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Quiet trading day

USD

The USD is trading higher this morning after a rather quiet overnight trading session. The greenback is higher against the GBP and EUR while trading lower against the CAD and JPY. According to a report by the Bank of International Settlements, BIS, the USD’s share as an international funding currency has grown to nearly 50%, a level not seen since the early 2000s. The dominance of the USD means that problems in the US can quickly spread across the globe. This was the situation that occurred in early March when the coronavirus-induced stress in the US credit markets caused stress in the global funding markets. According to Bloomberg, the USD accounts for 61% of official foreign exchange reserves and roughly 85% of all foreign exchange transactions occur against the greenback. This is why there is occasional volatility when geopolitical events take place across the globe, causing traders to seek the safe-haven of the USD. After finishing close to flat in trading yesterday, Dow Futures are higher this morning as traders look to end the week on a positive note. Initial claims data yesterday was somewhat disappointing as new applicants totaled 1.5 million higher than market estimates of 1.3 million. While the claims number lessened for the 11th straight week, the number does indicate that the pace of the economic recovery may be slowing. Coronavirus cases in several states have grown and some investors fear that a resurgence in coronavirus cases could lead to states to revert to stricter quarantine measures, thus thwarting expectations of a smooth economic recovery. At the moment DOW Futures are up 290 points indicating a positive opening this morning. US Treasury yields are higher this morning with the 10-year note trading at 0.7200%, while the 30-year bond is trading at 1.4917%. Boston Fed President Rosengren, Cleveland Fed President Mester, Fed Chair Powell, and Vice Chairman Quarlesand are scheduled to speak today. Traders will be watching closely to see what their take is on the recovering economy and how their predictions going forward.

EUR

EUR/USD is under pressure this morning, after trading in a very small overnight range. Technically, the single currency looks under pressure having briefly tested overnight support levels. EUR is currently trading below the 50, 100, and 200 moving averages and breakthrough support levels could see the downside gain momentum. RSI is currently trading at 37 just above the oversold 30-level, having tested that level a few times overnight. This is the third day of EUR weakness and the currency has dropped to two-week lows. The European Commission is holding a summit to discuss funding plans, and any positive progress towards that goal could provide a boost in the EUR. However, any headlines showing negativity by some participants will weigh on the currency. The proposal is back by Germany and France and most analysts expect it to eventually go through. As the 'Frugal Four' (Austria, Denmark, the Netherlands, and Sweden) continue to voice opposition to the plan, any agreement will probably be deferred to the next EU summit in July. Expect the EUR to continue to trade lower today.

GBP

GBP/USD has traded lower overnight since the Bank of England keeps rates unchanged yesterday and voted to expand its QE funding by GBP100 billion. BOE’s Governor Andrew Bailey said that the decision on negative rates is not “in any sense imminent”. Technically the GBP is trading in “oversold” conditions at the RSI is at 24. The pound is trading at lower levels not seen in a while and as fresh sellers emerge support levels continue to give way. Trading below the 50, 100, and 200 moving averages, the downward move looks to continue as we end the week. On a positive note, retail sales increased by 12% in May, which beat expectations but is still down over 13% for the year. Traders seem to be focusing on government handling of the Coronavirus. Cases and deaths remain at higher levels than those on the European continent and that has delayed the exit of the lockdown in Great Britain. Continued uncertainty regarding Brexit is not helping either, as it seems more likely every day that Great Britain and the EU will not come to an amicable agreement anytime soon. Look for the sell-off of the pound to continue.

 

JPY

USD/JPY trading in the middle of its overnight range, but closer to the downside after the Bank of Japan released their April meeting minutes. The BOJ is concerned over heightened economic uncertainty. Technically the moving averages are converging with USD/JPY trading just below them. RSI is relatively calm at 49. According to the April minutes, members agreed that strong uncertainty over the timing of when the pandemic will be contained, as well as the impact of the virus on markets overseas, will weigh on domestic economies. A few members said prolonged economic weakness could lead to rising credit costs for banks. Concerns over the potential clash between China and India have given way to some safe-haven buying in the JPY. The latest report from Japan’s Cabinet Office shows the economy remaining in an “extremely severe situation”, but the economy has stopped worsening. While private consumption is picking up, business investment remains weak. Japan’s core CPI was unchanged at -0.2% year-on-year in May, worse than the expected improvement to -0.1%. This is the second straight month of a negative reading. Not much is expected from USD/JPY today.

CAD

USD/CAD edged lower this morning, as oil prices rose overnight as traders looked towards supply reduction as well as a recovery in demand. Brent crude futures increased $0.07 to $41.58 per barrel, while U.S. West Texas Intermediate crude futures moved $0.14 higher to $38.98 per barrel. OPEC producers have promised to meet supply cut commitments. Early this morning, Canada’s Finance Minister Bill Morneau turned down the calls of a tax rate hike citing the economic weakness. The government is not contemplating tax increases at this time to help pay for costly coronavirus aid programs. Canada is due to release retail sales later today and the expectation is for a fall to -15.1%, after the previous release of -10%. As the Canadian economy continues to struggle, the loonie seems to move back and forth based on the movements of oil at present. Technically, moving averages are converging and the 50-day has crossed the 100-day so we could see a move upward in USD/CAD today. RSI is trading at 50.

CNY

China reported new infections in Beijing with viral cases up to 25, but they claim the newest outbreak is under control. A further increase in the virus outbreak could have traders' fears return. A report by Bloomberg overnight says that “China plans to step up purchases of US farm goods to comply with the Phase One trade deal following talks in Hawaii this week.” The China-India dispute remains a strong concern for traders as we end the week. Escalation of this dispute could push traders towards US safe-haven buying but for the time being, there seem to be calmer heads prevailing.

Quick Insights

USD: USD higher overnight in quiet trading.

USD: USD higher overnight in quiet trading.

EUR: EU Commission not expected to come to agreement on funding at this meeting.

EUR: EU Commission not expected to come to agreement on funding at this meeting.

GBP: GBP under pressure after BOE meeting.

GBP: GBP under pressure after BOE meeting.

JPY: BOJ minutes show concern over heightened economic uncertainty.

JPY: Higher oil prices help the loonie.

CAD: Higher oil prices help the loonie.

CAD: Higher oil prices help the loonie.

CNY: New cases in Beijing pose concerns.

CNY: New cases in Beijing pose concerns.

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