Daily Market Pulse

Weathering the storm


The USD is stronger this morning against the major currencies after being under pressure during most of yesterday’s trading day. Once again, the USD and the equity markets are maintaining their inverse relationship; as one goes up the other goes down. The markets continue to ignore the rise in Coronavirus cases across the US. Six additional counties in California were asked to close indoor businesses by the governor and the mayor of Miami Dade County banned dining at restaurants and closed gyms and party venues effective Wednesday to crack down on group events. Yesterday’s release by the Institute for Supply Management of their non-manufacturing index rose more than expected in June rising to 57.1, topping the Dow Jones estimate of 50.1 after last month’s reading of 45.4. The economy continues to move back despite the recent rise in viral cases. Analysts expect the volatility in the equity markets to continue, but seem optimistic that they will be able to weather the storm regarding recent spikes in infections. US Treasury yields are lower this morning, with the 10-year note trading at 0.6693% and the 30-year bond trading at 1.4253%. 


EUR/USD is trading near overnight lows after testing resistance levels overnight, but failing to breakthrough. This is the third attempt for the EUR to break through these resistance levels and this could be considered a bearish sign. Adding to the EUR’s woes, the German economy is not rebounding as much as expected. Industrial output rose only 7/8% in May, much weaker than expected. Yesterday’s release of Factory Orders rising only 10.4% was disappointing as well. The Sentix Investor Confidence number did recover to -18.2, but this still reflects deep pessimism in the economy. France’s trade balance also grew more than expected. Traders are still waiting for the approval of the EU recovery fund. Expect the pressure on the EUR to remain through the day as reports from the US regarding the number of virus outbreaks this past weekend could push some traders towards safe USD trades.


GBP/USD is also trading near overnight lows, as traders await UK Chancellor Sunak’s appearance before parliament. He is expected to address concerns about fiscal stimulus. Failure to break through resistance is causing downward pressure on the pound, although it is still holding above the moving average levels. Sunak is expected to provide details of the government’s stimulus plan to be unveiled on Wednesday. It is expected that the government will allocate GBP 3 billion, which is less than similar packages form other large European countries. If the news is underwhelming, as expected, there could be renewed selling of the pound. 


USD/JPY is trading close to overnight highs. According to a recent survey conducted by the Bank of Japan, Japanese households were most pessimistic about the economy in the last three months due to the coronavirus pandemic. The pandemic also has weighed on the central bank’s attempt to reach the 2% inflation price target. The index measuring households’ confidence in the economy stood at -71.2 in June, worsening from -36.3 in March, and is the lowest level since September 2009. The government still will continue plans to use domestic demand to stimulate the economy and hopes to quell the decline seem from April and May. According to Japanese Economy Minister Nishimura, as restrictions are lifted concerning the virus, consumption is recovering. It has been reported that cases in Tokyo have increased but not to a level where the government is concerned. USD/JPY is trading above all moving averages and has risen quite rapidly in the last few hours. RSI levels are approaching the overbought 70-level (65), so there could be a profit-taking reversal during the trading day.


USD/CAD is higher this morning, despite slightly higher prices in oil. Brent crude futures rose $0.07 to $43.17 per barrel, while US West Texas Intermediate crude futures rose $0.13 to $40.76 per barrel. The move higher in oil was tempered by the fact that as viral cases rise in the US, there is the potential of less demand for fuel is people return to lockdown measures. Summer demand for oil should be higher than it is in the US as people head out on vacations but this has not happened. Adding to the loonie’s woes is the recent downgrade by Fitch on the Government of Canada debt from AAA to AA+. This plus less demand for oil could see the Canadian Dollar come under pressure in the short term. The USD/CAD is currently trading above the 50 and 100-day moving averages and is looking to test the 200-day MA. RSI is at 60, so overbought conditions are not yet in play. It should also be noted that while the US, Mexico, and Canada have a new trade agreement, the US is contemplating imposing tariffs on Canadian aluminum. Most analysts are now expecting the USD/CAD to trade higher in the coming months.


The Shanghai Composite Index had jumped over 5.5% on Monday, despite the increase in coronavirus cases across the globe over the weekend. The bullish move was reportedly fueled by the positive comments by the Chinese state media. These comments, that a “bull market” is now more important than ever, saw social media in China, explode with searches for “open stock account” and “margin buying”. The UK and China continue to spar over Beijing’s new security legislation in Hong Kong. According to UK Foreign Secretary Dominic Raab, “It's a matter of trust, and lots of countries around the world are asking this question -- does China live up to its international obligations?”


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