Daily Market Pulse

Pressure on the USD continues

9 minute read


The bearish pressure surrounding the US dollar continued during overnight trading, in the wake of the uncertainty over the next round of the US fiscal stimulus measures. The greenback was further pressured by the recent fall in the US Treasury bond yields. Adding to the dollar’s woes were weak readings in U.S. manufacturing data. The New York Fed’s Empire State business conditions fell to 3.7 in August from 17.2 in July which was way worse than the Reuter’s prediction of 15. It was also announced that the delinquency rates on residential mortgages posted their largest quarterly increase on record. This is quite disturbing as a high delinquency rate could negatively affect the banking system which could negatively affect economic recovery. The last time this occurred was after the 2008 economic crisis. As usual, negative dollar points towards positive equity markets and DOW Futures were higher in overnight trading pointing towards a positive opening of the equity markets of around 60 points. The S&P 500 closed just below the record high achieved on Feb. 19. Investors remain optimistic that the economy will recover and the stimulus package will be approved. U.S. Treasury yields are lower this morning, as the 10-year note trades at 0.6704%, and the 30-year bond trades at 1.4147%. Traders continue to focus on US-China tensions as the U.S. tightened restrictions on China’s Huawei company, making it more difficult for the company to acquire parts. We may see the pressure remain on the USD during the trading day.


EUR/USD is trading just below the highs reached earlier this year. Technically, the EUR/USD has surpassed key resistance levels in trading this morning, allowing for the continuation of the ascent. While strong resistance levels remain intact, a test of new highs would not be a surprise. The single currency is trading well above the 50, 100, and 200-day moving averages, but RSI has been flirting with the overbought 70-level for most of the overnight trading period and a possible profit-taking retracement could occur. The EUR is finding traders have a renewed appetite for riskier assets on the back of firm hopes over a moderate economic recovery in the region, which is in turn being bolstered by news that a coronavirus vaccine could be out sooner than expected. Coronavirus cases increased by 1,390 in Germany on Tuesday versus Monday’s +738. The death count rose by 4, the tally showed. Concern remains over the increase in cases in Europe, which has seen more virus cases as markets continue to re-open. Traders may test the overnight highs and the EUR may move higher during trading today.


GBP/USD is also trading at overnight highs as traders take advantage of USD weakness and optimism over Brexit negotiations. From a technical perspective, the pair is now looking to build on the momentum beyond the top end of three-month-old ascending trend-channel. A subsequent positive move beyond these resistance levels will be seen as a fresh trigger for bullish traders and could lift the pound beyond yearly highs. As the pound is currently trading above all moving averages, there is concern regarding the RSI which is now at 75, well above the overbought 70-level. A profit-taking retracement here is not out of the question. There is improving sentiment regarding Brexit trade talks, which has further supported the British pound. Britain's chief negotiator David Frost said last Thursday that a Brexit agreement can be reached in September. Therefore, the key focus will remain on the resumption of the bilateral trade negotiations in Brussels today. The UK and the European Union want to reach an agreement over their future relationship before the scheduled conclusion of the negotiations on October 2. 


USD/JPY is trading much lower this morning, having broken through strong support levels, which set off some stop-loss position selling. The 50-day moving average broke through the 100 and 200-day moving average, triggering the move lower and RSI is well below the overbought 30-level, currently at 21. According to the latest monthly Reuters Tankan survey, released on overnight, Japanese business sentiment improved slightly in the four months to August, but risks remained skewed to the downside due to the coronavirus pandemic-led slow economic recovery. The survey found that the mood of manufacturers rose to -33 in August from -44 the previous month, which is the highest since February. The service-sector gauge was at -23 from -26. While the overall mood remained pessimistic, all industry categories but oil refinery/ceramics were less gloomy than in the previous month. Manufacturers’ sentiment was expected to recover further to -22 in November, while the service-sector firms were expected to drop to -26, according to the poll of 495 large and mid-sized non-financial companies, of which 232 firms responded, on condition of anonymity. Despite the possibility of some profit-taking, USD/JPY could remain under pressure. 


USD/CAD is trading lower this morning, despite a dip in oil prices overnight. Overall USD selling is seen as a key factor in the move. The uncertainty over the next round of the US fiscal stimulus measures, coupled with sliding US Treasury bond yields and Monday's softer US economic data kept traders in a selling mood. In other related Canadian Dollar news, Canadian finance minister Bill Morneau says he will not run again in the next federal election after resigning today. He says he will step down as Finance Minister and as a member of parliament and that he will put his name forward as next secretary-general of OECD, backed by Prime Minister Justin Trudeau. The resignation follows news that Morneau was having disagreements with Prime Minister Justin Trudeau over ballooning deficits. Oil prices moved lower overnight, as Brent crude was down $0.22 trading at $45.15, while U.S. West Texas Intermediate crude was down $0.23 trading at $42.66. Both had traded higher yesterday, but overnight OPEC+ stated there had been a drop in demand due to the virus pandemic. Given the oversold position at the moment, a reversal today in USD/CAD would not be a surprise.


According to the Moscow Times, Mexican President Andres Manuel Lopez Obrador said Monday that he would be among the first to receive a Russian coronavirus vaccine if it is shown to be effective. "I would be the first to get vaccinated because it matters a lot to me, but we have to ... ensure that it's something effective and that it's available to everyone," Lopez Obrador said at his daily news conference. The Mexican leader added that he would personally reach out to Russia or China if they are first to develop an effective vaccine. "In this important matter, there should be no ideologies... health comes first," he said. The Latin American country has recorded more than 56,000 coronavirus deaths — the world's third-highest toll — and over half a million infections. Travel restrictions at the U.S.-Mexico border have been extended for another month as both countries struggle to control the spread of the coronavirus. The United States and Mexico have agreed to keep land borders closed to nonessential travel until Sept. 21, which will be six months since the border first closed in March to slow the spread of the coronavirus. Canada extended its closure with the US on Sunday.


US-China tension continues overnight as China’s Foreign Ministry responded to the US tightening restrictions on Huawei. The Foreign Ministry said that they firmly oppose the US suppression of the Chinese technology giant. On Monday, the US BIS (Bureau of Industry and Security) within the Department of Commerce announced that it will further limit Huawei from accessing US computer chips. The US Department of Commerce will ban 38 companies all directly affiliated with Huawei across 21 countries, which have been used to go around the US ban that the Trump Administration extended through May 2021, according to the BIS. Adding to China’s woes, S&P Global Ratings, in its latest report, warned that China’s economic recovery from the coronavirus pandemic could falter, in the face of rising real rates. According to the report, “An unbalanced recovery, weak private demand, and excessive market optimism have combined to drive real rates up, increasing debt-servicing burdens even as financial conditions tighten.” The possible next step if the economy does not improve would be for the S&P to lower China’s rating.


At a time when Brazil faces criticism for its environmental policy, Minister of Agriculture, Tereza Cristina argues that the effective implementation of the Forest Code can help reduce deforestation in the Amazon rainforest. The measure, approved in 2012, defines the areas that must have conserved vegetation and those that can be used for agriculture and livestock. Owners suffer punishments in case of infractions. Minister Cristina said, “We need to stop questioning the Forest Code. It is a law; it was made; it was discussed; it is there and needs to be implemented.” Deforestation in Brazil has been a major concern now for a few years as far as world environmentalists are concerned.


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