Daily Market Pulse

USD lower ahead of initial claims


Once again the relationship between the USD and equity markets remains intact, as the USD trades lower this morning after the strong rally in equity markets yesterday. DOW Futures traded quietly overnight, as traders await the weekly US initial jobless claims release. Another 1.1 million workers are expected to have filed first-time claims for state unemployment benefits during the week ended August 8. That would mark a deceleration from the prior week, though still well above any reading before the pre-Covid era. Last week, the government said initial jobless claims rose by 1.18 million during the week ended August 1. That marked the 20th straight week in which initial claims remained above 1 million. Political squabbling over the stimulus package continues and this has had a negative effect on the USD. USD/JPY however, has been moving higher as traders take on more risk. After trading at levels not seen since early July, US Treasury yields are lower this morning. The yield on the 10-year Treasury note was 0.656%, while the yield on the 30-year Treasury bond at 1.338%. The U.S. 10-year note had climbed to a high of 0.691% in trading. Three policymakers from the U.S. Federal Reserve warned on Wednesday that economic growth would most likely be muted until the virus was contained, according to a report from Reuters. Traders seem less concerned over the jobless claims number lately as it has been decreasing. Only a shock number release would affect the market. It's possible the USD may remain under pressure until the stimulus package comes to fruition.


EUR/USD is trading higher this morning as the USD declines, following the move in Treasury yields and the ongoing fiscal impasse in Washington. The single currency has tested and broken through some major resistance levels and could move higher today. RSI number is above the overbought 70-level so we could see some profit-taking in early US trading, but the move higher seems inevitable. News came out overnight that the US has held off from a threatened tariff hike on EU products regarding the 16-year Airbus subsidies dispute, and signaled its willingness to go back to the negotiation table. The number of products subject to the tariffs is kept unchanged at USD 7.5B, with a 15% rate for aircraft and 25% on for other products. “The EU and member states have not taken the actions necessary to come into compliance with WTO decisions,” Trade Representative Robert Lighthizer stated. “The United States, however, is committed to obtaining a long-term resolution to this dispute. Accordingly, the United States will begin a new process with the EU in an effort to reach an agreement that will remedy the conduct that harmed the U.S. aviation industry and workers and will ensure a level playing field for U.S. companies.” 


GBP/USD is also higher this morning, despite pressure on the British economy. Technically the pound has moved above all three moving averages and has tested resistance levels overnight. A true break could see the point move higher rather quickly. RSI level is at 64, so there still is room for buyers to get on board. The negative move in the economy cannot be ignored as the GDP report confirmed that the UK economy has been one of the hardest hit by the negative COVID shock as it contracted by a record -20.4% in Q2. It was marginally better than the BoE’s forecast for a contraction of -21% although that provides little comfort. More encouraging was the stronger than expected recovery in recent months. The latest monthly GDP report revealed that activity started to rebound more robustly by 8.7% in June following an upwardly revised expansion of 2.4% in May. It still leaves the level of GDP of 17.2% below its pre-COVID peak. Brexit uncertainty remains and will eventually pose a downside risk to the pound, but for now, USD pressure has been stronger than any bad news from the UK.


USD/JPY remains well bid as traders move away from safe-haven trades. Some profit-taking at resistance points has slowed the USD/JPY rise, but the currency pair is currently trading above the moving averages and the RSI, after breaking the 70-level overnight, has eased back to 56. According to Japanese government sources, Kyodo News Agency reports that the government is considering relaxing travel restrictions between Japan and Singapore beginning in September. The relaxation of the restrictions will apply to business travelers and expatriates, Kyodo reported. Japan continues to report under 1,000 daily new cases over the past three days, as the new cases tally drops in Tokyo and other areas. However, the Tokyo coronavirus panel continues to maintain the highest alert for infection spread. 


USD/CAD has moved lower overnight, testing six-month lows as a failure by the US Congress to agree on fiscal stimulus. Technically, the 50-day moving average has broken through the 100 and 200-day moving averages and yesterday’s resistance levels have held as traders pushed the currency pair lower. RSI is currently at 33, just above the oversold level of 30. The USD/CAD hit a low not seen since February 21. The move higher in the loonie is happening despite oil futures easing off from highs seen on Wednesday. Brent crude was down $0.08 at $45.35 a barrel, after trading 2% higher yesterday. West Texas Intermediate crude was down $0.04 at $42.62 after rising 2.6% on Wednesday. Oil prices moved lower after OPEC released a bearish monthly report that demand would fall by over 9 million barrels this year, more than the 8.95 million number they expected a month ago. Oil demand will depend on Covid-19 outbreaks in the US moving forward.


Mexico's central bank (Banxico) is expected to lower its policy rate by 50 basis points today, according to most analysts. This move is not expected to be the last by the central bank and given the latest rise in inflation the central bank is expected to adopt a cautious guidance path. Even though Mexico’s policy stance is far tighter than that of its regional peers, Banxico will probably add one last 50bp cut, to 4.0% in its September meeting. The preliminary 2Q GDP print registered a large 19% YoY contraction, helping trigger another round of revisions in 2020 growth expectations. At -10%, Mexico’s 2020 GDP growth consensus estimate is among the worst in Latin America, even though public records show that the country’s Covid-19 outbreak has been somewhat milder than seen elsewhere in the region. Mexico’s small fiscal stimulus program, close to 1% of GDP, was substantially smaller than the programs announced by its regional peers and has done little to replace income lost due to the pandemic.


Traders are looking forward to the much-anticipated US-China trade talks this week. China’s Assistant Commerce Minister said that he hopes that the US will create positive conditions for the implementation of phase one trade deal. He said he hopes the US will stop restrictive and discriminatory actions against Chinese firms. At this meeting, the US and China will review the progress of their “phase one” trade deal, six months after the agreement came into effect. The centerpiece of the phase one trade deal is China’s commitment to buy at least $200 billion more in U.S. goods and services over two years on top of its purchases in 2017. In the first half of 2020, China bought less than a quarter of the targeted full-year amount of U.S. goods agreed under the deal, according to data compiled by Peterson Institute for International Economics. According to Peterson, China is far from meeting its commitment is all product categories. Despite the lag on Beijing’s part in fulfilling its obligations, U.S. top economic advisor Larry Kudlow said Tuesday that China’s purchases of American goods are “really good numbers,” and denied talk of the US voiding the trade deal, according to Reuters.


The Ministry of Health will take precaution against the new Coronavirus vaccine developed by Russia, due to the absence of the results produced by the immunization. The state of Paraná has already announced that it will enter an agreement with the Russians for the production of the new vaccine. According to Folha, the Brazilian daily newspaper another state Bahia is negotiating with the Russian Direct Investment Fund to obtain the new vaccine against Covid-19. The Russian ambassador in Brasília, Sergey Pogóssovitch Akopov, held a virtual meeting with Governor Rui Costa to discuss the issue. A memo, similar to the one signed by the Paraná government, would be in preparation. As of Tuesday, Brazil registered 1,242 new deaths by Covid-19 and 56,081 cases of the disease. According to data collected by Folha, the average number of deaths in the last seven days is 1,000, maintaining a position of stability although with high numbers.


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