings totaled 1.542 million last week after 1.775 million filed the week before. The good news? The number is receding. The bad news? The number is still above 1.5 million. As industries re-open, we will see this number decrease but it looks as if it will be a long road. In his press conference following the FOMC rate decision, Chairman Jerome Powell stated, “We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates... What we’re thinking about is providing support for the economy. We think this is going to take some time.” Powell noted that the economic predictions made by the Fed were made with the “general expectation of an economic recovery beginning in the second half of 2020 and lasting over the next couple of years, supported by interest rates that remain at their current level near zero.” The Fed lowered rates to 0%-0.25 in early March and this is where the funds rate was during the last financial crisis. At no time then, or now has the Fed entertained negative interest rates. DOW Futures have fallen over 500 points overnight as an increase in coronavirus cases in some states has occurred following re-opening from lockdowns. Investors had hoped for a smooth re-start, but Texas has reported three consecutive days of Covid-19 hospitalizations while nine California counties have seen a spike in cases. Over the last few weeks, analysts had spoken of a market correction and the DOW and S7P are still over 45% higher than their low point during the coronavirus outbreak. US Treasury yields are also feeling the effects of fear over a second outbreak. The yield on the 10-year note has fallen to 0.6984% and the yield on the 30-year bond is trading at 1.4634%.
EUR/USD has moved off its overnight highs. Technically, the single currency remains in an uptrend channel, that has continued since late May. Momentum remains intact as the EUR trades above the 50, 100, and 200-day moving averages. Resistance levels were tested overnight and the move higher for EUR should continue. As virus cases seem to be rising in the US, Europe is seeing an overall decline in cases as the continent continues its cautious return to normal. Also aiding the EUR is the fact that the 'Frugal Four', Austria, the Netherlands, Denmark, and Sweden seem to be easing up on their objections to the EU Fund program. Their approval of this fund would allow for more fiscal stimulus for Eurozone countries. Traders believe the EU may be in better shape than the US regarding fiscal stimulus as the Fed is urging the US government to continue support but is having problems at the moment getting the Congress on board for such a move. Easing of virus cases and fiscal stimulus seem to be leaning towards the EUR and the currency should remain strong versus the USD.
GBP/USD has also traded off its overnight highs. Technical momentum has turned negative, which is a bearish sign, as the pound fell below the uptrend channel and is currently only trading above the 200-day moving average. The 50 day MA is close to crossing the 100-day MA, which would be a negative indicator. UK PM Boris Johnson remains under pressure for his coronavirus policy. According to epidemiologist Professor Neil Ferguson, “Had we introduced lockdown procedures a week earlier we’d have reduced the final death toll by at least half”. Strong words indeed. The pressure is bearing down on Johnson from both the parliament and the public over confusing messages from the government. The fact that Britain is struggling with the disease means a slower than expected return to normal, which will weigh on the economy and the currency. Deadlocked Brexit talks are not helping as EU Chief Negotiator Barnier continues to hammer away now saying Britain want s all the benefits of membership without the obligations of membership. Expect the GBP to remain pressured during the trading day.
USD/JPY is also trading lower this morning. The currency pair is trading below the 50, 100, and 200-day moving averages and the RSI level for USD/JPY is getting closer to 30, indicating an oversold situation. According to Bank of Japan Governor Kuroda, in a speech on Thursday, the BOJ is ready to take all necessary steps to combat the pandemic fallout, without hesitation. He also said that the BOJ is carefully watching developments in Hong Kong as well as other Asian financial markets. As Japan restarts its economy, according to news reports, the Japanese government is considering a restart to business travel from Australia, New Zealand, Vietnam, and Thailand. According to the report, up to 250 business travelers per day will be allowed into Japan from these four countries. This news report comes from the Yomiuri daily news. Prospective visitors would need to submit documents ahead of their trip to Japan that shows no infection and would be asked to go through tests upon entry into the country. According to Japan’s Finance Ministry and Cabinet Office, the Business Sentiment Index, BSI of all industries felt -47.6 in the second quarter, down from -10.1 in Q1. This is the worst reading in 11 years, as many small businesses have been greatly affected by the viral pandemic.
USD/CAD has bounced off overnight lows as oil prices moved lower. Brent crude futures fell $1.50 to $40.23 per barrel, while US West Texas Intermediate crude fell $1.57 to $38.03 per barrel. The oil price fell due to a record build-up in US inventories and dire projections by the Fed regarding the US economy. Concerns continue by traders that a second wave of the coronavirus could once again shut down the economy and hamper demand. Technically, the USD/CAD is now trading above the three moving averages and the RSI levels, which were so oversold earlier in the week are now approaching overbought levels. As the currency pair continues to move upward, we should expect a test of resistance levels during the trading day.
The tension between Australia and China continues, as Australia’s PM Scott Morrison speaking to the media earlier today said, “his country would not be intimidated or give into coercion” when asked about China’s retaliation to Australia’s call for an investigation into the origins of the coronavirus pandemic. China has banned Australian beef imports and imposed tariffs on Australian barley. While there have been accusations of racism against Asians, the PM said “that’s rubbish and a ridiculous assertion”. Hopefully, calmer heads can prevail and end this impasse sooner than later.