Daily Market Pulse

USD lower as gold reaches all-time high


The USD remains under pressure as gold reaches an all-time high amid growing concerns of a second wave of coronavirus infections globally and the deterioration of US/China relations. As viral cases continue to rise in the US, traders are worried that this will undermine the US economic recovery. After the US ordered to close the Chinese consulate in Houston last week, the Chinese government has also ordered to close the US consulate in Chengdu in retaliation. This “tit-for-tat” action in consulate closings has significantly escalated the tension between China and the US over a range of issues including trade and human rights. The Chinese Houston consulate was closed last week amid reports by the US that it had become a nest for Chinese spies looking to steal data from Texas university medical studies. The Chinese denied this and called the allegations “malicious slander.” Last week the USD posted its largest weekly decline in almost four months. The U.S. Federal Reserve is scheduled to hold a two-day policy meeting this week on Wednesday and Thursday. No surprises are expected as last month the Fed stated interest rates would remain at current levels through 2022. The Republican Party has agreed on their coronavirus unemployment relief plan according to an interview on Fox News Sunday by Treasury Secretary Steven Mnuchin. The bill is worth $1 trillion. It remains to be seen if Congress will agree on these measures as Democrats and Republicans have not been able to come up with an agreement to this point in time. DOW Futures are higher this morning. The equity markets are expected to open around 80 higher this morning, with McDonald's, Pfizer, Alphabet, Apple, and AMD all expected to release earnings this week. As of Friday, 81% of the 128 companies that had reported earnings beat analyst expectations. US Treasury yields moved lower overnight as concerns over viral infections and geopolitical tensions remain, with the 10-year note falling to 0.5823% and the 30-year bond falling to 1.2249%. Expect the USD to remain under pressure throughout the week as concerns over the increase in viral infections will continue to create concerns over the recovery of the US economy.


The EUR/USD is trading near 22-month highs as the single currency continues to benefit from the EU recovery fund deal and better than expected German IFO numbers. The IFO Business Climate index rose to 90.5 in July, beating the consensus of 89.3 and improving on last month’s release of 86.3. From a technical standpoint, the EUR/USD remains in a bullish mode, despite the fact that RSI levels are “flirting” with the 70 overbought level. The EUR is currently trading above all moving averages. The EUR continues to be supported by optimism over the EUR750 billion pandemic recovery relief fund, as well as Eurozone PMI info from last week, which has pointed to a V-shaped recovery. German manufacturing rose in July to 50.0 a level not seen in the last 19 months and Eurozone Manufacturing and Services PMI numbers rose to 51.1 and 55.1, respectfully in July. Expect the EUR to remain well supported during trading this week.


GBP/USD is trading off its 4.5 month high but still appears to be well supported as we begin the week. USD weakness seems to have overtaken no-deal Brexit concerns underpinning a bullish sentiment for the pound. Similar to the EUR technicals, the GBP is trading around the 70 level on the RSI charts and there is concern here that any real negative Brexit news could see a reversal in the GBP, but that has not yet been the case. The pound is trading above the moving averages and should be able to take advantage of any “negative USD action”. GBP, while trading higher continues to have the Brexit negotiations emitting negative vibes. The fifth round of talks last week failed to show any improvement increasing the chances of a “no-deal Brexit”. EU chief negotiator Barnier was quoted as saying that “a deal by the end of the year seeks unlikely”. UK negotiator Frost agreed that there are strong differences but he still believes a deal can get done. While the USD pressure should benefit the pound this week, any truly negative news out of the Brexit negotiations could see the pound move lower.


USD/JPY has also come under pressure as the currency pair has hit a four-month low. 50 and 100-day moving averages broke through the 200-day moving average sending the USD/JPY lower as RSI levels are now below the 30 oversold level trading at 26. Safe-haven demand has helped push USD/JPY lower. The BoJ released its “summary of opinions” from the July 14-15 meeting and reiterated that the economy is “likely to improve gradually” in the second half of 2020, but that improvement will only be moderate as the coronavirus impact remains. The report stated that the economy is “unlikely” to return to pre-pandemic levels even in fiscal 2020, as it will take time to overcome the pandemic impacts. The report also stated that the BoJ will act quickly is further action is needed and will cooperate closely with the Japanese government and other central banks. The BoJ will be more vigilant than ever to make sure financial system stability remains. As the USD remains under pressure, the safe-haven JPY trade should continue throughout the week. 


USD/CAD is trading lower this mooring despite concerns that a US rise in viral cases could potentially damage the Canadian economy as the two are closely aligned. The loonie is higher this morning and technically has further room to move higher as USD/CAD moving averages have converged and are pointing lower. RSI is trading at 39, so there are no signs of an oversold market to this point. Two main concerns seem to be keeping the USD/CAD from moving similar to the other currencies. One is that Canada is the biggest US trading partner and this makes it susceptible to any American economic weakness if the US rise in viral cases forces a second economic shutdown. Second is the oil market which has had a very tight range over the last few months which is limiting the Canadian economic recovery. Brent crude fell $0.10 to $43.24 per barrel overnight, while U.S. West Texas Intermediate crude fell $0.05 down to $41.24. As pressure should remain on the USD over-all this week, expect the loonie benefit, but not as much as the other currencies.


Market concerns remain that the latest US/China escalation could translate into trade as President Trump has expressed disinterest in any trade deals with China lately. Comments by both governments and the closures of the embassies have raised the level of tension for the time being and this is weighing on both the USD as well as equity markets. It seems for the moment the US government is more concerned with passing the latest stimulus package than rattling sabers with China. The quarrel between the biggest economies continues and some analysts point to the issues such as the South China Sea dispute as unsolvable. These concerns will continue although for the moment they seem to be sidelined as the US focuses more on containing the virus outbreak in the US. Any news concerning China could affect the currency and equity markets but for now, other factors seem to be at the forefront.


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