The USD is lower this morning against the EUR, GBP, and CAD as traders move back into risk trades following the optimism over the possibility of a vaccine to combat the Coronavirus. Once again we see the DOW and USD moving in opposite directions as the US equity markets enjoyed their biggest one-day gain since April 6th. Moderna, a biotech firm, announced encouraging results on an early-stage coronavirus vaccine trial. The next and final stage of the test could be completed by July. Although the sample size of the test was small, the hopes for a vaccine soared. Yesterday, the DOW closed with a 960 point spike. US Treasury yields moved higher as well yesterday but have given back a little overnight as comments from the IMF suggest that global recovery may take longer than expected and that they will revise their forecast for a 3% contraction in 2020 instead of the 5.8% previously reported. The 10-year note was trading at 0.7094% and the 30-year bond fell to 1.4273%. The USD and the equity markets will certainly be affected by testimony given today by Fed Chairman Jerome Powell and Treasury Secretary Steven Mnuchin before the Senate Banking Committee. Traders will be listening closely to see if Chairman Powell deviates from earlier statements regarding his take on the economy, using their full range of tools to keep markets functioning, and negative interest rates. After yesterday’s huge rise, DOW Futures show today’s market opening around 100 points lower later this morning.
EUR/USD continues to rise hitting levels not seen in the last two weeks as traders not only react to the Franco-German proposal for a recovery fund but also to better than expected ZEW numbers. Yesterday, German Chancellor Merkel and French President Macron announced a recovery fund of around 500 billion euros for the recovery of the coronavirus crisis. Macron said it will be grants and not loans. This announcement caught a EUR market “well short” and the reversal of positions saw the EUR move higher quite rapidly. Today, the German ZEW Economic Sentiment was released and it bears expectations rising to 51 points, as this showed investors are looking beyond the current depressing situation. The reversal in Germany’s stance caught traders by surprise. The European budget will be expanded by EUR 500 billion to support economies such as Spain and Italy as the continent looks to get back on its feet. Virus cases and deaths have continued to drop, as countries reopen, but any setback in the coming weeks could adversely affect the EUR.
GBP/USD is also higher this morning as Great Britain announced a new tariff plan after Brexit that will allow 60% of trade to be tariff-free. The new tariff plan is called the UK Global Tariff (UKGT) and will replace the EU’s Common External Tariff beginning on January 1, 2021. Under the new plan, tariffs on many products will be eliminated. 60% of trade will come into the UK on WTO terms or through existing preferential access. Tariffs will be maintained on agricultural products and car tariffs will remain at 10%. According to International Trade Secretary Liz Truss, “Our new Global Tariff will benefit UK consumers and households by cutting red tape and reducing the cost of thousands of everyday products.” As we begin the day, the pound could see some pressure as the number of people claiming unemployment benefits rose to almost 2.1 million people in April, well above the forecasted amount. GBP initially has ignored this report, but GBP remains vulnerable to negative interest rate talk and the risk of more virus cases as the economy attempts to reopen.
USD/JPY is higher this morning as traders move away from safe-haven trades and go back to risk-on trades. USD/JPY is trading close to a six-day high. Adding to the pressure on the JPY is dismal Japanese economic data as March Industrial Production fell by 3.7% month-on-month and by 5.2% when compared to a year earlier. Capacity Utilization contracted 3.6% worse than anticipated. According to the Nikkei Asian Review, the Japanese government is going to set up a JPY50 billion fund to inject capital into small, mid-size firms. This proposal will be submitted to parliament for approval in June. According to the technical, the bullish USD/JPY sentiment should continue and the currency pair could move higher during the North American trading day.
USD/CAD is lower this morning. The move lower mostly occurred yesterday as the USD came under pressure against most currencies. USD/CAD fell to its lowest level since May 11th but has found some longer-term support levels as the currency pair trades below its 50-day moving average. A break of these levels could see the USD/CAD move towards levels not seen since April 30th. Oil prices are mixed this morning as Brent crude fell $0.19 to $34.62 per barrel after reaching its highest price since April 9th. US West Texas Intermediate crude was up $0.11 to $31.93 per barrel, having given up some earlier gains that had it hit its highest level since March 16th. Analysts are starting to forecast higher oil prices and that will bode well for the Canadian Dollar. Prices are now expected to reach $42 per barrel by the end of the year. Analysts also are optimistic that the largest wave of unemployment has passed and this will aid the Canadian dollar.
China is responding to President Trump threatening to reduce aid to the World Health Organization (WHO) as the Foreign Ministry is saying the US is trying to mislead the public. The President’s letter, sent to the WHO, threatened a temporary freeze on US funding and a possible change in US membership. Earlier, White House trade advisor, Peter Navarro accused the Chinese of "seeding" the coronavirus by sending hundreds of thousands of Chinese to Milan and New York to spread the virus. As tensions escalate, White House Economic advisor Kevin Hassett said that Beijing is adhering to the trade deal. Tensions aren’t only between the US and China. On Monday, China added an 80% tariff on Australian barley and said it could add tariffs on Australian exports of wine and seafood.