The USD begins the week on a positive note, while equity markets could possibly turn negative after last week's gains. The greenback seems to be getting the benefit of the doubt this morning from traders feeling the US will outperform the market and see its economy rebound faster and stronger than Europe. Adding to that way of thinking is the continued lack of a European fiscal stimulus plan to restart their economy. Many believe a key to the USD rally could be the bond markets. Bond yields have been relatively quiet but a change and rally could be a real boost to the USD. As trading begins today, US Treasury yields are higher as lockdown measures begin to ease across the U.S. The 10-year note was higher at 0.6876%, while the 30-year note was trading at 1.3958%. It’s not all rosy news concerning the US as over the weekend Minneapolis Fed President Kashkari stated that economic recovery will likely be “slow” and “gradual”. He also said as economies reopen, the risk of the virus flaring up again increases and a robust recovery would require a “breakthrough in vaccines, a breakthrough in widespread testing, a breakthrough in therapies to give all of us confidence that it is safe to go back.” He also expected the unemployment rate to rise to around 24%. DOW Futures are pretty flat ahead of this morning’s opening. At the moment, indicators point to a slightly lower opening of fewer than 50 points when the bell rings to start trading. Apple announced on Friday that they will begin re-opening stores in the U.S. this week, limiting the number of customers that will be allowed inside the store.
EUR/USD failed to break some key resistance levels overnight and now is trading towards the lower end of its overnight range. At the present level, the EUR/USD is trading below the 50,100 and 200 moving averages, which is considered a bearish sign. The saga of the European Commission versus the German Constitutional Court continues as members of the Commission have commented that the German court overreached their authority by considering part of the ECB bond-buying plan to be illegal. At present, the ECB’s Pandemic Emergency Purchasing Program, (PEPP) is set to run out of funds in October. A further legal impediment to the central bank doing their job could weigh heavily on the EUR. As far as the virus is concerned, European countries are reporting drops in the death rate, a small victory, as these countries proceed with a gradual easing of their lockdowns. The fear of a second wave of the virus remains. European economies continue to release poor economic numbers as Italy is the latest reporting a fall of 28.4% in industrial output for March. Once again these numbers are expected to be bad given the fact that these countries are all in lockdown, yet the numbers when released are staggering.
GBP/USD has moved towards the lower end of the overnight trading range, as PM Boris Johnson prepares to loosen lockdown procedures. In his comments over the weekend, the PM said people may spend more time outside as he laid the groundwork for further easing in June and July. He was quoted saying it would be "madness" to throw away the achievement gained to allow a second spike. As with all countries the main concern of the UK is the possibility of another round of Covid-19 once the population begins to return to work. Suffice to say there were many disappointed at the slower rate of return. Adding to the pound’s woes are the Brexit talks. Negotiations will resume today, via video, as animosity between the UK and EU continues to grow. The deadline that both sides could decide to extend the transition period beyond the year-end is June 2nd. If there is no agreement of terms or no extension decided, then the UK reverts to World Trade Organization commerce terms, which is a concern for investors and will weigh on the pound.
USD/JPY has moved higher overnight, breaking resistance levels and now trading near the overnight high. Continuing last week’s move, traders are taking on more risk and exiting safe-haven Japanese yen trades. As optimism over the easing of the coronavirus induced lockdowns occurs in parts of the world, traders are looking at riskier positions. The easing of tensions between the US and China has also had a positive influence on risk trading as trade representatives from both sides reaffirmed that the trade deal remains on track. It seems as though the market’s expectation of the NFP number was confirmed and did not affect the positive USD sentiment. On a technical note, the USD/JPY is near a strong resistance point and a break there could push the currency pair higher. The BOJ’s Summary of Opinions from their April 27th meeting stated that “A rapid economic contraction not seen since the Great Depression in the 1930s may occur in the short run.” It also stated that Policy authorities must act decisively in order to avoid a second Great Depression." The report also said that fiscal and monetary policies must cooperate during this economic crisis.
USD/CAD is trading a bit higher this morning, testing overnight highs as oil prices fail amid concerns of a supply glut, which seems to be canceling out the support gained late last week from supply cuts. Brent crude was down $0.29 trading at $30.68 a barrel, while US West Texas Intermediate crude was down $0.17 cents at $24.57 a barrel. After fuel demand initially moved higher as some countries eased pandemic restrictions concerns of a possible second outbreak of the virus have worried investors and out the pressure back on oil. As a commodity-based trading currency, this puts pressure on the Canadian Dollar as well. Adding to the loonie’s woes, was the employment data released on Friday showing a negative change in employment of a record 1.99 million. Analysts are now looking at a very negative economic picture in Canada, expecting a 25% contraction in GDP for the 2nd quarter. According to reports, 3/4 of the job losses were full-time jobs, and the jobless rate rose to 13%, just below the peak seen in 1982. Poor economic predictions, plus lower oil prices should continue to weigh on the Canadian dollar.
The People’s Bank of China, (PBoC), China’s central bank, announced on Sunday that they were lowering the standing lending facility rate by 30 bps. The overnight, seven-day, and one-month rates were lowered to 3.05%, 3.20%, and 3.55%, respectively. These moves were part of the coronavirus relief measures. The PBoC also issued the following statement in its monetary policy implementation report “prudent monetary policy will be more flexible and appropriate going forward”. They also said they will continue to maintain liquidity at a “reasonable ample level”.