Daily Market Pulse

Quiet overnight markets amid virus concerns


Yesterday’s price action saw the DOW trade lower and the USD move higher as fears over the spread of the coronavirus made traders look towards the safety of USD trades. And the correlation continued between equities and currencies. One goes up, the other goes down. While the dollar rose, the DOW fell 397 points as traders looked to take some profit. In a report issued by Reuters, the US coronavirus cases have risen to over 3 million on Tuesday, the largest outbreak in the world. Adding to the concern over the virus, the US gave notice to the WHO and officially announced that it will withdraw from the organization. The withdrawal will occur on July 6, 2021, as withdrawal notice carries a one-year time frame. As tensions continue between the US and China, US Secretary of State Mike Pompeo joined other top advisers in the Trump administration regarding using the Hong Kong dollar’s peg with the US currency as a means to punish China for recent moves regarding the former British colony’s political freedoms, according to a report from Bloomberg. The idea of striking against the Hong Kong dollar peg -- perhaps by limiting the ability of Hong Kong banks to buy U.S. dollars, faces strong push back from others in the administration who worry such a move would only hurt Hong Kong banks and the U.S., not China. Several Fed presidents spoke yesterday, with Fed Vice Chairman Clarida stating “We have a lot of accommodation in place. There is more that we can do. There is more that we will do if we need to." He also said Fed officials are watching the new outbreaks closely. Atlanta Fed President Bostic was quoted saying “people are getting nervous again”, and that the next three to six weeks will be critical for the strength of the economic recovery. Cleveland Fed President Mester noted that the economy is coming back pretty well, but that there has been “some leveling off as cases increase”. US Treasury yields were mixed overnight as the 10-year note traded higher at 0.6529%, while the 30-year bond traded lower at 1.3859%. We may see some further move lower in the equity markets today, as DOW Futures were pretty flat overnight. Look for the USD to edge higher.


EUR/USD is trading mid-range this morning once again failing on the top side to take out serious resistance levels. Continued failure to the topside has technicals forming a triple-top pattern which could leave the single currency vulnerable to a move lower. The currency is trading below the 50 and 100-day moving averages and is approaching the 200-day MA. RSI is getting close to the oversold 30-level, currently trading at 33. EU economic recovery has been less than impressive, adding pressure to the EUR. ECB President Lagarde has hinted that the central bank will take a break and urged EU leaders to agree on a fiscal stimulus. The ECB meets next Thursday. Adding to the EUR’s woes, the European Commission protected the EU economy will shrink more in 2020, by 8.3% and recover less in 2021 by 5.8%. These numbers have increased since the last report released in May. There is little news expected from the Eurozone today so the currency pair remains at the mercy of the USD and developments regarding the virus.


GBP/USD is trading mid-range ahead of UK Chancellor Sunak’s speech to Parliament that will lat out the fiscal stimulus plan. The direction of GBP will be decided by the speech. Job placement for 18 to 24-year-olds is the main point of the stimulus plan. The plan looks to add around 350,000 jobs as the plan hopes to kick start the economy. It will be up to the traders to decide if this plan is enough to get the economy moving. The Bank of England continues to buy bonds and the chief economist for the bank, Andy Haldane, said that the recovery is going better than expected. Britain seems to have a handle on the virus, except for Leicester, and the UK is returning to normal. Brexit continues to rear its ugly head as talks remain deadlocked. Earlier in the day, UK PM Johnson met with German Chancellor Merkel and is prepared to leave the European Union on the same terms as Australia if it cannot agree on a future trading deal. Much of the EU-Australia trade follows default World Trade Organization rules, through specific agreements are in place for certain goods.


USD/JPY is trading lower this morning as some traders seek possible safe-haven trades amid coronavirus concerns. Overnight, Japan Economy Minister Yasutoshi Nishimura warned that “untraceable” coronavirus cases among older people are “gradually rising”. He emphasized it is “necessary to respond with a sense of crisis,” but, he reiterated that there is no need to declare a new state of emergency as the serious cases remained low, without strain on the medical system. The Bank of Japan released figures overnight showing a record 6.2% hike in June month bank deposits as well as a surge in the Certificate of Deposits (CDs) to mark the investors’ rush in the safe-haven currency. The bank also released data showing the current account surplus widened in May to JPY0.82 trillion, which was larger than the expected JPY0.71 trillion. USD/JPY has tested support levels overnight and is RSI is currently at 32, close to the oversold level of 30. 


USD/CAD is trading higher this morning as technical levels of resistance have been tested. The 50-day moving average has crossed the 100-day moving average which is a bullish move and has resulted in heavy USD/CAD purchases. RSI has been trading above the overbought 70-level for the last few hours. Adding to the loonie’s woes, a report in the Globe and Mail is suggesting that Finance Minister Bill Morneau will forecast a deficit over $300-billion today. Oil prices are lower this morning amid concerns that with the latest surge in coronavirus cases, this could hamper recovery in oil demand. Brent crude futures fell $0.24 to $42.86 per barrel and West Texas Intermediate crude futures fell $0.01 to $40.62 per barrel. As more and more states in the US report increases in coronavirus cases, the concern of states shutting down has traders concerned. The tension between China and Canada continues over the Hong Kong issue. China has warned its citizens to exercise caution when traveling to Canada, due to “frequent violent actions” by law enforcement.


According to reports from IHS Markit, the further expansion in China’s manufacturing and industrial orders will be an uphill task, in the absence of stronger broad-based demand and exports. The report did mention that “orders for infrastructure materials and equipment have helped industrial output recover faster in China than most places emerging from COVID-19 lockdowns.” The industrial recovery is expected to help China’s economy post a positive growth rate in the second quarter after contracting for the first time in decades due to COVID-19. Australia-China tension continues as Australia has upgraded a travel warning for China, according to the Sydney Morning Herald. Early Wednesday morning in Asia, Australia’s Depart of Foreign Affairs and Trade (DFAT) warned that their citizens living in and traveling to China may be arbitrarily detained. Residents have been warned by Hong Kong police that pro-independence chants, flags, and as of Tuesday - blank pieces of paper raised in defiance - could violate the new legislation.


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