The USD continues to remain under pressure against the EUR, GBP, and CAD while rising against the JPY. Traders are reacting to the massive protests both in America and around the world over the death of George Floyd in Minneapolis. Yet equity investors continue to look forward to the economy reopening, earnings improving, and continuing stimulus support from the Fed. The DOW closed up over 267 points yesterday and this morning DOW Futures are suggesting an opening of around 180 points higher. The “tunnel vision” of investors have them ignoring what may be considered short term problems, such as US-China relations, national protests, and the ongoing pandemic. Some analysts are now predicting the US recession could be short-lived if there is no second wave of the virus. Economic news could sway the markets this morning. ADP private sector jobs report is due out before the opening bell and an analyst poll says we should see a loss of 8.75 million jobs in May. ISM Manufacturing PMI is forecast at 44, after previously coming in at 41.8, US Treasury yields are higher this morning as the reopening of the economy is outweighing civil unrest here as well. The 10-year note was higher at 0.7081% and the 30-year bond is trading at 1.5170%.
EUR/USD continues to rise and reach levels not seen since March. The technical numbers remain well into overbought territory with hourly RSI around 75, which could suggest a move lower is in the cards. Nevertheless, the EUR/USD has broken above the uptrend channel and the single currency remains above the 50, 100, and 200 moving averages. Some concerns are coming from Germany where Chancellor Angela Merkel is having trouble getting her coalition government to agree on a EUR100 billion stimulus package. Agreement favors the EUR, disagreement does not. On a brighter note, the ECB, which meets tomorrow is expected to expand the PEPP from EUR750 billion. Estimates range from EUR250-500 billion. These additional funds should mean a quicker recovery for those countries hardest hit by the pandemic such as Italy and Spain. Economic reopening in those countries has continued to go smoothly and Spain has reported two consecutive days without any deaths, Germany’s Reproduction indicator has fallen below 1, and Paris is set to reopen cafes. Overall, the virus looks to be coming under control and this is supporting the EUR. One negative note was the release of Euro Area Markit Composite and Services PMI for May which came in at 31.9 and 30.5 respectively. Both were better than expected and much better than the previous 13.6 and 12.0, however, it's still a long away from leaving contraction status.
GBP/USD is also higher this morning, despite Markit Composite and Services numbers reflecting deep contractions. UK Composite PMI came in at 30, better than the 28.9 expected and much better than the previous reading of 13.8. Services PMI was 29, better than the 28 that was forecasted and also much better than the previous reading of 13.4. Technically, just like the EUR, the GBP is showing a well-overbought status as the current RSI number is just below 80 at 79.6. The pound is approaching resistance levels not seen since April, but the currency remains vulnerable to news releases concerning the Brexit negotiations. To this point, the hope for mutual concessions from both sides has failed to occur, with the current round of talks set to end on Friday. PM Boris Johnson is set to meet European Commission President von der Leyen later in June, and there are hopes this meeting could trigger a breakthrough. The UK has made it clear they will not extend the transition period beyond the end of the year. PM Johnson has also voiced displeasure over human rights violations in Hong Kong and this could strain relations between the UK and China. Virus statistics continue to improve in the UK, but not quick enough for some as officials look to reopen the economy. The pound seems ready for correction as any negative Brexit news could trigger sales.
USD/JPY continues to move higher as traders leave safe-haven trades for riskier ones. Technically, the currency pair is well overbought with RSI levels nearing 80, as the USD/JPY reaches two-month highs. A correction is expected to occur, but with the risk-on rally continuing this correction is expected to be short-lived. The USD/JPY is trading well above the 50, 100, and 200 moving day averages. The Japanese media outlet, Jiji Press, reported on Wednesday that the Bank of Japan (BOJ) is considering doubling its financial aid to the small businesses which are struggling in the aftermath of the coronavirus pandemic. According to the report, BOJ aid could total some 100 trillion yen. The central bank also said they will work with the government to support small firms facing the fallout from the pandemic. The Bank of Japan is expected to decide on this additional aid package at its next monetary policy meeting on June 15-16. It was also reported that the BOJ will provide 0% loans to commercial banks that extend interest-free, unsecured lending to client companies under the government’s coronavirus relief package.
USD/CAD is lower this morning as oil prices rise. Brent crude futures rose $0.43 to $40.00 per barrel, after rising to $40.42 per barrel earlier in the trading session - the highest level since March 6. US West Texas Intermediate crude also rose $0.68 to $37.49 per barrel after rising to $37.88 earlier in the session, also the highest level since March 6. It is expected that the major oil producers will continue production cuts and recovery and reopening of the economy will increase fuel demand. Tiff Macklem will chair his first meeting this morning as Bank of Canada Governor today. Analysts expect the BoC to keep interest rates unchanged at 0.25% and that their QE policy will remain the same. The accompanying statement is also expected to contain a cautious tone, given the latest disappointing GDP and inflation data. The market also expects the Bank to continue the stimulus so that inflation can return to the 1-3% range. There will be no economic projections or press conferences at this meeting. As long as oil continues its upward pace, the loonie should remain strong. Looking at the technicals, the RSI level has moved above the 30 level. The USD/CAD continues to trade below the 50, 100, and 200 moving day averages which should push the currency pair to trade lower.
China Caixin Services PMI for May rose to 55.0 in May up from April’s 44.4, and PMI Composite also rose to 54.5, up from 47.6, back into expansion territory. Business activity and new work rose at the quickest pace since late 2010. China’s official manufacturing Purchasing Manager’s Index as well as a private survey, both showed manufacturing activity in the country expanding in May. This is giving markets hope that other economies will follow in the nation's footsteps as a template for a global economic V-shaped recovery. According to Wang Zhe, the senior economist at the Caixin Insight Group, “In general, the improvement in supply and demand was still not able to fully offset the fallout from the pandemic, and more time is needed for the economy to get back to normal.” Analysts seem optimistic about the economy moving forward.