The USD sell-off continued yesterday as the ADP survey showed that the private sector added just 167,000 new jobs in July well below the estimate of 1,000,000 jobs according to Dow Jones estimates. This now has traders setting their sights on Friday’s Non-Farm Payroll release. The number of new jobs expected is 1.264 million, well below the June number of 4.8 million. The one positive note yesterday came from the ISM Services PMI which surprised to the upside coming in at 58.1, much better than the expected 55. The US Congress continues to discuss the next aid package, without reaching an agreement just yet but Treasury Secretary Mnuchin said the goal is to strike a deal by the end of the week. The Senate is set to leave for a break on Friday. U.S. equities markets closed higher with the DOW gaining 373 points. The USD remains under pressure this morning while DOW Futures are slightly higher indicating a positive start to the trading day. US Treasury yields are slightly lower with the 10-year note trading at 0.5350% and the 30-year bond trading at 1.2020%. Several Fed Presidents and Vice Chairman Clarida spoke yesterday and the main topic was the re-opening of the economy amid the continued outbreak of coronavirus cases. Cleveland Fed President Meister said the increase in virus cases has raised the downside risks to the economic outlook and the re-opening maybe “more protracted than anticipated”. Dallas Fed President Kaplan said we need a continuation of the unemployment benefits and that the virus has “slowed down the recovery we were expecting. Vice Chair Clarida was a bit more upbeat saying he expects a rebound in activity in Q3, but the “course of the economy is going to depend on the course of the virus, and it’s a complex picture.” He expects the economy to get back to the levels it was in February by the end of 2021.T Unless the initial claims number, which is estimated to be 1.4 million for the week ending Aug. 1, after last week’s 1.43 million is way better than expected when released this morning, the USD may remain under pressure throughout the day, as traders will begin to focus on NFP, immediately after the initial claims release.
EUR/USD has come off its overnight highs but still trading in a technical bullish mode. Momentum on the charts remains positive as the single currency is trading above the 50, 100, and 200-day moving averages. A break above resistance levels achieved last week will see the EUR trade higher and continued pressure on the USD only helps the cause. Covid-19 infections are on the rise in Europe, especially in France, Spain, and Belgium. The markets for the most part have “shrugged” this information off, and continue to see these flare-ups are “local”. Focus remains on the negative aspect of the USD, but if these flare-ups increase, there is room for the EUR to fall. All in all, the wind seems to be at its back as the SS EURO powers on.
GBP/USD is also trading off overnight highs, yet is well bid, after the Bank of England as expected refrained from taking any further action and left its benchmark interest rate at 0.1%. The BoE also kept its bond-buying program unchanged at GBP745 billion. Both decisions were made by unanimous 9-0 votes. The accompanying statement said the Committee “does not intend to tighten monetary policy until there is clear evidence that significant progress is being made in achieving the 2% inflation target sustainably.” The Bank also expects the UK GDP to be -20% lower in Q2 2020, compared to Q4 2019, and GDP will not exceed Q4 2019 until the end of 2021. There may be a top side to the rise in GBP as there is growing worry over the second wave of infections in the UK and also continued fears of a no-deal Brexit could begin to weigh on the pound. Adding to the possible downward move in GBP, at his post-meeting news conference, BoE Governor Bailey reminded all that “negative interest rates are in the toolbox, but that is not the current plan.” His comments, mostly negative should have forced the GBP lower, but anti USD bias is so strong the GBP remains better bid at the moment.
USD/JPY had a quiet trading range overnight, still pointing lower as USD selling pressure remains strong. The currency pair has tested some support levels overnight but has not yet broken through. Japanese Prime Minister Shinzo Abe was quoted overnight, via Reuters, speaking on the coronavirus situation in the country and the likely treatment options. He stated that the “virus situation is very different from the situation in April, as many of the infections are now amongst the young.” He does not believe that the situation calls for an immediate emergency declaration. PM Abe has come under fire in recent days for his government’s handling of the epidemic. While there has been some modest USD buying over the last few hours, traders are looking at this uptick as a fresh level to sell. Pressure may remain on the USD/JPY.
USD/CAD is trading near its overnight highs this morning in a quiet overnight trading range, as oil prices are mixed after yesterday’s trade. Brent crude and West Texas Intermediate crude both rose to their highest levels yesterday since March 6, after the Energy Information Administration reported a larger than expected drop in US crude stockpiles. Brent crude futures are up $0.06 at $45.23 per barrel, while U.S. West Texas Intermediate crude futures are down $0.03 at $42.16 per barrel. The weaker USD seems to be supporting higher oil prices. Canada's trade deficit expanded from $1.33 billion in May to $3.19 billion in June, according to data published by Statistics Canada showed on Wednesday. In June, Canadian merchandise imports and exports rebounded sharply, which was mostly due to the strength of motor vehicles and parts. Imports rose 21.8% and exports were up 17.1%. However, when compared with figures from February 2020, the month before the pandemic's economic impact was felt in Canada, imports were down 14.3% and exports decreased by 17.9%. These numbers gave the USD/CAD a slight boost, but sellers emerged moving the currency pair lower again.
The Mexican health ministry on Wednesday reported 6,139 new confirmed coronavirus cases and 829 additional fatalities, bringing the total in the country to 456,100 cases and 49,698 deaths. These new numbers put Mexico on track to surpass 50,000 deaths this week. Mexico currently has the world’s third-highest coronavirus death toll, after the United States and Brazil. The government has said the real number of infected people is likely significantly higher than the confirmed cases. The USD/MXN finally reversed its upward trend on Wednesday and fell back below strong resistance levels. The Mexican Peso was aided by USD selling across the board and was among the biggest gainers against the USD on Wednesday.
Tensions continue at a high level between the US and China. Commenting on the US seeking to block Chinese apps, China’s Foreign Ministry said on Thursday that it is firmly opposed to the US action. The Ministry repeated that it will take whatever measures are needed to defend their interests and reiterated that the latest tension between the nations is being brought upon by the US. Adding fuel to this fire, US Secretary of State Pompeo continued to warn US citizens to exercise increased caution concerning travel in or to China. On an economic note, the People’s Bank of China (PBoC) stated yesterday that monetary policy will be more flexible and targeted and that it will look to stabilize land and home prices. According to Reuters, “The PBoC will keep liquidity appropriately ample” and the PBoC “expects the macro leverage ratio to gradually return to a reasonable level”. These comments had a positive reaction in Asian equity markets.
Brazil's central bank cut its benchmark interest rate by 25 basis points to a record-low 2.00% yesterday. "The remaining space for monetary policy stimulus, if it exists, should be small," the bank's rate-setting committee, known as Copom, wrote in their decision on Wednesday. Policymakers added that any future rate cuts "would occur with additional gradualism" and would depend on the evolving outlook for inflation and public spending. The decision was unanimous. According to a range of scenarios using various foreign exchange and interest rate forecasts, Copom estimated that inflation will run well below this year's target of 4.00% and next year's goal of 3.75%. Brazil's economy is expected to shrink this year at the fastest pace on record, with forecasts ranging from the government’s -4.7% to the International Monetary Fund's -9.1%. Central bank president Roberto Campos Neto has said the bank's forecast of -6.4% now looks too pessimistic. Policymakers said recent economic indicators in Brazil point to a "partial recovery," but noted that uncertainty remains high, "especially for the period starting at the end of this year," as emergency public spending winds down.