An upbeat release on U.S. employment failed to counter investors’ concerns regarding the economic implications of the continued stalemate over another U.S. stimulus package. Earlier on Thursday, the Labor Department reported that 963,000 workers filed for unemployment benefits for the first time last week, below the 1.1 million that economists had estimated the number to be. It also was the first time since the pandemic took effect in March that the number was below 1 million. Traders will focus today on US retail sales and the University of Michigan consumer sentiment index. Investors have been looking forward to two things since Monday – progress on stimulus talks and an update on the recovery. Inflation data, while interesting has very little impact on the markets in a zero-interest rate world with no changes by central banks in the foreseeable future. Retail sales are expected to grow at a slower pace in July as economists forecast spending to rise by 2%, down from 7.5% in June. Consumer sentiment is expected to come in at 71.7, down from last month’s 72.5. The USD is trading higher this morning against the EUR and CAD, and a bit lower against the GBP and JPY. Higher yields in US Treasuries has drawn traders back to the greenback as well as worse than expected China retail sales data. As we end the week, it seems as though risk sentiment is slowing a bit. As the USD improves, DOW Futures were lower in early Friday morning trade, falling around 215 points, indicating a negative opening of around 200 points later today. Early in trading yesterday the S&P traded above its record closing high and if the S&P makes a new record today it would be the index’s quickest recovery from a 30% drop in its history. US Treasury yields are slightly lower this morning, after trading higher following the initial claims report. The 10-year note is trading at 0.7012%, while the 30-year and is trading at 1.4135%.
EUR/USD is trading lower this morning as moving averages converge and the RSI level moves lower following the release of Eurozone GDP. The Eurozone economic output shrank in the second quarter, according to figures released by Eurostat. The bloc’s GDP contracted 12.1% quarter-on-quarter in Q2, matching the expectation of -12.1% and -12.1% reported in the first estimate. The annualized figure arrived at -15.0% vs. -15.0% expected and -15.0% last. Meanwhile, the number of employed persons in the Eurozone decreased by 2.8% quarter-on-quarter in Q2 vs. -1.7% expected and -0.2% previous. The seasonally adjusted Trade Balance for the bloc stood at EUR21.2 billion in June vs. EUR8.0 recorded in May. EUR/USD has been retreating from the highs as the dollar rises with yields and upbeat data. COVID-19 cases in the US seem to flatten out at a high rate of 50,000 per day, while deaths have also stabilized. Cases are on the rise in the old continent as well, with Spain's daily case count touching 3,000, France reporting over 2,000 infections, and Germany consistently topping the 1,000/cases per day. Look for pressure to remain on the EUR during the North American trading day.
GBP/USD has bounced off its overnight lows amid the latest optimism over Brexit negotiations. UK chief negotiator David Frost said that he believes an agreement can be reached next month. “We are not looking for a special agreement, we want a deal with at its core a free trade agreement like the one the EU has with Canada." Later in the day, UK PM Johnson repeated that "there's a very very good case for the EU to strike a zero tariff zero quota deal.” Ahead of the next round of talks about the future relationship, set to commence in Brussels on August 18, the comments suggested that the two sides remain committed to reaching a deal and this has given support to the pound. Adding underlying support for the currency, UK PM Boris Johnson announced early Friday morning some details regarding the UK lockdown that will take effect on August 15. According to the statement, the increase of COVID-19 infections appears to have leveled off, allowing for theaters to re-open. Fines, however, will be increased for those who repeatedly ignore face-mask rules. Technically, the GBP remains better bid as RSI levels have risen over the last few hours, presently at 60.
USD/JPY once again failed to take out resistance levels and is currently trading below 50 and 100-day moving averages. RSI has been falling as well, currently trading at 33, just above the oversold 30-level. There was some safe-haven buying as the continued impasse over the next round of US fiscal stimulus seemed to overshadow signs of US economic recovery. After finishing five straight days of higher highs, the currency pair should finish the day lower and traders will wait to see if there is any follow-through selling before adding to USD/JPY short positions.
USD/CAD is trading higher this morning as the currency pair bounces off strong support levels as traders take back some short positions. The bounce occurred as the RSI hit the oversold 30-level earlier in Asian trade and the USD/CAD is now trading between the 50- and 100-day moving averages while RSI has bounced back to the 55-level. This move happens despite the fact the oil prices have moved higher overnight and appear to be heading for good weekly gains. Brent crude was up $0.14 at $45.10, while West Texas Intermediate crude was up $0.11 at $42.35. Brent crude is heading for a gain of around 1.6% this week, while West Texas will show a gain of nearly 3% this week. Oil prices moved higher although the International Energy Agency has reduced its oil demand forecast for this year, and said lower air travel due to the pandemic would cut global oil consumption this year by 8.1 million barrels per day. As oil prices steady, the USD/CAD may once again head lower during the day.
Mexico's central bank lowered the benchmark interest rate by 50 basis points to 4.5% on Thursday, which was the 10th cut in a row as the economy plummets during the COVID-19 pandemic. Analysts had expected the monetary policy committee to cut the rate by 50 basis points, but the decision was not unanimous and one committee member voted to cut it by 25 basis points. On the dovish side, the central bank sees inflation as driven by the pandemic, acknowledging that in the short-term inflation is higher. But over the medium term, they expect it to converge to target. The central bank did not say when it might slow down the rate of interest rate cuts. In its statement, the committee said it would take "required action" based on the "evolution of the financial shock we are facing." The state of the markets had improved since the previous monetary policy meeting in June, which took some pressure off the peso, but the economy experienced a profound contraction in the second quarter due to the COVID-19 pandemic, the committee said. Inflation, in turn, rose to 3.62% in July from 3.33% in June, pushed by food and energy prices, it added. Banxico has lowered the benchmark rate 10 times in a row since August last year. The rate is at its lowest point since September 2016, when it was 4.25%.
China retail sales unexpectedly contracted in July. The collection of economic data released from China is mixed. Retail sales contracted -1.1% year-on-year in July, versus an expectation of 0.3% year-on-year. That number showed vulnerability in domestic demand. Nevertheless, industrial production rose 4.8% year-on-year in July, which was slightly above the expectation of 4.7% year-on-year. Fixed asset investment dropped -1.6% in July, above the expectation of -3.3%. The People’s Bank of China (PBOC) announced on Friday that it will push forward yuan internationalization based on market principals. The central bank said it will move to remove obstacles so the yuan can be used both domestically and overseas, which will make it easier for foreign investors to invest in China’s bond and stock markets. Currently, there is an on-shore and off-shore yuan market and this move by the central bank will help investors making payments in mainland China.
The number of confirmed COVID-19 cases in Brazil has increased by 60,091 to 3,224,876 with the past 24 hours, according to the national Ministry of Health on Thursday. The death toll has risen by 1,262 to 105, 463 people within the same period. A day earlier, Brazil reported 55,155 new cases of the coronavirus disease and 1,175 new fatalities. Brazil is second on a global tally of coronavirus cases after the United States. According to Brazil’s Interim Health Minister, the best vaccine option is the AstraZeneca vaccine. If chosen production and technology will be transferred to Brazil. A contract with AstraZeneca could be concluded on Friday.