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U.S. officially enters into Recession

USD

“We are officially in a recession.” This was the statement made yesterday by the National Bureau of Economic Research (NBER). According to the NBER, this recession began in February 2020 and has ended what had been 11 years of economic expansion, which was the longest in the history of the United States. The committee said that the global pandemic has contributed to the downturn, with a large decline in employment and production. The committee did say this recession could be a brief one as economists are calling for a “V” shaped rebound in the US economy. Almost on cue, the equity markets took the bad news and moved higher, while currency traders looked at the news and entered into “risk-on” trades, forsaking the safe-haven of the USD. That however has changed during trading overnight. The USD is stronger as the North American trading day begins against the EUR, GBP, and CAD while losing ground against the JPY. As the USD moved higher, equity markets eased overnight and DOW Futures have fallen overnight. It is expected that the opening will see a decline of around 350 points. Traders remain confident of the re-opening of the US economy as economic releases tend to show the worst is behind us. Traders look to be taking some profit ahead of the FOMC meeting tomorrow. 

EUR

EUR/USD is trading off yesterday’s highs as German and French trade balance numbers fell short of estimates. German Balance of Trade came in at EUR3.2 billion, lower than the expected EUR10 billion and French Balance of Trade came in at -EUR5 billion, higher than the expected -EUR4.6 billion. In her speech yesterday, ECB President Christine Lagarde urged European leaders to adopt the EU Commission’s stimulus program. The focus is now on the "Frugal Four", Austria, the Netherlands, Denmark, and Sweden, to see if they will agree to this program. Their decision will probably determine the direction of the EUR. Technically, profit-taking has seen the single currency move through the 50 and 100 day moving averages on the hourly chart and is now testing support near the 200-day moving average. RSI numbers which over the last few trading sessions had flirted with “overbought” status are now approaching the “oversold” area of 30. As Europe looks to re-open, Coronavirus statistics are falling in European countries. EUR/USD should remain range-bound ahead of the FOMC meeting.

GBP

GBP/USD is also trading lower overnight. Technically, the pound has also broken through the 50 and 100-day moving averages and is also looking to test the 200-day moving average. The move lower in GBP overnight has been more pronounced and the currency has retreated into an “oversold” situation with the RSI number coming in at 27 at the moment. There are several reasons for the sell-off of the pound. As always, Brexit has reared it’s ugly head as the fourth round of talks on future UK-EU relations ended just like the last three, without an agreement. As we move closer to the end of Great Britain’s membership in the EU, leaders seem to be wondering whether or not PM Boris Johnson will be able to make a deal with EU leaders. If Britain is forced to adopt World Trade Organization rules in 2021, this would not be a sterling positive move. Concerns remain over the easing of the viral lockdown in England. Non-Essential shops are scheduled to re-open on June 15. No deaths were reported yesterday for the first time. There are concerns that these numbers may once again increase after protests over the weekend, with protesters not following social distancing measures. 

JPY

USD/JPY has been the main mover overnight as traders have driven the currency pair lower through all technical support levels. The break of the 50, 100, and 200 day moving averages have set off “stop-loss” selling and the USD/JPY is now testing levels not seen in a month. RSI levels are below 30 indicating an “oversold” situation and the possibility some buying back of positions could push USD/JPY higher. There has been some renewed purchasing of JPY as a safe-haven move as tensions remain in the US as demonstrations continue. Japan and the United Kingdom have begun trade talks, for a free-trade agreement that would replace the current EU agreement that Britain is trading on. Japanese Trade Minister Hiroshi Kajiyama was quoted as saying “We hope to urge Britain to bring forward the removing of tariffs for auto and auto parts, and adopt high-level rules on digital trade”. In its latest credit rating review, S&P revised Japan’s rating outlook to stable on increased uncertainty around debt stabilization. Short term sovereign credit ratings remained at A+ for the long term and A-1 for short term debt. The stable outlook reflects the S&P view that until fiscal 2023 relatively large fiscal deficits will continue in Japan.

CAD

USD/CAD has bounced off overnight lows are reversed higher even though oil prices rose overnight as the easing of lockdowns has traders expecting higher fuel demand. The USD/CAD has broken through 50 and 100-day moving averages as traders have taken profits after the moves of the previous week. RSI is now approaching the 70-level, which would indicate the currency pair is entering into overbought territory. Oil prices rose overnight at Brent crude futures moved up $0.14 to $40.94 per barrel after falling on Monday by $1.50, which broke a seven-day streak of positive moves. US West Texas Intermediate crude also rose $0.26 to $37.45 a barrel, after also falling by $1.36 on Monday. As US economies re-open, demand seems to be recovering on a steady basis and this eventually will put favorable for the loonie. This reversal on profit-taking is not surprising given the large and quick move down that the USD/CAD experienced in the last week.

CNY

China’s Education Ministry came out with a statement on Tuesday morning stating that there had been many incidents that targeted Asians during the Covid-19 epidemic in Australia. The Ministry said that Chinese students should carefully consider decisions on studying in Australia. There has already been on-going tension between China and Australia. Australia’s Trade Minister Simon Birmingham said on Monday that the Chinese have been unresponsive to requests by Australia to ease tensions between the two trading partners. The tensions began after the Australian government called for an international inquiry into the origins of the coronavirus pandemic. China has been a major trade partner of Australia for years and this disagreement could affect both economies if it goes on much further.

Quick Insights

USD: NBER declares US in recession. Traders await FOMC.

USD: NBER declares US in recession. Traders await FOMC.

EUR: EUR higher overnight as ECB expected to add to recovery fund.

EUR: EUR higher overnight as ECB expected to add to recovery fund.

GBP: Brexit negotiations putting pressure on GBP.

GBP: Brexit negotiations putting pressure on GBP.

JPY: S&P revises Japan credit outlook to stable.

JPY: S&P revises Japan credit outlook to stable.

CAD: USD/CAD rises despite oil prices moving higher.

CAD: USD/CAD rises despite oil prices moving higher.

CNY: Tension between Australia and China continue.

CNY: Tension between Australia and China continue.

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