Daily Market Pulse

ISM release expected to show expansion


USD - The USD opens the first week of the third quarter slightly lower against the major currencies as U.S. stock futures traded higher, trying to build on the momentum they gained from trading last week. While the DOW rallied to gain over 17% last quarter, concerns remain over the number of coronavirus cases that continue to rise raising concerns about the world economy and the recovery from the pandemic. The Institute for Supply Management’s (ISM) index for non-manufacturing activity will be released later this morning at 10:00 am EST, and it is expected to rise to 50.0 in June from 45.4 the previous month, indicating the economy is done contracting and should begin expanding. Pandemic cases continue to rise in Florida and Texas which has resulted in the closing of some businesses and created concerns that this new outbreak could overwhelm hospitals in those states. Geopolitical tensions also return this morning between the US and China as US military exercises in the South China Sea, added to the latest tweets by President Trump regarding punitive measures towards China raise further tensions between the two top economies. US Treasury yields are higher this morning with the 10-year note trading at 0.6923% and the 30-year bond trading at 1.4584%. 


EUR/USD has started the week on a positive note testing overnight highs before easing back a bit before the North American trading day. News from China regarding their bullish assessment of the Chinese economy has traders adding risk along with optimistic comments made by ECB Governing Member Francois Villeroy de Galhau, who is also the head of the Banque de France. In commenting about the ECB policy measures he stated that "The first lesson is that what we presented as exceptional, provisional weapons will be long-lasting,” and "The non-conventional becomes the quasi-conventional, and that helps us in the current crisis.” According to de Gathau, the bounce in economic activity in the Eurozone will show the continent has Covid-19 under control. Support from ECB President Lagarde regarding the EU Fund has also boosted sentiment. As Europe re-opens there have been some setbacks as Spain has locked down some local areas as there have been some flare-ups in virus cases. Positive US economic figures this morning should boost the US equity markets, which should weaken the USD and benefit the EUR.


GBP/USD is also trading higher this morning, aided by the reports out of China as well. As equity markets move higher, traders return to risk and move away from the safe-haven USD. The upward movement of the GBP may be quite temporary, however, as there are reports that Andrew Bailey, the Governor of the Bank of England, sent a letter to commercial banks, preparing them for the possibility of negative interest rates. The banks may need some time to adjust their systems to support such a move. This is going to place some pressure on the pound at some point and will make it unable to take full advantage of the USD weakness. Another potential negative to the pound is the continued lack of any positive movement in Brexit talks. The gap between the EU and the UK remains wide and no breakthrough is expected anytime soon. Positive movement in the GBP appears unlikely as the negatives seem to be outweighing the positives at the moment.


USD/JPY is trading in the middle of its overnight range as sources close to the BOJ are being quoted by Reuters that the Japanese central bank will continue to maintain its current view that the economy will gradually recover later this year from the pandemic impact. These are the comments the markets are expected to hear when the BOJ meets next week on July 14-15. There are concerns that if a possible second outbreak of the virus occurs this would put a delay into economic recovery and Japanese growth. As the US economy improves and traders take on risk positions the JPY becomes vulnerable and could test some resistance levels later during the trading day. Technically, the USD/JPY is trading above the last day’s high, and this bullish tone could see a move higher later today.


USD/CAD is trading lower as oil prices are higher this morning on tighter supply and market expectations of positive economic data. Brent crude futures were up $0.73 to $43.53 per barrel, while U.S. West Texas Intermediate crude futures were up $0.28 to $40.93 per barrel. This positive news for the loonie is being offset by reports that China has warned Canada regarding their activity in Hong Kong, warning this action could backfire against the Canadian economy. The two countries are already at odds as Canada holds the Huawei CFO in Vancouver, awaiting extradition to the US. This is an ongoing story that could put a negative effect on the Canadian Dollar. On a side note, it is being reported by Bloomberg that Canadian Prime Minister Justin Trudeau has reportedly declined an invitation to the White House this week. The invitation was for a trilateral meeting between the US, Mexico, and Canada to discuss the USMCA. It looks now as if only Mexico and the US will be meeting.


China’s Securities Times is reporting that a healthy bull market is more important than ever before to the Chinese economy. Chinese stock markets in Shanghai have risen over 5% in trading today after rising 8% last week. These are the highest levels for the China A50 since March of 2008 and is showing that investors are looking positively at Chinese investment. The move higher in Chinese equities has helped the rest of the Asian markets move higher, with the Nikkei improving 2% after pretty much ignoring the equity move last week. Tensions could arise between the US and China with US aircraft carriers entering the South China Sea for exercises. There will be expected saber-rattling from either side as the US delivers a specific message that it doesn’t appreciate an increased military presence in the region by China. We all hope cooler heads prevail.


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