Daily Market Pulse

US-China trade deal review postponed


The USD is once again feeling the pressure this morning as traders begin to feel concerned about the US economic recovery. The big news over the weekend was the postponement of the US-China trade deal review, which leaves the deal intact. This looks to be a quiet week with the main action occurring on Thursday when the Fed will release minutes from their latest meeting. Traders will look for any hints of a possible change to the Fed’s thinking ahead of their September meeting. DOW Futures traded quietly overnight, and the equity markets are expected to open around 25 points higher later this morning. Equities are on a winning streak, as they finished higher for a third consecutive week, but fell short of the all-time high set on February 19. Stimulus negotiations have become stalemated and, for now, there appears to be no end to the deadlock. U.S. Treasury yields are lower this morning, with the 10-year note trading at 0.6947% and the 30-year bond trading at 1.4380%. There seems to be no end to the stimulus negotiations currently and the longer this takes the more pressure the USD may experience. 


EUR/USD has moved off overnight lows and is once again trading towards overnight highs. Technically, the 100-day moving average has crossed the 200-day average indicating a bullish sentiment on the single currency. There have been some tough resistance levels that need to be broken, and failure here could see some initial consolidation. RSI, at the moment, is neutral at 57. There is an added risk of consolidation as Covid-19 trends in the Eurozone have moved in an unfavorable direction. This could challenge the recent bullish sentiment if countries are once again forced into shutdown measures. The growth rate of new cases has increased in Europe as economies have re-opened. The weekly average of cases has risen from 1,620 per day in July to 8.650 cases at present. However, it is still well below the peak at the start of April with 27 cases per day. If these daily cases continue to rise, there is a risk of the EUR moving lower and testing support in the short term. 


GBPUSD is trading higher this morning as moving averages converge and the RSI level is at 57. Brexit talks resume on Tuesday in Brussels and citing a source close to the UK negotiators, the Daily Mail is reporting today that British negotiators will not accept any deal that ‘constrains’ the UK to the EU’s rules and infringes sovereignty. The article reiterates that the UK is looking for a deal that at its core is a free trade agreement similar to the one the EU has with Canada. Also given the pound some support was an article from a Saturday edition of the Daily Mail that quoted Bank of England Chief Economist Haldane stating the British economy was on the path to “rapid recovery.” He also stated that the UK economy has been rising for the last three months, “sooner than anyone expected.” While UK shops remained closed, citizens moved to online shopping and sales rose over 70%, allowing retail spending levels to recover to pre-pandemic levels. The pound seems well bid at the moment but has had trouble breaking through resistance levels lately. We could see profit-taking at these high levels move the pound lower.


USD/JPY is trading lower this morning despite worse than expected GDP news. The current pair is currently at overnight lows falling below the 200-day moving average as the 50-day MA has crossed the 100-day MA. RSI is now at an overbought 29 level as traders seem a bit more concerned over US-China relations than their economic problems. Japan’s GDP contracted -7.8% quarter-on-quarter in the second quarter, worse than the expected -7.6% quarter-on-quarter. Annualized, GDP contracted -27.8% versus expectation of -27.2%. The annualized contraction was the worst since comparable data became available in 1980. It also well surpassed the -17.8% annualized decline in GDP in Q1 2009 during the global financial crisis. Economy Minister Yasutoshi Nishimura pledged “flexible, timely” action to support the economy. “We hope to do our utmost to push Japan’s economy, which likely bottomed out in April and May, back to a recovery path driven by domestic demand,” he added. Being in an oversold position at the moment, we may see some rebound in USD/JPY during trading today.


USD/CAD is trading lower this morning as oil prices have risen with the news that China plans to import a large amount of U.S. crude in August and September. Brent crude rose $0.21 to $45.01 per barrel, while U.S. West Texas Intermediate crude rose $0.27 to $42.28 per barrel. Technically, there is room for the loonie to strengthen as USD/CAD RSI is at 41. In other news regarding Canada, according to a statement by Public Safety Ministers Bill Blair, the U.S-Canada border will remain closed to non-essential travel for at least another month, as Canada responds to the escalating coronavirus outbreak in the US. The restrictions first introduced in March, due to the coronavirus pandemic, have been extended monthly, as Canada has extended the ban until September 21. A poll published by the BBC ahead of the extension showed that 80 percent of Canadians would prefer the border to be shut until at least 2021. Many Canadians fear a reopening. Canada has flattened the epidemic curve while the US has more confirmed cases and deaths from COVID-19 than any other country. Essential cross-border workers like health care professionals, airline crews, and truck drivers are still permitted to cross.


Risk appetite is undoubtedly an important part of USD/MXN trading, and the past week has been no different. News about a possible Covid-19 vaccine produced by Russia broke early on in the week, helping the Mexican Peso recover some lost ground against the Dollar. But many uncertainties remain, and renewed worries about the spread of the virus have caused risk assets to falter towards the end of the week, helped by the inability of US politicians to find a common ground when agreeing their highly anticipated stimulus package. To help reactivate the economy, Banxico has once again cut interest rates by 50 basis points, taking it from 5% to 4.5%, making this its sixth cut since the start of the year. The question now is whether the Mexican Peso will be able to maintain this relative strength. Fundamentals remain weak and risk-on assets have been enjoying some upside as the US Dollar faced problems of its own, but that is unlikely to last forever. Before the pandemic struck, USD/MXN was heading for yearly lows and if anything, carry trade value was the one thing keeping flows coming towards Mexico, but that may be diminishing as Banxico continues to cut rates. At present, the USD/MXN has bounced of overnight lows and RSI has risen from a low of 25 to the current 36.


The Peoples Bank of China, (PBoC) rolled over CNY 700B maturing medium-term loans today and also kept the MLF rate at 2.95%, which was unchanged for the fourth straight month. The injection was well above the two set batches of MLF that are set to expire in August, totaling CNY 500B. China’s Foreign Ministry declined to comment about the trade talks review delay, at its daily briefing on Monday. According to Reuters, scheduling conflicts and the need to allow time for more Chinese purchases of US exports have been cited as reasons for the delay. US Trade Representative Robert Lighthizer, US Treasury Secretary Steven Mnuchin, and Chinese Vice Premier Liu He were expected to hold a videoconference on Saturday, the six-month anniversary of the trade deal’s Feb. 15 entry into force.


Brazil’s retail sales ended the first half of the year on a strong footing, official figures showed, surging back to pre-crisis levels as the easing of lockdown measures to combat the coronavirus pandemic continued across the country. Retail sales rose more than forecast and May’s record rise was revised higher still, adding weight to the view among government and central bank officials that the economy is recovering quicker than expected from the crisis. Retail sales excluding cars and building materials jumped 8% in June, statistics agency IBGE said, more than the median forecast of a 5.4% rise in a Reuters poll of economists. “The positive results were expected because we came from a very low base. Growth was widespread, across almost all activities. Since the beginning of the pandemic, we have broken many records, both negative and positive, so the numbers are very volatile,” IBGE research manager Cristiano Santos said. On an annual basis, sales rose 0.5% in June compared with the same month last year, IBGE said. Economists in the Reuters poll had expected a fall of 3.45%. The government will present its 2021 budget later this month. The ceiling is 1.485 trillion reals ($275 billion), only 31 billion reals more than this year. That leaves hardly any room for maneuver in normal times, never mind the extra social, health, and investment spending needed in a pandemic. Just 3% of Brazil’s total $1.45 trillion debt is in foreign currency, according to the Bank for International Settlements. That is one of the lowest levels in emerging markets, leaving the government less exposed to currency fluctuations than in the past.


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