After a rousing end to a turbulent week, traders will now be focusing on the Fed meeting on Wednesday and the FOMC rate decision and press conference. It is widely assumed that the US central bank will keep interest rates unchanged at 0-0.25%. Expectations are that the Fed will continue to write off the chances of negative rates. Some guidance on the bond-buying programs and what lies ahead is likely. With signs that the economy has bottomed out, given the May employment number, we may see policymakers commenting on the potential for the US economic outlook. Given the performance of the US equity markets, investors seem to be betting on a V-shaped recovery in the US and for the most part are ignoring risks, such as persistently high coronavirus infections in South America, US-China tensions, and social unrest in the US. The USD is trading lower against all major currencies this morning as traders once again take on risk and steer away from safe-haven USD trades. DOW Futures are higher again this morning, building on the momentum gained last week and continued optimism over the re-opening of the US economy. It looks as if the US equity markets will open around 150 higher later this morning. US Treasury yields are little changed from Friday’s close, with the 10-year note trading at 9019% and the 30-year bond trading at 1.6819%. Yields rose on Friday after the NFP release. It is important to note the strong rally in the 10-year yield, which is trading above 0.9%. The breakout from its two-month tight range is an indication that investors are pulling their funds out of safe-haven assets. The 1% handle, however, could be a psychological level that may take time to break through for now.
EUR/USD remains firm this morning trading just below overnight highs. Technically, the single currency has exited “overbought” conditions trading below the 70-level on the hourly RSI chart. This should allow for further gains in the EUR, as the currency is trading above its 50, 100, and 200-day moving averages. The EUR has tested higher resistance levels overnight and is expected to move higher going forward, despite poor economic releases. German Industrial Output fell by 17.9%, worse than the previous 8.9%, and worse than the expected 15.5%. Traders are more focused on a speech later today by ECB President Christine Lagarde, where she will reiterate the intentions of the ECB to ramp up monetary and fiscal stimuli. Traders applauded the ECB move to increase funds to the PEPP last week, and this package will now continue through June of 2021. Lagarde’s testimony before the European Parliament is expected to include a call to all governments to do more to speed up the recovery from the crisis. Europe is continuing to re-open as cases and deaths from the Coronavirus decline. With very little else to focus on Lagarde’s speech will garner most of the traders’ attention.
GBP/USD is also trading off its overnight highs, as traders continue their concern over deadlocked Brexit talks and the slow re-opening of the UK economy. The upward momentum of the hourly charts has eased a bit as RSI has moved below the 70-level. Traders will once again look to test overnight resistance levels. As for the Brexit negotiations, EU negotiator Barnier commented that “the UK continues to backtrack on commitments taken”, and these types of comments reflect the deadlock that has occurred in the talks. The reality that negotiations may end is becoming more real. If negotiations eventually end, if it becomes more evident that the UK will end using the WTO terms, this should eventually pressure the GBP. As most economies around the world seem to be robustly re-opening, Britain’s response has been slower. Virus statistics in the UK are falling at a slower rate than in other countries on the continent. Adding to the economic woes, the UK has decided to institute a 14-day quarantine period for those entering the country and this decision did not sit well with airlines and will certainly be a setback for the tourist industry. Protesters in the UK over the weekend were seen to not be observing social distance measures and there is a concern that a new cluster of the virus may further delay the return of the British economy.
USD/JPY is trading a bit lower as traders take some profits from last week's upward surge. Technically, RSI levels are mid-range as the currency pair has dipped below the 50-day moving average but still is trading above the 100 and 200 day moving averages. Japan’s GDP contraction was finalized at -0.6% in the first quarter of 2020, better than the earlier estimate of -0.9% and just missing the expected -0.5%. In annualized terms, GDP contracted -2.2%, revised up from -3.4%. The upward revision was largely thanks to capital expenditure, which rose 1.9% reversing from a preliminary -0.5% decline. Japanese Economy Minister Nishimura was quoted saying that it is “premature to consider fiscal, monetary steps aimed at stimulating consumption as Japan is still focusing on containing coronavirus pandemic.” He also added, "what’s most important now is to protect jobs and help businesses survive the pandemic.” It is also expected that the Bank of Japan will continue to play its part in helping financial institutions meet corporate funding strains. USD/JPY remains better bid as traders look to move away from safe-haven trades and assume more risk.
USD/CAD is trading near overnight lows as the market reacts to strong Canadian labor statistics released on Friday as well as higher oil prices overnight. The Canadian labor market added 289,000 jobs in May, for the first signs of renewed economic life since the Coronavirus shut down large parts of the economy. Hours worked rose at a faster rate than total employment with a 6.3% month-on-month increase. While the unemployment rate was slightly higher to 13.7% compared to the expected 13.5%, analysts said this was driven by higher participation. Oil prices helped the loonie overnight as Brent crude traded $0.21 higher to $43.41 per barrel, while US West Texas Intermediate crude was up $0.02 to $39.57 per barrel. It had traded overnight as high as $40.44 per barrel. Oil prices surged then eased a bit as currently there is a deal between major producers to extend output cuts did not move past the end of July. Market observers had hoped for a longer-term agreement. Technically, USD/CAD is trading slightly above the 30-level on the RSI chart so there is no immediate concern that the currency pair would be in an oversold state. USD/CAD is also trading below the 50, 100, and 200 moving day averages.
Over the weekend, China released its June Trade Balance, which posted a surplus of USD62.9 billion, beating expectations and setting a record high. Exports fell 3.3% year-on-year, better than the expected decline of 7.0%, but imports plunged 16.7%, worse than the expected 9.7%. This is being attributed to the result of coronavirus-related lockdowns. The trade surplus was also helped by the decline in crude oil prices and the decline in commodity prices like soybeans. China is expected to release its CPI and PPI numbers on Wednesday.