Risk-off was the theme of the day yesterday as US equity indexes closed in the red. The Dow dropped 710 points, posting their worst day since June 11, with concerns about rising coronavirus cases in the US being a major catalyst. Florida is the new epicenter of the pandemic, but the cases have also risen in Texas, Arizona, and California. The dollar appreciated against all of its major rivals, included those considered safe-havens and the USD has maintained its strength overnight. Traders this morning will be focused on initial claims for unemployment for the week ending June 20. A total of 1.48 million first time jobless claims have been reported, a decline from last week’s 1.54 million. The weekly claims number has remained above 1 million for the last 13 weeks. In other economic news, it was learned that the Trump administration is considering new tariffs on $3.1 billion on exports coming from France, Germany, Spain, and the UK. These would include new duties on olives, beer, gin, and trucks and the tariffs could go as high as 100%. Reaction from the EU and UK will be closely monitored. Meanwhile, the EU has put the US on the list of countries temporarily not welcome when they open their door to foreign tourists and businesses. US Treasury yields are lower this morning amid virus concerns. The 10-year note was lower at 0.6741%, while the 30-year bond was also lower at 1.4258%
EUR/USD is trading lower this morning having broken through support levels. Technically, the 50-day moving average is about to cross the 100-day moving average which will keep the single currency under pressure. The market is well oversold, with the RSI level at 15, so as always the possibility remains for a sudden pullback due to short covering. The EUR is heading towards levels not seen since early June. The European Central Bank is set to release their meeting minutes, which should show what level of concern there might be among policymakers regarding the increase in bond-buying. It is also expected that there will be some wording in the minutes about the increase in bond buying that will appease the German constitutional court. While coronavirus cases remain low in most of Europe, there have been some outbreaks in Germany and Spain that could cause a pause in re-opening those economies. Overall, the “bears” look to take the EUR lower.
GBP/USD is also trading lower this morning, and the technical aspect is pretty similar to that of the EUR. 50, 100, and 200-day moving averages are converging with the 50-day about to cross the other two on the downside. Downside momentum has been gaining since the middle of June, and the pound will be at the will of traders during the rest of this week. After breaking through the RSI 30 level earlier in overnight trade the pound has bounced a bit and the RSI now is at 45. There is some potentially good news for the pound, as the Financial Times is reporting that the EU is ready to compromise with the UK on the sensitive “level playing field” issue, which is aligning regulations between the two sides after the current transition period ends. Talks between London and Brussels will resume on Monday. After four rounds of talks that have gotten nowhere, any hope would be beneficial to the pound.
USD/JPY is also trading higher this morning and the technical analysis is very similar to the previous two currency reports. The 50-day moving average is about to cross the 100-day moving average, indicating buy signals, which should push USD/JPY higher. The focus here, however, is the RSI reading which is much higher at 84, creating a very strong overbought situation. Most economists expect the Japanese economy to have trouble growing over the next 12 months as there is not much confidence given to the Japanese stimulus package. Japan released their April All Industry Index and it declined to -6.4% from the previous -3.4%.
USD/CAD is higher this morning, as a pull-back in oil prices has undermined the commodity-linked currency. Overnight, the USD/CAD had risen to an overbought level on the RSI chart, but traders have reversed some of those position and the RSI has fallen from 75 to 55. Moving averages are still converging on the hourly charts so a renewed move higher is not out of the question. The Canadian dollar is the mercy of the broader market sentiment, which has turned anti-risk due to trade tensions and resurgent coronavirus fears. Oil prices fell overnight amid continuing virus fears as well as and increase US oil inventories. Overnight, Brent crude futures fell $0.30 to $40.01 per barrel after having fallen over $2.30 on Wednesday. U.S. West Texas Intermediate crude futures fell $0.26 to $37.75 per barrel after having dropped $2.36 on Wednesday. Added US inventories as well as worries that a resurgence in viral cases choke end fuel demand were reasons given for the decline in oil prices. Analysts still expect the loonie to weaken over the year due to a weak trade balance and the fact that the economy was in trouble before the pandemic. Interest rates are expected to remain near-zero for longer than many expected. Adding to the Canadian Dollar woes is a report that Fitch Ratings has decided to downgrade Canada’s credit rating to AA+ from AAA.
China is celebrating the Dragon Boat Festival, a traditional 3-day holiday occurring near the summer solstice. The festival commemorates the life and death of Chinese scholar Qu Yuan who was a loyal minister of the King of Chu back in the third century. US-China relations remain tense as the Pentagon has listed 20 companies that have aided the Chinese military, which could open the door to further US sanctions. Adding to these tensions, US FBI Director Christopher Wray told FOX News that the Chinese pose the most comprehensive threat to the US in terms of cyber-theft. The Chinese handling of the coronavirus is also being investigated. Market reaction to this point has been somewhat muted, but the rift between the two super-powers doesn’t seem to have an end in sight.