Dollar Bounces, Gold Slips, while Equities Hold Their Own

In the emerging market space, the liquid and accessible currencies, like the Turkish lira, Mexican peso, and Russian rouble, are down the most. The lira has fallen 1% after intrasession volatility that pushed it to a record low against the euro yesterday. That seems to be the source of the pressure on the lira against the dollar.

The South African rand is among the weakest among emerging market currencies today even though the IMF approved a $4.3 bln loan, the most granted so far to assist in combatting the virus. Despite the correction in the foreign exchange market, equities are mostly firm. In the Asia Pacific region, only a few markets could not sustain gains.

Japan, Taiwan, and Australia were among them. South Korea led the region with a nearly 1.8% gain. Europe’s Dow Jones Stoxx 600 is up almost 0.5% after falling for the past two sessions (~2%). US shares are little changed. US bond yields backed up yesterday, with the 10-year yields popping back above 60 bp. This exerted upward pressures in Asia and Europe. Gold reached $1981 before the profit-taking pushed it to about $1907 from where it is recovering. September WTI is little changed around $41.50 a barrel.

Asia Pacific

China is resorting to local lockdowns to combat the new outbreak in the virus. The 61 cases reported Monday were the most in four months. Separately, New Zealand became the latest country to suspend the extradition treaty with Hong Kong. That means that of the intelligence-sharing Five Eyes, only the US has not done so, though it has threatened to do so.

India has banned almost 50 Chinese apps to largely check the workaround the 59 apps banned last month. Another 250 apps are under review. India has cited threats to user privacy and national security. This is a new front in the confrontation with China. The US and Japan are considering their own bans on some Chinese apps.

The dollar is in a quarter of a yen range on either side of JPY105.45, as it is confined to yesterday’s range. The upside correction does not appear over, and the greenback could test previous support and now resistance near JPY106, where an option for $600 mln expires today (and a $1.8 bln option expires Thursday).

The Australian dollar is little changed as it moves within the $0.7065-$0.7180 range that has confined it for around a week now. It has held above $0.7115 today, but it may be retested. The PBOC set the dollar’s reference rate at CNY6.9895 today, nearly spot on where the models suggested. After falling to a four-day low near CNY6.9870, the dollar recovered back above CNY7.0. China seems intent on not allowing the US to get an advantage by devaluing the dollar, something that President Trump has advocated. A stable dollar-yuan rate in a weak dollar environment means that the yuan falls against the CFETS basket. Against the basket, the yuan is at its lowest level in a little more than a month.


News from Europe is light and the week’s highlights which include the first look at Q2 GDP (median forecast in the Bloomberg survey is for a 12% quarterly contraction), June unemployment (~7.7% vs. 7.4%), and the first look at July CPI (median forecast is for a 0.5% decline for a 0.2% increase year-over-year) still lie ahead.

Today’s focus is mostly on earnings and bank earnings in particular. European banks are being encouraged to extend the hold off of dividend payout and share buybacks that were first introduced in March. This may be worth around 30 bln euros. The UK is fully aboard too. In terms of loan-loss provisioning, European banks are expected to set aside around the same amount as they did in Q1, which was about 25 bln euros. In comparison, the five largest US banks have added a little more than $60 bln in the first half to cushion sour loans.

Fitch lowered its five-year growth potential for the UK from 1.6% to 0.9%. It also took EMU’s potential to 0.7% from 1.2%. This could weaken the resolve of asset managers, where industry surveys suggest a desire to be overweight European stocks and the euro on ideas of economic and/or earnings outperformance. That said, the number of analyst upgrades has surpassed the number of downgrades in Europe for the first time this year.

The euro reached $1.1780 yesterday. As the momentum stalled in Asia, some light profit-taking has been seen that saw it briefly dip just below $1.17 in early European turnover. Intraday resistance is seen near $1.1740-$1.1750. In the recent move, the session high has often been recorded in North America, and we’ll watch to see if the pattern holds today. The market may turn cautious ahead of tomorrow’s outcome of the FOMC meeting.

Sterling poked above $1.29 yesterday for the first time in four months. It made a marginal new high today (~$1.2905), but it too is consolidating. Support is seen in the $1.2830-$1.2850 area. As the euro was trending higher against the dollar yesterday, it also rose to about CHF1.0840, its highest level here in July. However, today’s consolidation has seen the euro slip back to around CHF1.0775. Look for it to find support above CHF1.0760.


The US reports house prices, Conference Board consumer confidence, and the Richmond Fed’s July manufacturing survey. Even in the best of times, these are not the typical market movers. The focus instead is three-fold: corporate earnings (today’s highlights include McDonald’s, Pfizer, and 3M), the negotiation over the fiscal bill, and the start of the FOMC meeting. Canada has not economic reports, while Mexico’s weekly reserve figures are due. It continues to gradually accumulate reserves. They have risen by about 4.5% this year after a 3.5% increase last year.

The Economic Policy Institute estimates that a cut in the $600 a week extra unemployment insurance to $200 a week will reduce aggregate demand and cut the number of jobs that were projected to be created. It expects a loss of about 2.5% growth and 3.4 mln fewer jobs. After this week’s FOMC meeting and the first look at Q2 GDP, the US July employment report is due at the end of next week.

It is one of the most difficult high-frequency economic reports to forecast. Still, the outlook darkened after last week’s increase in weekly initial jobless claims, which covered the week that the non-farm payrolls survey is conducted. Another increase, which is what the median forecast in the Bloomberg survey expects, is only momentarily going to get lost in the excitement around the GDP report.

The relatively light news day allows us to look a little closer at Mexico’s June trade data that was out yesterday. Mexico reported a record trade surplus of $5.5 bln. Yet, it is not good news. Mexico is hemorrhaging. The IGAE May economic activity index, reported at the end of last week, showed a larger than expected 22.73% year-over-year drop. The 2.62% decline in the month was nearly three times larger than economists forecast. With the virus still not under control, the government’s forecast for a 9.6% contraction this year is likely to be overshot. The record trade surplus was a function of a larger decline in imports (-23.2%) than exports (-12.8%).

Auto exports are off more than a third (34.6%) this year, to $47.5 bln. Other manufactured exports are down 3.4% to $113.8 bln. Petroleum exports have fallen by nearly 42% in H1 to $8.0 bln. Agriculture exports edged up by 7.3% to $10.5 bln to surpass oil. The peso’s strength reflects not the macroeconomy but its high real and nominal interest rates in the current environment. Yesterday, the dollar fell below MXN22.00 for the first time this month. The June low was near MXN21.46.

The US dollar initially extended its losses against the Canadian dollar, slipping to CAD1.3330, just ahead of last month’s low (~CAD1.3315) before rebounding to almost CAD1.3400. The upside correction could run a bit further, but resistance in the CAD1.3420-CAD1.3440 area may offer a sufficient cap today. The greenback found support against the Mexican peso near MXN21.90 and bounced back to around MXN22.07. Resistance is seen near MXN22.20. The peso is up about 4.5% this month, but within the region has been bettered by Chile (~+6.75%) and Brazil (~+6.15%). The Colombian peso’s almost 2..2% gain puts it in the top 10 best performing emerging market currencies so far this month.

For a look at all of today’s economic events, check out our economic calendar.

Dollar Slide Continues, while Gold Soars

Emerging market currencies are fully participating, with the JP Morgan Emerging Market Currency Index posting its fifth gain in six sessions. The greenback’s retreat appears to have become decoupled with the equity market. The yen’s strength, for example, had a limited impact on Japanese shares, which were narrowly mixed, with the Topix rising and the Nikkei falling.

Asia Pacific bourses were mixed, though most of the large ones, including China, South Korea, Australia, and Taiwan advanced. Note that the shake-up in the chip space that saw Intel shares crushed at the end of last week lifted Taiwan Semiconductor Manufacturing Company up 10% and helped the Taiex rise 2.2%. European stocks were struggling, but the better than expected German IFO helped equities recover. US equities are trading higher after the S&P 500 posted back-to-back losses at the end of last week for the first time this month. Bond markets are also mixed.

The European core is doing better than the periphery, but yields are +/- 2 bp. The US 10-year is near 57 bp. Gold is rallying for the seventh consecutive session at around $1944 is at new record levels. Its 2% gain is the most in three months. Oil, on the other hand, is little changed with the September WTI contract trading quietly around $41 a barrel, inside the pre-weekend range.

Asia Pacific

Japan reported it May All Industries Activity Index fell 3.5% in May after the April reading was revised to -7.6% from -6.4%. This is like a proxy for GDP. While the US and EMU report Q2 GDP this week, Japan’s first estimate is not due until the middle of next month. Separately, the May Leading Index was revised lower (to 78.4 from 79.3) but still held on to a small gain from April’s 77.7.

Hong Kong’s imports and exports recovered in June, but not by as much as had been hoped. Exports fell 1.3% from a year ago, a 7.4% slide in May. Economists had project outright growth. Imports fell 7.1% from a year ago. Economists had expected that May’s 12.3% slump would have been halved. The net result was an HKD33.3 bln deficit. Of note, Hong Kong’s exports to China rose 8.8% from a year ago, while its exports to the US were 21.4% below a year ago (-14.4% in May). Exports to Taiwan were also stronger. Exports to Europe were weaker.

Helped by the economic recovery and government infrastructure spending, China reported June industrial profits rose 11.5% year-over-year, following May’s 6% improvement. Still, profits were off 12.8% in H1 from a year ago. Private sector and foreign businesses trailed in the profit-recovery, underscoring the role of state-owned enterprises. Although the manufacturing sector led the rebound in the PMI to be released at the end of the week, it is the service sector that appears to be recovering quicker.

The dollar was sold through JPY106 before the weekend while Tokyo was on holiday. The market was cautious and took it back to JPY106 at the close. Japanese traders sold the dollar back off to around JPY105.45 before Europe entered the fray and has kept it in a narrow range near its trough, awaiting the US market leadership. Initial resistance is seen near JPY105.70. The Australian dollar is firm near $0.7120.

It reached a high last week, closer to $0.7180. The intraday technicals suggest it is poised to move higher in North America today. The PBOC set the dollar’s reference rate at CNY7.0029, which was stronger than expected, and the yuan snapped a three-day decline. The greenback finished the mainland session near its reference rate.


The German IFO survey lent credence to the improvement seen in the preliminary PMI before the weekend. The current assessment rose to 84.5 from 81.3. It is the best since March. The expectations component improved to 97.0 from 91.6, its best since November 2018. This lifted the assessment of the overall business climate to 90.5 from 86.3. It has not been this high since January.

The idea that Europe is outperforming the US is so far limited to some recent PMI surveys and may be vulnerable to the new flare-up in Covid-19 in several countries, including Spain and France. The divergence is unlikely to be reflected in this week’s first estimate of Q2 GDP. The eurozone contracted by 3.6% quarter-over-quarter in Q1 and is expected to have shrunk by another 12% in Q2. The US contracted by 5% at an annualized pace in Q1, which is about 1.2% quarterly. The median forecast for Q2 GDP in the Bloomberg survey is for a 35% annualized decline, which is about 7.8% on a quarterly basis.

The EU debt issuance under the Recovery Plan is embraced by some as the Hamiltonian moment. We recognize its potential but are reluctant to extrapolate to a fiscal union from what could be one-off emergency measures. We have suggested it could be scaffolding but that the building of the greater union is still in the distant future. Bundesbank President Weidmann cautioned that while he endorsed the action, it should not serve as “a springboard for large scale EU debt for regular household financing.” He emphasized the temporary nature of it, and urged a control mechanism to ensure the funds are spent “wisely and efficiently.”

The euro’s run higher is being extended for the 10th session of the past 11. It has fallen once since July 9. Today’s push in the Asia Pacific timezone saw $1.1725 before consolidating and easing to almost $1.1680 in the European morning. This pullback may provide a better buying opportunity for North American dealers who have been consistent dollar sellers in the run. Sterling is bid as well and has moved above last month’s high (~$1.2815) to rise to its best level since March (~$1.2860). Support now is seen near $1.2800. Meanwhile, the euro, which had tested the GBP0.9000 area last week, tested the upper end of this month’s range near GBP0.9140.


The US reports June durable goods orders today and the Dallas Fed’s manufacturing survey. The manufacturing and housing market seems to be leading the US recovery, and this is expected to be evident in today’s reports. Headline durable goods orders are expected to have risen by around 7% after the 15.7% gain in May.

However, the May report was bolstered by defense and aircraft orders. Excluding these, June orders will likely be stronger than May’s 1.6% increase. The report may help economists fine-tune their forecasts for Q2 GDP, which is released later this week. Of course, the FOMC’s two-day meeting, which concludes Wednesday, is the other main highlight of the week.

The moratorium on evictions from federally-backed rental properties enshrined in the CARES Act came to an end over the weekend. The landlords can give tenants a 30-day notice to vacate the premises. Prior to the passage of the moratorium, federally-backed apartment buildings accounted for a third of eviction cases.

The $600 a week extra unemployment insurance is set to expire at the end of the week. Some Republicans are pushing for an employment bill to be passed this week, which would tie the extra compensation to the previous pay, capping it at around 70%, according to press accounts. Part of the problem, and why this approach was previously rejected, is the logistical challenge that may prove to be beyond the capacity of many states to properly implement.

At just below 59 bp, the 10-year posted its lowest weekly close in history. The 10-year real yield closed at a record low of minus 92 bp. A dovish FOMC statement is expected amid the mounting virus cases and the escalation of US-China tensions, as officials prepare for additional measures as early as September. Unlike a year ago, the US-China tensions are not being spurred by rounds of tariffs but geopolitics. In fact, it appears that China has stepped up its purchases of US agricultural products in recent weeks.

The US dollar bears have their sights set on last month’s low near CAD1.3315. The greenback was sold through CAD1.34 last week but straddled the area in the previous two sessions. The Canadian dollar often lags behind the other major currencies in moves against the US dollar. The CAD1.3400 area should offer initial resistance, and a move above CAD1.3450 would likely squeeze the greenback shorts.

Mexico reports its June trade balance today. It is expected to return to surplus after two months of large deficits (~$3.5 bln). The dollar is trading a little above this month’s lows (~MXN22.1550). A break could see MXN21.90-MXN22.00. The peso’s strength is not so much a reflection of its domestic economic situation as much as it is about the broader risk appetites and its high real and nominal rates.

For a look at all of today’s economic events, check out our economic calendar.

Dollar Momentum

The five-week slump in the Dollar Index is the longest since late 2017/early 2018. Although we were early dollar bears, the downside momentum appears stronger than the momentum indicators suggested last week. Even shallow dollar bounces have been sold.

By and large, as we will see below, the momentum indicators continue to suggest a consolidative or corrective phase may be near. Yet, there does appear to have been a material shift in sentiment toward the dollar. Speculators in the futures market have been net long euros, for example, since mid-March. The change seems to be among asset managers, judging from flow reports and surveys, and interpolating from the options market, some levered participants as well. It also appears that the North American market is leading the current move.

The dollar’s decline should not be exaggerated. The year-to-date move has been modest. The strongest major currency has been the Swedish krona, which often acts as a high-beta euro. It has risen nearly 6% against the US dollar. Despite intervention by the Swiss National Bank, in the face of US threats to cite it as a currency manipulator, the franc’s 4.5% gain in second-place behind Sweden. Meanwhile, Sweden’s neighbor, Norway, sports the weakest of the major currency, with almost a 4.7% decline. Sterling’s roughly 3.8% decline puts it just ahead of the Norwegian krone. The dollar’s modest decline is not a material factor for policy or trade, even if the momentum gets noticed.

Dollar Index

The downward pressure on the Dollar Index is evident in the fact that it has risen in four sessions this month, and once in the last 11 sessions, and none last week. It is at its lowest level since October 2018 and finished the week on its lows. For the better part of three weeks, it has been sliding down with the lower Bollinger Band (~94.55). The next area of chart support is seen in the 93.75-94.00 area. The momentum indicators are still falling but stretched.


The euro will take a six-day advancing streak into next week. It not only pushed above $1.15, but it crossed and settled above $1.16 as well at new highs for the move (~$1.1645). The euro finished last month, near $1.1230. Although some narratives link the euro’s strength to the EU Recovery Plan, July will be the third consecutive monthly gain for the euro, the longest such move in three years. The MACD is still trending higher, while the Slow Stochastic is arching, set to turn down in the coming days. Rarely has there been a session in the last few weeks that the euro did not bump against or through the upper Bollinger Band. Initial support may be in the $1.1550-$1.1580 band.

Japanese Yen

With the Tokyo market closed before the weekend for the Health and Sports Day holiday, foreign exchange dealers took the dollar below the JPY106 level that has marked the floor since March. The JPY105.20 area marks the (61.8%) retracement objective of the rally from the March low (~JPY101.20), and a move below JPY105 would begin escalating the pain of yen strength on many Japanese companies. The yen’s strength, as exaggerated as it may be without Tokyo, coupled with the weakness in Asian and US shares ahead of the weekend, warning of the risk of catch-up on Monday. Resistance now will likely be seen ahead of previous support around JPY106.65.

British Pound

Sterling made new highs for the month, a little shy of the $1.28 level. The June high, which is highest since the panic struck in March, was a tad above $1.28 and near the upper Bollinger Band (~$1.2810). The next important chart point is not until closer to $1.30. The momentum indicators are stretched but still moving higher. Support is likely to be found near $1.2700. The euro is firm against sterling. It bounced smartly off the GBP0.9000 level tested following a reversal at the start of the week after reaching almost GBP0.9140. The euro needs to take out the GBP0.9180-GBP0.9200 area to be meaningful.

Canadian Dollar

The US dollar convincingly broke below the CAD1.3500 shelf that had been forged ahead of the 200-day moving average (~CAD1.3515). It fell to around CAD1.3350 before consolidating ahead of the weekend by straddling CAD1.3400. The June low was near CAD1.3315. The greenback fell every day last week for a 1.3% decline. It finished last month by CAD1.3580. The momentum indicators just about to enter over-extended territory. A possible head and shoulder pattern may have been carved since mid-June, and if valid, 1) it would project toward CAD1.3200, and 2) suggests the CAD1.3500 area offers resistance.

Australian Dollar

The Aussie shot up through $.0.7180, its highest level since April last year. A little profit-taking was seen in the previous two sessions, and the Aussie found bids ahead of the $0.7050 area, now expected to be support. It managed to hold to a solid 1.4% gain for the week to extend its streak to the fifth consecutive week and put it into positive territory for the year. A couple hundredths of a cent decline in the face of the nearly 4% drop in the Shanghai Composite illustrates a more significant point we have made about the decoupling of the two. Still, the technical indicators are flashing a yellow sign as they have failed to confirm the new highs.

Mexican Peso

The dollar’s roughly 0.8% decline against the peso last week gave back the previous two weeks of gains and maintaining the broadly sideways trading range since mid-June. The greenback has given up nearly 3/4 of the prior month’s 3.6% gain. The Slow Stochastic appears curling higher, while the MACD has almost flatlined. The lower volatility makes Mexico attractive for carry trades, but the strength of the Swiss franc and yen discourage their use, leaving the dollar as arguably the cleanest expression. A near-term downtrend line from earlier this month held before the weekend and begins the new week near MXN22.60. The month’s low so far is about MXN22.15.

Chinese Yuan

The dollar posted a key upside reversal against the yuan in the middle of last week, making a new low for the move (~CNY6.9650) before shooting up and closing above the previous day’s high. Follow-through buying was seen in the last couple of sessions, and the dollar finished the week near CNY7.02, a two-week high. Linking the yuan’s weakness to the political tit-for-tat consulate shutdowns does not necessarily mean manipulation by Chinese officials.

The operative channel could be the equity market where the Shanghai Composite has fell by a little more than 4% over the past two sessions, and the Shenzhen Composite shed 5%. The momentum indicators favor dollar gains, but with the greenback’s losses before the weekend in North America warns of the likelihood of a lower fix.


The rally continued with the yellow metal rising every day last week, reaching nearly
$1906.50 at the end of last week. It will take a six-day rally into the last week of July. Its resilience in the face of the heavier tone in the equity markets will support the arguments seeing it has a hedge to equities. There are two obvious targets. The first is the record high from 2011 a little above $1921, and the other is the round, psychological level of $2000. It is difficult to talk about resistance in never-before-seen prices, but if our view of interest rates and the turn in the dollar cycle is fair, then $2500 might not seem unreasonable.


After rallying to start the week and selling off in the second half, the September WTI contract finished the week little changed a little below $41 a barrel. The week’s high was about $42.50, which closed the breakaway gap created in the March disruption. Around $41.70, the contract reached the middle of this year’s range. Before the next retracement (61.8%) near $46.35 comes the 200-day moving average (~$44.35). The MACD did not confirm the high. The Slow Stochastic did but has still turned lower. This month, September WTI has not closed below its 20-day moving average ($40.60) and offered support ahead of the weekend.

US Rates

Disappointing preliminary PMI on the heels of the first increase in weekly jobless claims, and the end of the S&P 500 three-week rally saw the 10-year yield slip to 55 basis points at the end of last week, the lower end of the range since March. Still, it managed to close around 58 bp to end a four-day decline. The focus is on the Federal Reserve meeting and the negotiations over the next fiscal package, while the virus sets the general parameters.

The 10-year yield has drifted lower for the past three weeks after finishing June near 65 bp. The two-note yield has been in a three basis point range this month (~13.5-16.5). The effective (weighted) average fed funds rate, which the futures contract settle against, has quietly crept higher. Both last week and the previous week, the effect rate rose to 10 bp. Recall that as recently as June 1, it was at five basis points. The secured overnight financing rate is also trading firmly around 12-13 bp at the high over the past two weeks. Many are linking it to the Fed’s decision to lift the minimum bid rate for its repo facility earlier this month.

For a look at all of today’s economic events, check out our economic calendar.

Risk Appetites Firm, but the Greenback is Mixed

The Shanghai Composite rose 1.8%, and the Shenzhen Composite surged 3.5%. Taiwan and South Korea markets also rallied more than 1%. European and US stocks enjoy more modest gains of around 0.5%-0.6%. Benchmark 10-year yields are mostly 2-3 bp higher, though the US 10-year Treasury yield is a little softer around 64 bp.

European sovereigns are expected to sell around 36 bln euros of bonds this week, while there may be $20 bln investment-grade bonds coming to market from US names this week. The dollar is narrowly mixed. The Swedish krona, Australian dollar, Canadian dollar, and euro are firmer, while the Norwegian krone, Japanese yen, and New Zealand dollar are nursing small losses.

Emerging market currencies are similarly mixed, leaving the JP Morgan Emerging Market Currency Index virtually flat after rising by about 0.35% last week. Gold has come back firmer after slipping in the last couple of sessions and is trying to re-establish a foothold above $1800. OPEC+ may be ready to bring more output next month, and this is weighing on crude oil prices. The September WTI contract is struggling to hold above $40 a barrel.

Asia Pacific

First officials in China stir the pot, buy stocks was patriotic. People bought stocks. Stocks soared. Then the regulator of banking and insurance sectors cautioned against “illegal speculation,” and stocks fell. Last week’s data showed total social funding (bank and nonbank financial intermediaries) has risen by almost 13% in H1 20. In addition to these funds, savings from the wealth-management products, that are often variable-rate fixed-income investments, may have been freed up as well as the risk of defaults increase.

South Korea’s trade in the first ten days of July suggest better regional trade is taking place. Exports fell 11% in June (year-over-year) but in the first part of July were off 1.7%. Semiconductor chip exports rose 7.7% after a flat showing in June,m though wireless device exports fell 9.7%. Auto exports increased by 7.3%, but parts shipments fell by a third. Ship exports soared by over 300%. Exports to China increased by 9.4%, and exports to the US rose by 7.3%. Shipments to Japan fell by more than 20%. Imports fell by 9.1%. Oil purchases slumped by nearly a third. Imports of chip fabrication machinery surged by 85%.

Japan’s tertiary activity (service sector) slipped 2.1% in May after a revised 7.7% decline in April (initially 6.0%). The revision fully made up for smaller than expected May decline, which had been anticipated closer to 3.8%. The BOJ’s two-day meeting starts tomorrow. All of the regions were downgraded in a BOJ branch report out late last week. The BOJ itself is not expected to change policy but can be expected to promise to take more action if necessary.

The dollar has been confined to about 15 bps on either side of JPY106.95. There are $1.2 bln of options expiring today between JPY106.75 and JPY106.85. On the upside, the JPY107.40-50 area looks to be a solid cap and backed by a $545 mln option expire today at JPY107.50.

The Australian dollar is firm but is not going anyplace quickly, either. It is capped near $0.7000 and found support near $0.6920 at the end of last week. The greenback has stayed within 50-pips of CNY7.0. The PBOC set the dollar’s reference rate today a little weaker than the models suggested. It also injected CNY50 bln via “reverse repos,” the first open-market operation in 11 sessions, and helped ease money market rates. China’s 10-year yield edged a couple basis points higher to almost 3.05%.


Ahead this week’s summit that is to address the European Recovery Plan and the EU’s seven-year budget, European Council President Michel offered new compromises. One obvious take away is that a deal that would ensure unanimity has not been found. Michel offered a slightly smaller overall EU budget while keeping the 750 bln euro Recovery Fund intact. There is disagreement about how the funds should be distributed. How much of a veto should the countries retain?

The mix between loans and grants, and conditionality that should be attached, remain open issues too. A second take away from recent developments is that that the opposition is more than the Frugal Four (Denmark, Sweden, Austria, and the Netherlands). Finland stands them, but more, many others allied last week to defeat the German, French, Italian, and Spanish-backed candidate to lead the eurozone finance ministers.

Ironically, there is not much debate about a common bond that seemed to have dominated earlier discussions. It appears, as a last resort, Michel is offering budget rebates that may be sufficient to allow some compromise. However, the decision needs to be unanimous, and the impact on domestic political consideration cannot be taken out of the equation.

In a closely contested election in Poland, it appears that President Duda will have another term. The voter turnout looks to be a modern record. The challenger, Trzaskowski, claimed victory too and may formally protest the results. Duda’s Law and Justice Party lost the upper house of parliament last year, but it has not compromised. It looks like another snub at Brussels ahead of the summit. The Polish zloty is virtually unchanged on the day and over the past month.

The US has announced a 25% tariff on $1.3 bln of French consumer goods (e.g., cosmetics, ceramics, cookware, and handbags, but not wine or cheese) over the digital tax, which the US argues, discriminates against US companies. The tax will be not be collected for 180 days as France has not begun collecting its digital tax. Hopes of a break-through at the OECD, seem ill-founded. European-US trade tensions are at risk of escalating in the coming months. That said, one area that the US does appear to be making headway is the banning of Huawei.

The euro has held about a 35-tick range above $1.1300 today. Last week’s high was near $1.1370. It looks too far to be re-tested today. An expiring option for a little more than 720 mln euros at $1.1350 may be a sufficient cap today. That said, the North American session seems to have been biased to the upside recently. Still, there is a 2.1 bln euro option at $1.13 that expires tomorrow. For the third consecutive session, sterling’s upside has been checked by sales around $1.2670. Support is seen a little below $1.2600, and it looks poised to try the upside again in North America.


The chock-filled US economic calendar begins slowly. The June budget statement and the Fed’s Williams and Kaplan speak. In the past, the NY Fed President was part of the troika of leaders, but Williams does not appear to be regarded in those terms. Some may link it to the seemingly petty personnel decisions, made early in his tenure at the NY Fed, left the execution arm of the Federal Reserve System, somewhat ill-positioned to deal the challenges both repo and Covid-related.

The Treasury sells more bills this week but no coupons. Strong demand was seen at last week’s coupon auctions that saw the five-year yield fall to record lows, and the 10-year was sold at record-low yields. The US 30-year yield fell to 1.25% before recovering ahead of the weekend.

The financial focus may shift to Q2 bank earnings this week. Financials have underperformed the market. The slump in spending and investing squeeze lenders, and many current borrowers are stressed. Trading and underwriting, as well as re-financing, may have cushioned the blow. Net interest margin (similar to the gross margin of a non-financial business) appears to have widened too.

The tit-for-tat with China is likely to continue. Beijing has sanctioned Senators Rubio and Cruz over legislation they sponsored to sanction China and Chinese officials over human rights violations. The Trump Administration has signaled its intent to take additional action in the coming days. Apps, like TikTok and WeChat, reports suggest may be banned or curtailed.

The central bank meeting in the middle of the week is Canada’s highlight after a stronger than expected jobs report at the end of last week (952k vs. the median forecast in the Bloomberg survey for 700k). The Bank of Canada is expected to stand pat, but will likely attest to its willingness to scale its efforts if necessary. Mexico’s economic calendar is light this week.

The US dollar rose to about CAD1.3630 ahead of the weekend, the best level here in July. However, it looks poised to re-test support near CAD1.3500, which corresponds to last week’s lows and the 200-day moving average. A convincing break of CAD1.3500 could open the door to a re-test on last month’s low near CAD1.3315.

With a few minor exceptions, the greenback has been confined between MXN22.00 and MXN23.00 for the past month. It was a little firmer in Asia and the European morning, but the relatively high rates (~4.8% on three-month cetes) remains attractive, especially given the implied volatility is near three-month lows (~15.5%)

This article was written by Marc Chandler, MarctoMarket.

Bearish Case for Dollar Thickens, but Bulls are Tough to Find

However, few seem emotionally or materially prepared to resist the official efforts to generate favorable financial conditions to facilitate an economic recovery. Most seem to be expecting more policy support to be forthcoming.

The bearish technical case for the dollar appears to be growing. It is a little disconcerting that it seems to have become the consensus view, and the gross and net long speculative euro positioning in the futures market is near two-year highs. However, the speculative positioning in the other currency futures is not nearly as extreme. Indeed, speculators are still net short sterling, Australian dollar, and Canadian dollar.

Turns in the market often appear to have a cascading effect. The turn does not happen all at once. Given that the euro is the single most important currency in the world after the dollar, that is the real interest. The Swiss Franc can sometimes be seen as its lead indicators.

The Golden Cross (50 and 200-day moving averages) crossed down for last July. The euro’s averages crossed late last month, and at the start of last week, the 50-day moving average moved below the 200-day moving for the Dollar Index. The moving average for the Swedish krona crossed in the middle of June, while the Aussie’s averages crossed on the last session in June.

Sterling is a laggard, and the 50-day moving average is about 2.5 cents below the 200-day moving average. And so is the Canadian dollar. The New Zealand dollar’s average look set to cross early next week, and Norwegian krone may take a little while longer. We note that both the S&P 500 and the Shanghai Composite experienced the Golden Cross on the same day last week (July 9).

Also, adding to the bearish technical outlook for the dollar was the advance in gold. It has rallied now five consecutive weeks and pushed above $1800 an ounce for the first time in nine years. Nor has the greenback drawn much succor from the fact that the Fed’s balance sheet has shrunk for four consecutive weeks, while the ECB’s balance sheets jumped by more than 11% over the same period, which stands contrary to conventional wisdom.

Dollar Index

The Dollar Index fell for the third consecutive week. The poor close warns of scope for additional near-term losses. A note of caution comes from the lower Bollinger Band, which begins the new week near 96.35. The Slow Stochastic is still trending lower, and the MACD looks poised to turn lower. The first support area is seen between 95.70 and 96.00. The year’s low was set in early March around 94.65 and that, or the 93.90 retracement area, are more important targets.


The euro set a four-week high near $1.1370 on July 9 and reversed lower to $1.1255, about 15-ticks ahead of the week’s low. However, the US market has been particularly keen to sell dollars, and they did so against ahead of the weekend and sent the euro back to $1.1325 into the close of European markets for the week.

The momentum indicators are still favorable. Resistance is seen around $1.14, and June’s three-month high was about $1.1420. A break of the $1.1170 area would undermine the bullish technical case. The $1.16-$1.18 target for seems reasonable, though the Blomberg consensus for year-end is $1.1400.


The market rejected the dollar when it poked above JHPY108 in early July, and it kept selling the dollar last week. It pushed it below JPY107 for the first time in a couple of weeks. The Slow Stochastic is moving lower, and the MACDs are gently easing. In May and June, the dollar found support a little above JPY106.00. The lower Bollinger Band is around JPY106.55.

British Pound

In the last two weeks, sterling has recovered drop to around $1.2250 to approach the 200-day moving average near $1.2700. The upper Bollinger Band is found near there too (~$1.2675). The momentum indicators allow for additional near-term gains. Last month’s high was almost $1.2815. However, that trendline that connects the March (~$1.32) and June highs starts next week a cent lower. Support may be found in the $1.2500-$1.2520 area.

Canadian Dollar

The Loonie was the underperformer last week. It was the only major currency that fell against the US dollar (~-0.3%). The US dollar remains in a range against the Canadian dollar of roughly CAD1.3500 to CAD1.3700. The range has been intact for a month, though it did fray the lower end of the range last week (~CAD1.3490 low).

The sideways movement has muted the momentum indicators. In a weak US dollar environment, the Canadian dollar often lags behind the other majors. The greenback is testing a downtrend line that connects the March, May, and late-June highs. It appears to come in a little below CAD1.3590 at the start of the new week.

Australian Dollar

After several tests, the Aussie poked briefly above $0.7000 for the first time in a month, but there were no follow-through gains, and it returned to $0.6925, the lower end of the week’s range ahead of the weekend. The MACD has flatlined, while the Slow Stochastic appears to be curling down. Before the weekend, the Aussie closed below its five-day moving average (~$0.6960) for the first time this month. Key support is not seen until the $6780-$0.6800 area, but a break of $0.6900 would disappoint some bulls.

Mexican Peso

The dollar has fallen in eight of the past ten sessions against the Mexican peso, over which time it shed about 2.2%. The greenback was turned away from MXN22.90 early last week and posted an outside down day ahead of the weekend (trading on both sides of the previous day’s range and then settling below that low). A trendline drawn off the February low (~MXN18.56), the June low (~MXN21.46), and the last week’s low (~MXN22.15) starts the new week near MXN22.35.

Chinese Yuan

The dollar’s seven-day slide that took it below CNY7.0 for the first time since March, stalled ahead of the weekend. It managed to settle just above that once key level, which is essentially the middle of this year’s range. Some link the yuan’s rise to underweight foreign investors having to chase the stocks market higher.

Even with the nearly 2% pullback at the end of last week, the Shanghai Composite netted a 7.3% gain, and the Shenzhen Composite rose 10.25%. The yuan outperformed most emerging market currencies and the dollar-bloc currencies, sterling, and the Norwegian krone. Chinese officials have succeeded in keeping the yuan fairly steady against the US dollar.


The buying enthusiasm faded in the middle of last week as the yellow metal reached $1818. It consolidated within Wednesday’s trading range during the last two sessions. The momentum indicators are look poised to turn lower, which has made us cautious. A month-long trendline begins next week near $1790, and a break could signal a set back into the $1750-$1765 area. Gold has rallied from around $1670 in early June, and some consolidation should not surprise.


The September WTI contract has advanced in eight of the past ten weeks, during which time it has risen from below $30 to almost $42. However, the contract slipped to nine-day lows (< $38.80) ahead of the weekend, before staging a smart rebound and closed near new session highs of almost $41 barrel. Neither the MACD nor Slow Stochastic is generating a strong signal.

The June high near $41.75 is the next obvious target, which is also about the middle of this year’s range, and there is the gap from March that extends toward $42.50. Although violated intraday, the trendline off the late May low (~$32.20), mid-June low (~$35.00), and late June low (~$37.30) may still be valid and begin next week near $39.50.

US Rates

Fears that the new outbreaks will have a material impact on the economy encouraged lower yields and appeared to help ensure a strong reception to the US 30-year bond auction. Most foreign investors prefer shorter maturities, but indirect bidders showed up in force even with yields new two-month lows. The US 10-year yield fell to almost 56 bp at the end of last week, its lowest level since mid-May.

The same story holds for the two-year yield. It approached 13 bp for the first time since mid-May. The record-low was just above 10 bp, but the five-year note yield did register a new record low of almost 25 bp ahead of the weekend, before bouncing back to nearly 30 bp. A near-term low in rates may have been seen, but the upside continues to appear limited.

S&P 500

The S&P 500 spent the week alternating between gains and losses to net about a 1.5% increase that keeps it knocking on the 3200-cap ahead of the three-month-plus high set in early June near 3233. The lack of transparency with Q2 earnings season getting underway in earnest has been cited by many observers as a challenge, but that assumes earnings matter right now.

The market does not appear to be trading with much of a focus on the April-June period. Admittedly, the advance of the S&P 500 seems narrow. Nevertheless, the price action remains constructive. Many keep looking for European stocks to outperform the US, but if it is going to happen, it has not begun yet. In the past two weeks, the S&P 500 has gained about 5.70%, while the Dow Jones Stoxx 600 is up 2%.

For a look at all of today’s economic events, check out our economic calendar.

This article was written by Marc Chandler, MarctoMarket.

The Dollar is Sold through CNY7.0 as Chinese Equities Continue to Rally

US shares are little changed after yesterday’s 0.8% rally in the S&P 500 and new record high close in the NASDAQ. Bonds are sidelined. Asia Pacific yields edged higher, but mostly flat in Europe. The US 10-year benchmark is hovering around 65 bp. The dollar is on its back foot, trading heavily against most major and emerging market currencies.

Sterling and the Swedish krona led the majors with a 0.20-0.25% gain through the European morning. The dollar punched below CNY7.0 for the first time in almost four months. Gold is holding above $1800 an ounce and looks set to push higher above $1818 seen yesterday. Oil is little changed as the August WTI contract is confined to a narrow range (~$40.60-$41.00)

Asia Pacific

As widely anticipated, China’s CPI firmed to 2.5% in June from 2.4%. This was in line with expectations. Food prices are still an important culprit. They are up over 11% year-over-year. The 81.6% increase in pork prices accounts for 2.05 percentage points of CPI. Non-food prices rose 0.3% year-over-year. Producer prices showed somewhat less deflation. PPI fell 3% year-over-year after a 3.7% decline in May. We anticipate more stimulus, but it may be targeted rather than broadly delivered.

Japan reported core machinery tool orders rose 1.7% in May. It follows a 12% slump in April. Economists had projected another decline. The rise in new orders was driven by the service sector, which underscores the weakness in the manufacturing sector seen in other economic reports. Manufacturing orders fell.

Home loan values fell by 11.6% in Australia. This was more than twice the decline expected by the median forecast in the Bloomberg survey. It is the third decline in the past four months. Meanwhile, tensions are rising between Australia and China. It suspended the extradition treaty with Hong Kong while seeking to draw Hong Kong residents that want to flee in light of the new security lows, and have begun strengthening its ability to resist Beijing’s cyber attacks.

The dollar has been confined to about a fifth of a yen range above JPY107.20. There are nearly $800 mln in options that expire today struck between JPY107.10 and JPY107.25. There is also a $1.1 bln option at JPY107.50 that will be cut today. The Australian dollar is firm and managed to briefly trade above $0.7000 for the first time since June 11.

However, here too, a consolidative tone persists. Support is seen in the $0.6960-$0.6970 area. Downward pressure on the dollar against the Chinese yuan has been building, and today it broke out. The greenback fell to CNY6.9825, its lowest level since mid-March. It had been sold through the 200-day moving average (now about (CNY7.0420) and has barely looked back. The next important technical area is near CNY6.95.


The ECB’s figures showed grew by almost 72 bln euros last week to a record high of nearly 6.29 trillion euros or 53% of GDP. The increase was split between asset purchases (~33 bln euros) and the revaluation of gold (~39 bln euros). In comparison, the Federal Reserve’s balance sheet is about a third of the US GDP. Data out later today will show whether its balance sheet shrank again as it has over the past three weeks.

The Bank of England’s balance sheet is a little more than 30% of GDP. The Bank of Canada has been more aggressive than many may realize, and its balance sheet is now almost 25% of GDP. The Bank of Japan’s balance sheet is nearly 120% of GDP. The balance sheet expansions have two functions: Stabilize markets and ensure an easy monetary setting in an extremely low-interest-rate environment.

Sterling rallied in a soft dollar backdrop yesterday and is extended those gains today. They may and may have been encouraged by the additional measures announced by Sunak, the Chancellor of the Exchequer. These included a reduction in the VAT for hospitality and tourism and a cut in the tax on home purchases (up to GBP500).

What will catch the eye of some policy wonks elsewhere, including in the US is the offer to pay the company 1000 pounds per employee that returns form furlough. Meanwhile, the UK’s International Trade Secretary formally warned that the post-Brexit border plan, particularly how Northern Ireland is treated by risk being challenged before the World Trade Organization.

German trade figures show the world’s third-largest economy is recovering. The trade surplus nearly doubled to 7.1bln euros in May from April. Exports rose 9% in May, a dramatic improvement after a 24% slump in April, even if not the 14% the Bloomberg polls showed was the median forecast. Imports rose by 3.5% after declining by 16.2% in April.

The euro rose to a high near $1.1370 in Asia before falling to session lows in early Europe near $1.1320. It is likely to base ahead of $1.1300, where there is a 1.8 bln euro expiring option. There is nearly a billion euro option at $1.1375 that also expires today. The euro has been in a large $1.1170-$1.1400 range since the end of May. Sterling is at its best level since mid-June, reaching $1.2650 in the European morning. Today is the fifth consecutive advance in sterling that began close to $1.2440. The next target is in the $1.2680-$1.2700, which houses the mid-June high and the 200-day moving average. The June high was set near $1.2815.


The EIA reported more than twice the 2 mln barrel build that the API estimated. The 5.6 mln barrels that went into inventory was the most in four weeks. Cushing accumulated 2.2 mln barrels, the first addition in nine weeks. The larger than expected inventory build plays on fears that the new virus outbreaks are disrupting demand.

Weekly US jobless claims are on tap. Although economists expect some improvement, they have recently been over-estimating the decline. This is the first report that covers the start of Q3 (week through July 4), and despite the holiday-shortened week, it is expected that nearly 1.4 mln people applied for unemployment insurance for the first time.

Canada reports June housing starts. A small uptick is expected. Yesterday’s fiscal update pointed to a 16% budget deficit this year (1.5% in 2019), and the debt rising to almost 50% from 31%. Its debt to GDP would still be the lowest within the G7. June jobs will be reported tomorrow. The median forecast in the Bloomberg survey is for about 700k increase, which follows a nearly 290k rise in May.

June inflation likely ticked up in Mexico from the 2.84% year-over-year increase in May. The central bank would probably feel more comfortable if the headline pace remained below the 3% target. It could slow its willingness to cut the overnight target rate of 5.0%. That said, the Banxico does not meet again until mid-August, giving it plenty of time to monitor the situation. Separately, Brazil’s Senate approved a bill that the central bank has advocated that is designed to make it more efficient for financial institutions in Brazil to hedge their foreign currency exposures.

The US dollar is slipping through its 200-day moving average against the Canadian dollar near CAD1.35 in the European morning after posting an outside down day yesterday. There is an option for almost $790 mln at CAD1.3500 that expires today. Nearby support is seen around CAD1.3470. Like yesterday, the dollar is consolidating in the upper end of Tuesday’s range against the Mexican peso when it almost MXN22.87. The next area of support is seen between MXN22.44 and MXN24.53.

New Record Number of Covid Cases Doesn’t Curtail Appetite for Risk

The Shanghai Composite rallied 5.7% today to bring the five-day advance to 13.6%. Most other regional markets, including Hong Kong, rallied as well (3.8%). Australia was the main exception, and it pulled back by 0.7%. It is still up a solid 3.4% over the past five sessions.

European shares are advancing. The Dow Jones Stoxx 600 is up around 1.4% near midday and has gained four of the five sessions last week. US shares are up around 1%, positioning the S&P 500 to open near the pre-weekend highs. Bond markets are little changed.

The US 10-year is hovering near 70 bp. Italian bonds are rallying with risk assets, and near 1.22%, the yield is about half of the three-month peak. The dollar is trading lower against nearly all of the currencies. Among the majors, the yen and Canadian dollar are laggards, and in the emerging market universe, the Russian rouble and Indian rupee are heavy. Gold is trading in a narrow band on either side of $1775, and August WTI is straddling $41 a barrel.

Asia Pacific

President Trump has not signed legislation that would sanction Chinese officials involved with the new national security law in Hong Kong. However, the signals from Washington suggest further action will likely be taken in the coming days. Meanwhile, the UK government claims that a turn in the past six months demonstrates the danger China poses and looks to expedite the departure of Huawei from its 5G build-out. Underlying this is the US ban on Huawei, which forces it to use “untested” equipment whose security could be compromised.

The Reserve Bank of Australia meets tomorrow. It is unlikely to take new initiatives. The current policy stance, including targeting the 3-year yield at the cash target rate of 25 bp, appears to be working at the moment. The yield curve control, as has been the case in Japan, seems to require fewer bond purchases than one might have expected to maintain the target.

The dollar continues to find support around JPY107.30. Nearby resistance is seen in the JPY107.80-JPY108.00 area. Three-month implied volatility fell below 6% at the end of last week for the first time in a month before the weekend. There was little reaction to the news that Tokyo Governor and potential Abe successor, Koike, was re-elected to a second term.

The Australian dollar is extending its advance for the sixth consecutive session and reached $0.6985, the highest in almost a month. Initial support now is pegged around $0.6950. Last month’s high was set near $0.7060, and its the next important target.

The PBOC set the dollar’s reference rate a touch higher than the models suggested. It appears to be a mild attempt to limit the dollar’s decline today. It is off by about 0.5%, which is one of its largest moves in the past three months. Separately, note that China reportedly has tightened the disclosure rules for large withdrawals, a step on the capital control escalation ladder.


UK Prime Minister Johnson and EU President von der Leyen agreed to accelerated trade talks, but the first round last week ended early. EU chief negotiator Barnier cited “serious divergences.” At the same time, BOE Governor Baily warned banks to be prepared in case a negative base rate is adopted. In the middle of the week, the government is likely to announce some new stimulative measures that may include support for the arts and entertainment and, possibly, a temporary cut in the VAT.

German factory orders jumped 10.4% in May after a revised 26.2% drop in April (initially -25.8%). While some observers highlighted that it missed expectations for a 15.4% gain, the broad uncertainty, and the magnitude of changes, which typically as modest, requires wider berth than usual. The takeaway is that the eurozone economy has begun recovering. It will report industrial production figures tomorrow, and a small double-digit gain is expected. That was the story in Spain, which reported a 14.7% increase in May’s industrial output. It fell 22.1% in April (originally, it was a 21.8% decline). It missed the median forecast on Bloomberg (16.9%), but must still be regarded as a good report.

The euro poked above $1.1300 as it did on July 2 but again found eager sellers. There did not seem to be any reaction to the new French Prime Minister Castex, who is expected to announce a new cabinet later today. A close above $1.1275 would be constructive from a technical perspective. Above $1.1305, and the next target is near $1.1350. Sterling is continuing to probe the $1.25 area. Last week’s high was about $1.2530, and a move through there targets $1.26.


Canada’s Trudeau is threatening to skip the USMCA celebratory summit in Washington on Wednesday that Mexico’s AMLO will attend. The virus is one consideration, but the underlying casus belli may be the US threat to reimpose a 10% tariff on imports of aluminum from Canada unless it voluntarily restrains exports.

It is as if the policy response to the crisis has two main challenges: starting them and stoping them. The risk is withdrawing support too early rather than too late. Two fiscal initiatives will expire this month and recall several Fed facilities are to wind down in September. The $600 a week extra unemployment insurance will terminate at the end of July. A week before the moratorium on evictions and foreclosures ends.

The House has passed a roughly $3 trillion stimulus bill and an extension of the moratorium through Q1 21. The Senate is on a two-week recess and reconvenes on July 20. While the financial media is giving a broad coverage of the US bank that revised down its Q3 GDP forecast, and it plays on fears that the jobs survey was conducted before the last surge of cases and traffic patterns and credit card usage has subsequently slipped. However, keep in mind the downward revision was from an unrealistic 33% to a still wildly optimistic 25% annualized pace. The NY Fed’s GDP tracker sees a 15.1% contraction in Q2 to be followed by a 10.4% pop in Q3.

The US reports service and composite PMI and the non-manufacturing ISM. The preliminary service PMI rose from 37.5 to 46.7. Another small rise is likely in the final reading. The non-manufacturing ISM is forecast to have returned to 50 from 45.4 in May. The Bank of Canada reports the results of its Q2 business survey, typically not a market mover. Argentina’s government made new proposals over the weekend to restructure $65 bln of dollar debt. It appears to have softened some of its positions to make it a little more attractive for the creditors. The deadline was extended to August.

The US dollar tested the CAD1.3520 earlier today, its lowest level in a couple of weeks. The greenback bounced in the European morning, but this may provide North American operators with a better level to sell the dollar. Resistance is found near CAD1.3560. The 200-day moving average is a little below CAD1.35, and a break of CAD1.3480 is needed to signal a return to the last month’s low near CAD1.3315.

With today’s losses against the peso, the greenback nearly met the (61.8%) retracement objective of last month’s bounce. A break of the MXN22.14 area is needed to maintain the pressure on the US buck. The next immediate downside target is around MXN21.88.

For a look at all of today’s economic events, check out our economic calendar.

This article was written by Marc Chandler, MarctoMarket.

Are We on the Cusp of New Leg up in Risk Assets?

The June PMI readings confirm a significant improvement is underway and that many high-income economies are on track to return to positive growth in Q3. At the same time, the extent of government and central bank support is unprecedented.

The dollar fell against all the major currencies last week, save the Japanese yen. All five of the best performers (NOK 2.1%, NZD 1.6%, AUD 1.0%, GBP 1.0%, and CAD 0.9%) appeared to take out downtrend lines that were in place since around June 10. What is striking about the dollar’s slump is that it took place as the Federal Reserve’s balance sheet was shrinking for third consecutive week and the unsecured overnight rate in the eurozone fell to new record lows, often cited as dollar-supportive.

The same is true of the JP Morgan Emerging Market Currency Index. It snapped a three-week downdraft with a 1.1% rally that lifted the benchmark above the downtrend line begun with a key reversal of June 10. The greenback had been trending higher against the Mexican peso since then as well and last week’s 2.7% decline pushed it below the trendline.

Equity benchmarks also did well last week. The MSCI Asia Pacific has made the most convincing break higher. As an aside, it may appear notable that Hong Kong’s Hang Seng rallied 2.4% last week despite the protests against and the first arrests under the China’s new security laws and the US beginning to remove some of Hong Kong’s special trade privileges. The Dow Jones Stoxx 600 and the S&P 500 rose above their respective downtrend lines but the move thus far is not yet convincing.

Dollar Index

The Dollar Index made a three-month low on June 10 (~95.70) and reached 97.80 on June 30. It was sold back to the trendline near 96.80, which is almost a (50%) retracement of its three-week advance on July 2 after the employment data. The trendline begins the new week a little below 96.90. The ascent of the MACD is slowing and the Slow Stochastic has turned down. A convincing break of the trendline signals an immediate test on the 95.70 area.


With a few exceptions, Europe’s single currency has been confined to a $1.12-$1.14 range for a month. Within that range, it has appreciated for the past two weeks by a cumulative 0.5%. It poked through the middle of the range after the US jobs figures but met good selling that pushed it back to almost $1.1220.

The downtrend line, drawn off the June 10 high (~$1.1420) begins the new week near $1.1275. The MACD is still trending lower while the Slow Stochastic has turned higher. The charts and risk-reward calculations suggest buying the euro on dips toward the lower end of the range and even on marginal penetration.

Japanese Yen

Since testing key support near JPY106 on June 23, perhaps fueled in part by Softbank’s divestment of T-Mobile, the dollar rallied above JPY108.00 for the first time since June 9. However, the greenback encountered a wall of selling and saw it posted a key reversal in the middle to last week and fell to about JPY107.35. Follow-through selling over the past couple of sessions has been virtually non-existent.

The price action reinforces the technical significance of the JPY106-JPY108 range, which mostly confined the greenback is Q2. The MACD has been muted by the sideways action and the Slow Stochastic has turned higher. Our correlation work shows a weakening of the yen and S&P 500 co-movement in recent weeks, but it looks set to re-couple shortly.

British Pound

Sterling’s downtrend since June 10 ended and the subsequent bounce to $1.2530 retraced half those losses. It where the corrective upticks in the previous week had run out of steam. This area needs to be taken out to be convincing, and the next retracement level (61.8%) is at $1.26. The MACDs have flatlined near zero in recent days, while the Slow Stochastic curled up. Initial support is seen a little below $1.2400.

Canadian Dollar

The US dollar had set a nearly four-week high on the last Friday of June near CAD1.3715. There was no follow-through buying last week and the greenback was sold in four of five sessions to about CAD1.3540. The uptrend line off the June 10 low was frayed on June 30 and successfully penetrated to kick-off the second half.

With closes near the low more often than not in recent sessions, the Slow Stochastic has turned down from its highest level in Q2. The uptrend in the MACD has flattened. The CAD1.3480-CAD1.3500 offers important technical support. It houses the 200-day moving average, the low from the second half of June, and the halfway mark of the greenback’s bounce from June 10. The next retracement level (61.8%) is near CAD1.3470.

Australian Dollar

The downtrend line off the June 10 high was violated in the middle of last week. The Aussie settled above it for the past two sessions and found support at it ahead of the weekend. The downtrend line begins the new week a little below $0.6900.

The statement following the central bank meeting on July 7 may pose some headline risk, but the momentum indicators favor more gains. The Slow Stochastic has turned up and the MACD seems poised to follow suit in the next day or two. A move above $0.6960 could signal a retest of the high from June near $0.7065.

Mexican Peso

The dollar will carry a four-day slide against the peso to start the new week. The dollar’s 2.75% slide snapped a three-week 6.6% rally. After setting new highs for the month on June 30 (~MXN23.23), the dollar reversed lower. The subsequent losses surrendered roughly half of the gains scored since the June 9 low (~MXN21.4650).

The momentum indicators favor additional dollar losses. The MACD has just turned down and the Slow Stochastic is has rolled over in the last couple of sessions. The next retracement target (61.8%) is found near MXN22.14 but the near-term potential may extend toward MXN21.90. The upside should be capped now in the MXN22.75 area.

Chinese Yuan

The dollar rose in the last four weeks of May against the Chinese yuan and has spent the last five weeks alternating between gains and losses. Net-net the dollar fell a little more than 1% in June after rising 1% in May, leaving it virtually unchanged since the end of April (CNY7.0665). The CNY7.05-CNY7.10 range still seems in effect. Still, if the dollar weakens broadly as our reading of the charts suggests, the dollar could drift a bit lower against the yuan. The 200-day moving average, for example, is near CNY7.0440 and the June 10 low was closer to CNY7.04.


On July 1, gold made new multiyear highs a little below $1790. It has found support near old resistance around $1750. Even though prices remain firm, the new highs have been marginal and difficult to sustain. The momentum indicators seem to be warning of greater downside risk than upside in the near-term. A break could see late longs cut fuel a pullback toward the $1715-$1730 area.


August WTI pulled back a bit ahead of the weekend, but still managed to finish the week above $40 a barrel for the first time since early March. It made a high last week near $40.75. Last month’s high was closer to $41.65. The old gap from March beckons around $42.55. The MACD has been trending lower since around June 10 and has not confirmed the recent highs. The Slow Stochastic is turning higher but also did not confirm the highs in price. A drop through the $39 a barrel level could mark a near-term high in place and further consolidative work.

US Rates

The US 10-year yield rose about three basis points last week to 0.67%. It was the first week in four that yields rose. It is a net two basis point increase from the end of May. The 60 bp area looks like a solid floor. The near-term range looks capped around 70 bp and the 20-day moving average is a little higher. The yield spent a few days after the May employment data (in early June) above 80 bp. The five-year yield fell to new record lows at the end of June of almost 26 bp. It finished the week just below 40 bp.

Many participants will be keeping on eye on the Fed Funds rate and Secured Overnight Financing Rate, which have been creeping higher. The effective Fed Funds rate on July 2 was nine basis points and because of the holiday weekend, it counts as four days for the monthly average (which is what the fed funds futures contract settles at) after averaging about five basis points in May. For the first time in 12 weeks, foreign central banks liquidated Treasuries from the custodial account kept at the Federal Reserve. About $8.5 bln of Treasuries were sold. Separately, for the first time, a foreign central bank used the Fed’s repo facility offered a group of emerging market central banks. Some suspect that it may have been Brazil.

S&P 500

Last week began with a dip slightly below 3000 before buying emerged to lift the S&P 500 to almost 3166 after the US employment data on July 2. In doing so, the benchmark took out the downtrend line off the June 8 high (~3233). The employment data spurred a gap higher opening that was subsequently filled in late pre-holiday activity.

The four-day island top from early June that signaled the corrective phase remains intact. Once again the index entered it but failed to close it. It is near 3181.50. The poor close may see a further pullback and initial support is seen around 3100 and then 3080. Both the MACD and Slow Stochastic are turned higher.

For a look at all of today’s economic events, check out our economic calendar.

This article was written by Marc Chandler, MarctoMarket.

Macro Considerations in the Week Ahead

The risk assets had been rallying since mid-March in anticipation of an economic recovery and fueled by the massive liquidity provided by central banks and the spending plans of governments. Subsequent data have generally confirmed that after sharp contractions, many high-income economies are on the mend, and a return to positive growth is likely in Q3.

The corrective/consolidative phase appears to be drawing to a close.

The stronger than expected China and eurozone PMIs and another strong gain in US non-farm payrolls report may provide the fuel new highs for many risk assets. The better data, the liquidity/stimulus story, and optimism over progress toward a vaccine can renew the draw of savings into risk assets. While flare-ups of the virus are taking place in numerous places, the US seems to be struggling more than other high-income countries.

Many states have frozen re-opening efforts, and some have backtracked. One report suggested credit card usage fell in the last week of June. At the same time, the US may be the best positioned to provide more support. This could also weigh on the dollar and encourage its use to fund the purchase of other assets.

Congress extended the Payroll Protection Program into early August, and it is working on a new fiscal bill that is likely to be worth at least 5% of GDP ($1 trillion).

The Federal Reserve seems to recognize that it can do more, as well. Many of the facilities the Fed has launched are not being used very much. Part of the reason is that the central bank succeeded in helping stabilize the capital markets. Dollar swaps with foreign central banks and large repo operations are simply not needed. The same appears to be true of its money market, commercial paper, primary dealer support. Other facilities, like Main Street, appear not to be sufficiently enticing. The primary and secondary market purchases of corporate bonds have begun, but the Fed is going relatively slowly. The same is true of its support for local and municipal bonds.

Redeployment of resources, tweaking the programs to make them more attractive/accessible, and new initiatives are likely, even if not immediately.

The Fed’s balance sheet shrank in June, the pace of M2 growth slowed, and the average effective fed funds rate ticked up. It is unlikely to accept this combination for long, given its economic assessment and outlook. The FOMC meets late July and then mid-September. The minutes from the recent meeting showed that officials want to give more guidance on the outlook for rates and asset purchases.

Yield curve control, or that the Fed is calling yield curve targeting, which entails the purchases of sufficient notes or bonds to achieve and maintain a predetermined interest rate, remains a distinct possibility later this year. Instead of announcing a fixed amount of bonds it would buy regardless of price, the central bank would set the price (yield) and buy an unspecified quantity to ensure its target is met. A small majority of economists in a Bloomberg poll a month ago anticipate the such a policy will be eventually adopted. Fed officials seem reluctant to take such measures under current conditions. The bar may be higher than previously signaled but

The economic calendar suggests a slow start to the second half.

The June non-manufacturing ISM and PMI are on tap, but the employment data steals its (potential) thunder. June non-farm payrolls jumped by 4.8 mln after a revised 2.7 mln (initially estimated near 2.57 mln) gain in May, well more than expected. It appears that around a third of those who lost jobs returned (~7.5 mln of 22 mln). The unemployment rate fell to 11.1% from 13.3%.

This was a larger drop than expected, but there continue to be definitional problems that may be exaggerating the improvement. Moreover, the surveys were conducted prior to the recent flare-up and reintroduction of restrictions in several states. Meanwhile, weekly initial claims are slowing, but 1) over a million new filings a week is disheartening, and 2) they are not receding as fast as anticipated.

Globally, measures of producer prices are subdued, and the US and China are no exceptions. The weakness of producer prices is understood to broadly signal weak demand from industry. China’s producer prices are expected to have stabilized in June after falling for the past four months. In May, producer prices had dropped 3.7% from a year ago.

Recall that China was already experiencing outright deflation in producer prices throughout H2 19. At the extreme last October, producer prices were down 1.6% year-over-year. Last week, the eurozone reported producer prices tumbled 5% from a year ago in May after a 4.5% drop in April. China reports CPI as well. It appears to be stabilizing after dropping from 5.4% in January to 2.4% in May.

In the US, producer prices rose 1.4% in 2019 after a 2.6% rise in 2018. With the collapse in the price of oil and the dollar’s strength, producer prices were 1.2% lower in April than a year ago. They were still down 0.8% in May but likely jumped back in June. Crude oil (August WTI) rose over 10%. Commodities more broadly (CRB) rose about 4.25%. The base effect also is favorable.

While not typically a market-mover, the consumer credit report may get a closer read than usual. Retail sales jumped twice as much as the economists expected in May (17.7% vs. median survey forecast of 8.4%). Did they not expand credit usage in May after a $68.8 bln slump in April? Economists expected another decline of around $17.5 bln. The almost $80 bln collapse in March and April offset the prior six-month gains.

Europe may surprise with a strong bounce in May retail sales that are the data highlight for the eurozone next week. Retail sales sank 11.1% in March and another 11.7% in April. However, the May data from Germany and France were particularly strong. French consumer spending spiked 36.6% in May (month-over-month) after falling a revised 19.1% (initially -20.2%) in April. German retail sales leaped 13.9%.

The median forecast, according to Bloomberg, was 3.5%. In April, retail sales in Germany tumbled 6.5% (initially report -5.3%). Recall that eurozone retail sales were soft in H2 19, falling in four of the six months, including a 1% decline in December. That was the largest decline in a couple of years.

The Reserve Bank of Australia gets begins the new month of central bank meeting.

The Australian economy was still struggling in May but appears to have turned a corner in June. The composite PMI jumped to 52.6 in June from 28.1 in May. Recall that it finished last year below the 50 boom/bust level at 49.6. With imports falling faster than exports, Australia’s monthly trade surplus has averaged nearly A$7 bln in the first five months of 2020 compared with an average of a little less than A$5.1 bln comparable 2019 period.

The central bank has had opportunities to talk the Aussie lower as it appreciated by about 12.6% in Q2 against the US dollar, the most of the major currencies. We see no compelling need for the RBA to alter or drop its 2-3% inflation target that it has consistently under-shot, nor extend its yield-curve control beyond the three-year bond. With a brief exception in early June, Australia’s 10-year yield, for example, has been in a 10 bp band on either side of 90 bp.

There are three other political events to note next week.

First, Mexico’s President AMLO will visit the US ostensibly to celebrate the implementation of the new USMCA free-trade agreement. The largest benefit may be that it lifts the uncertainty spurred by repeated threats of the US to pull out of the continental agreement. The modernization of NAFTA was previously going to happen through the Trans-Pacific Partnership until the US withdrew a couple of years ago. Ironically, both presidents are at a low ebb of their public support. A major difference is that AMLO, like all Mexican presidents, serves one six-year term, while Trump faces the voters in four months.

Second, the Eurogroup of EMU finance ministers will decide on a new head. Domestic political machinations in Portgual saw Finance Minister and Eurogroup President Centeno shuffle portfolios and return to the central bank as Governor. There are three candidates for the 2.5-year term: Calvino for Spain, Donohoe from Ireland, and Gramegna from Luxembourg. A simple majority (10) is needed for victory, and we suspect it will stay in Iberia with Calvino.

Third, European Council President Michel is expected to unveil a compromise proposal for the EU budget and the European Recovery Fund. The European Commission had proposed a 750 bln euro facility of 2/3 grants and 1/3 loans as part of the EU’s seven-year budget. The heads of state (European Council) could no reach an agreement last month and will try again at a summit on July 17-18. The compromise reportedly may keep the EC’s proposal for 70% of the fund (~525 bln euros) and hold off the distribution of the remainder until 2023, and then distributed depending on the depth of the recession.

Michel may offer more rebates to creditor countries, and add some conditionality to keep the spending in line with Europe’s strategic goals. These include climate change and the digital transformation and could also be used to help incentivize some countries, like Hungary and Poland, to avoid or minimize confrontations with the EU.

Reports also indicated that Michel could propose a reduction in the EU budget in the later years, which would likely appeal to some creditor countries. There does seem to be a big push to reach an agreement, and Michel, no doubt, is crafting a proposal that could secure a majority. Still, since the decision must be unanimous, it boosts the incentive to be a “holdout” to win extra concessions.

Again, it is remarkable that the common bond which received so much attention in the media is among the least controversial elements now. It is not the coup de grace that once and for all settles the issue of fiscal union. It could be scaffolding for a new, more integrated Europe, or it could be dismantled after the emergency passes.

For a look at all of today’s economic events, check out our economic calendar.

This article was written by Marc Chandler, MarctoMarket.

Dollar Thumped Ahead of US Jobs Report

Following the NASDAQ close yesterday at record highs, global equities have advanced. Led by Hong Kong returning from yesterday’s holiday, Asia Pacific equities rallied. Most local markets rose by more than 1%, though Tokyo and Taiwan lagged. Europe’s Dow Jones Stoxx 600 is up over 1% to extend its rally for the fourth consecutive session.

The S&P 500 is trading more than 0.5% higher in electronic trade, which is sufficient to take out a month-old downtrend line. The equity rally has not sapped demand for government bonds, and peripheral European yields are off 3-5 bp. The US 10-year is little changed around 67 bp. The dollar has been sold against nearly all the world’s currencies.

Among the majors, the Canadian dollar is struggling to join the party, while among emerging market currencies, Indonesia, Thailand, and Turkey are the notable exceptions. Gold is firm above $1770, while August WTI continues to straddle the $40 a barrel level. Note that some US markets close early today ahead of tomorrow’s holiday and liquidity will suffer for it after the flurry of US data.

Asia Pacific

Australia’s May trade figures were better than expected. Exports fell by 4% year-over-year. This compares with an 11% decline in April and expectations for a 7% drop in May. Imports were off 10% in April and were off only 6% in May. This, too, was better than economists expected. The result was the trade surplus came in at A$8 bln after a revised A$7.8 bln in April. Goods exports to China rose in May, but to most other countries, except New Zealand and Hong Kong.

South Korea emerged from deflation in May. The headline CPI rose 0.2% in May for a flat year-over-year performance. In April, consumer prices had fallen by 0.3% year-over-year. Core prices ticked up to 0.6% year-over-year from 0.5% in April.

The dollar posted a potential key downside reversal yesterday, but new selling has been limited. Yesterday the dollar rose above recent high but met a wall of sellers near JPY108.15 that drove it through the previous session’s low (~JPY107.50) and closed below there. Today’s low is near JPY107.30. There is an option for $950 mln at JPY107.50 and another for about $475 mln at JPY107.00. Both expire today.

The Australian dollar is firm in the upper end of yesterday’s range. It is trading through a downtrend line drawn off the June 10 high. The next target is near $0.6950, where an option for about A$505 mln is struck that rolls off today. The PBOC set the reference rate for the dollar a little softer than the models suggested at CNY7.0566. The yuan has risen its highest level in about a month against its basket.


The eurozone wholesale deflation intensified in May. Producer prices fell 5.0% year-over-year in May after a 4.5% decline in April. In May alone, they fell by 0.6%, a bit more than expected. Energy and construction accounted for about half of the monthly decline. Non-durable consumer goods prices fell 0.6% in May and were up less than 1% for the year. Durable consumer goods prices were unchanged and up 1.3% year-over-year. Capital goods prices were also stable in May but were 0.9% higher from a year ago.

Eurozone unemployment ticked up to 7.4% in May from 7.3% in April. This was not as bad as economists feared. It stood at 7.3% at the end of last year. Many countries have moved to support workers furloughed rather than dismissed, and several governments have subsidized most of the cost.

The euro poked above $1.13 for the first time in six sessions but met sellers in the European morning ahead of the US jobs data. Note that the downtrend line from last month’s high comes in today just above $1.1290. The overnight unsecured rate (ESTR) fell to a record low yesterday and is hovering near there today (~-0.55%). Expiring options may be playing a role as well.

There is an option at $1.13 for 1.9 bln euros. Another is struck at $1.1275 (~508 mln euros) and $1.1250 (2.4 bln euros). Sterling is near a seven-day high (~$1.2525). It is overextended on an intraday basis and a push back toward $1.2450, where a roughly GBP610 mln option will expire today. Initial support may be encounters closer to $1.2475.


Market participants will not be bitten by the same dog twice. Last month, expecting a loss of 7.5 mln jobs, investors were shocked by the reported 2.5 mln increase. The median forecast in the Bloomberg survey anticipates a 3 million increase in non-farm payrolls. The average is a bit higher, a little above 3.3 mln. However, the wide range of 500k to 9 mln underscores the great uncertainty. The Bloomberg survey also shows the manufacturing sector growing almost 440k jobs, nearly twice the 225k reported for May.

The ADP report is not particularly helpful. It projected an increase of 2.37 mln jobs (~600k less than the median forecast), but the real story was the incredible revision to the May series. Instead of a loss of 2.76 mln jobs that were initially reported, ADP says that 3.065 mln private-sector jobs were created.

The data, including the unemployment rate, are likely to be skewed by self-reporting and composition issues. Weekly jobless claims for the week ending June 27 will be reported at the same time. Another 1.3 mln American are expected to have filed for unemployment insurance for the first time, which is staggering.

The May trade balance will be lost in the wake of the employment data. Improvement that had been seen late last year and earlier this year is being unwound quickly. Preliminary figures showed the goods deficit widening by $3.6 bln. Goods exports were off almost 35%. Imported goods were off about 23%. Besides, the value-added issue, for which there now an OECD database, another element that perplexes many are the terms of trade or an index of export prices to import prices. Imagine two countries trade two goods–raw materials and finished goods.

The change in the terms of trade, or relative prices, can and have historically had a significant impact on trade balances. Separately, May factory orders contain a little new information since a preliminary estimate of durable goods orders has already been released. A solid rebound after April’s 13% drop is anticipated. Note that yesterday’s auto sales report was a little stronger than expected, but it still left June sales off about 24.6% from last June. Japan reports its figures yesterday too. Auto sales in Japan were off about 26% year-over-year.

The Canadian dollar is unable to take advantage of the weaker US dollar tone today. Initial resistance for the greenback is seen near CAD1.3620. Above there, an option for around $535 mln at CAD1.3650 expires today. Support for the US dollar is now seen around CAD1.3560.

The greenback peaked at the end of June near MXN23.23, which was the high for the month. It reversed lower and has seen follow-through selling that has pushed it to almost MXN22.53 today. Initial support may be near the 20-day moving average (~MXN22.45). A break would lend credence to the ideas that the nearly month-long upside correction is indeed over.

For a look at all of today’s economic events, check out our economic calendar.

This article was written by Marc Chandler, MarctoMarket.

When Primary is Secondary

Energy and financials are the biggest drags, while real estate and information technology sectors are firm. All the markets had rallied in the Asia Pacific region, with the Nikkei and Australian equities leading with around 1.3% gains. US shares are trading lower. Bond markets remain quiet, and yields are little changed. The US 10-year benchmark is near 63 bp.

The US dollar is stronger against all the major currencies, with the dollar bloc and Scandis down the most, while the yen and Swiss franc are resilient. Emerging market currencies are mostly lower, though both the Chinese yuan and Indian rupee are firmer. Gold is straddling the $1770 area and is sticking close to the recent highs. August WTI posted an outside up day yesterday but continues to be stymied near $40.

Asia Pacific

China’s PMI was stronger than expected, but many observers are not convinced a robust recovery is underway. The manufacturing PMI rose to 50.9 from 50.6, and the non-manufacturing PMI rose to 54.4 from 53.6. This lifted the composite to 54.2 from 53.4. Export orders rose.

Japan reported a deterioration in its lower market and continued weakness in the industrial sector. The unemployment rate rose to 2.9%, its highest in three years, from 2.6% in April. The job-to-applicant ratio fell to 1.2 from 1.3. Industrial output slid 8.4% in May (month-over-month) after falling 9.8% in April. Separately, the BOJ boosted its bond-buying in July but did not increase the buying of the very long maturities, which seems to signal acceptance of a steeper curve. The 10-30 year spread was already at three-month highs.

South Korea’s industrial output fell 6.7% in May, matching the April decline. The weakness in Japan and South Korea’s industrial sector may also be impinging on China’s recovery. The central bank is preparing to buy US Treasuries on a repo basis from banks to boost liquidity.

As China approved the new security law in Hong Kong, the US announced export restrictions on sensitive technology and halting the export of defense equipment. Even if the US were levy tariffs on Hong Kong imports as it does the mainland, the impact might be modest–more symbolic than substantive. Hong Kong specializes in financial and logistic services, not manufactured good exports. The US ran a $26 bln trade surplus with Hong Kong last year, among the biggest bilateral surpluses. Estimates suggest that around 1300 US companies are represented in Hong Kong, 800 of which have regional headquarters.

The dollar is trading in the upper end of yesterday’s range against the Japanese yen when it peaked just shy of JPY107.90. It is in about a quarter of a yen range so far today. It has not traded above JPY108 since June 9. It has held above JPY107.50. There are $1.6 bln in options that will expire today struck between JPY107.35 and JPY107.50. For the fourth session, the Australian dollar has been capped in front of $0.6900.

There is a A$1.4 bln option there that expires today. The lower end of the consolidative range it has been stuck in for the last couple of weeks is about $0.6770-$0.6800. A break could signal another cent decline. The PBOC set the dollar’s reference rate a little stronger than the models implied and announced a 25 bp cut in the rediscount rate.


Last month the German Constitutional Court cast doubt on the legitimacy of the ECB’s Public Sector Purchase Program, the bond-buying operation that preceded the pandemic. It claimed that the European Court of Justice ruling exceeded its mandate. European and German officials have sought to address the former while ignoring the latter. It is not a small matter as no fewer than three German ECB officials, including a Weidmann’s predecessor at the hall of the Bundesbank, resigned in recent years over asset purchases. The ECB forwarded the documents to the Bundesbank, which gave them to the President of the Bundestag, providing evidence of its ongoing discussion over the proportionality of its response. A bill that broadly supported by the two main parties that make up the governing coalition, the Greens, and the FDP will be debated in the coming days. Its passage is virtually certain, which clears the way for the Bundesbank to continue to participate in the PSPP.

After Germany reported a larger than expected rise in May CPI, it was clear that deflation was going to be avoided for the euro area as a whole. This was born out in today’s report. Eurozone CPI rose by 0.3% in May and on a year-over-year basis. In April, it has fallen by 0.1% and was up 0.1% year-over-year. The core rate slipped to 0.8% from 0.9%.

UK Prime Minister Johnson is endorsing a “New Deal” for Britain. Extracts from his speech reflect the call to accelerate spending on roads, schools, and hospitals. Meanwhile, as the UK is accelerating its efforts re-open the economy, Leicester has had to re-close schools and non-essential shops after a flare-up in cases. Separately, it reported that Q1 GDP contracted by 2.2% rather than 2.0% of the earlier estimate. Consumption was the main culprit. It contracted by 2.9% instead of 1.7%. The external account was a larger drag, and government spending fell more than expected.

The euro stalled near $1.1290 yesterday and is testing the $1.12 area today. There is an option for 1.6 bln euros at $1.1185 that expires today and an option for 1.5 bln euros at $1.1250 that also rolls off today. Last week’s low was a touch below $1.1170, and below there, the $1.1150 area corresponds to the halfway point of the leg up from the dip below $1.09 on May 25.

Sterling is holding barely above yesterday’s low (~$1.2255) in the European morning, which is also the low for the month. The next big target on the downside is a little above $1.21, where the (50%) retracement objective of the rally off the March lows. However, the intraday technical indicators warn that a bounce is likely first. The $1.2300-$1.2320 area offers initial resistance now.


A few weeks after making its Secondary Market Corporate Credit Facility operational by purchasing first ETFs of corporate bonds, and then individual issues, the Federal Reserve announced yesterday that its Primary Market Corporate Credit Facility was now open. The primary facility allows the SPV the Fed has established to be the sole investor in a bond issuance or portions of bond issued or syndicated loans.

The Treasury Department seeded both of these facilities with a combined $75 bln from the CARES Act (initial allocation is $50 bln for the Primary facility and $25 bln for the secondary). The combined size of both facilities is initially capped at $750 bln. That means that the Primary facility will lever the Treasury’s money 10x while the Secondary facility will be levered 7x.

These facilities, like the others launched by the Fed, are temporary, and the purchases currently stop at the end of Q3. Through June 24, the Fed had bought a little less than $9 bln of corporate bonds and corporate bond ETFs. That said, as we have noted previously, many of the Fed’s emergency facilities have considerably greater capacity than has been tapped. Initiatives, like the repo operations and swap lines with foreign central banks, are being unwound as they are no longer needed. The Fed has re-embraced the ample reserve regime, and the dollar-funding markets are functioning again.

Among the efforts that have been pulled back, the Federal Reserve has slowed its Treasury purchases to $4 bln a day from a peak of $75 bln. Some observers worry that this means that it is only buying a quarter of the new issuance. That could be an issue at some juncture, but it is not now.

The US five-year yield fell to new record lows yesterday (~26.5 bp) The 10-year yield is below 65 bp, its lowest level since mid-May. The 10-year break-even (difference been the convention yield and the inflation-protected security) has crept higher from about 115 bp at the end of May to 133 bp now. It had finished January near 165 bp. The 2-10 year yield curve is virtually flat on the month a little below 15 bp.

The US reports house prices, the Chicago PMI, and the Conference Board’s consumer confidence. None are typically market-moving, even in the best of times. Quarter-end portfolio rebalancing and adjustments may dominate. Powell and Mnuchin testify before Congress. Powell’s prepared remarks have been published. In addition to recognizing the “extraordinary uncertainty,” the Fed Chief encourages Congress not to withdraw support prematurely.

Note that at the end of business today, the SBA will stop approving new Payroll Protection Program loans/grants. Reports suggest that nearly $135 bln is unused. Separately, Canada reports April GDP. It may be too historic to have much impact. Still, it is expected to have declined by more than 12% after the March contraction of 7.2%.

The US dollar is firm near CAD1.37. The high from last week is near CAD1.3715, and assuming this is surmounted, the next target is near CAD1.3770 and then CAD1.3830. Initial support is seen around CAD1.3650. The greenback is finishing the month with new highs against the Mexican peso (~MXN23.20). It had closed May near MXN22.1760. The next resistance area is near MXN23.30-MXN23.35. Initial support is expected in front of MXN22.90.

For a look at all of today’s economic events, check out our economic calendar.

This article was written by Marc Chandler, MarctoMarket.

Contagion Growth and Calendar-Effect Saps Investor Enthusiasm

The S&P 500 gapped lower yesterday and fell 2.6%, led by energy and airlines. The NASDAQ snapped an eight-day rally. Follow-through selling in the Asia Pacific region saw most markets fall at least 1%, with Korea and Australia seeing losses in excess of 2%. China, Hong Kong, and Taiwan markets were closed for national holidays.

European shares opened lower but have steadied after dropping about 2.8% yesterday. US shares are trading with a downside bias. Bonds are mostly little changed, while peripheral spreads in Europe are a little wider. The US 10-year yield is about 67 bp, the lower-end of a two-week range. The foreign exchange market is subdued.

The New Zealand dollar, which was hit the hardest yesterday (-1.25%), is leading the majors higher today with around a 0.4% gain. The dollar-bloc currencies and the Swedish krona, along with sterling, are firmer, while the euro, yen, and Swiss franc are nursing small losses. Emerging market currencies are mostly lower. Gold reached only $1780 yesterday before reversing lower. It found support above $1755 today. Oil is stabilizing after yesterday’s slide. The August WTI contract fell 5.8% yesterday and eased further today to almost $37 a barrel before returning to the $38-area.

Asia Pacific

Japan reported its All-Industries Activity Index plummeted 6.4% in April after a revised 3.4% decline in March (initially -3.8%). Japan’s economy contracted in Q4 19 and Q1 20, and a third quarterly decline is likely before a recovery in the second half.

The Philippines’ central bank surprised the market with a 50 bp rate cut. The overnight deposit rate sits at 1.75%, and the overnight borrowing rate is 2.25%. The market seemed to have been split between no change and a 25 bp cut. Monetary policy is bearing the brunt as the fiscal response has been limited. The central bank has cut rates by 150 bp in the past three meetings, cut reserve ratios, and provided liquidity. With inflation near 2%, the central bank may be hesitant to cut rates further.

After falling to almost JPY106 on June 23, perhaps linked to yen-demand related to Softbank divestiture of T-Mobile, the dollar recovered yesterday and extended those gains today to almost JPY107.30, its highest level since the middle of last week. There is an option for about $500 mln at JPY107.40 that expires today, and another one at JPY107.00 for around $475 mln. The JPY107.50-JPY107.65 area may offer formidable near-term resistance. Australia reported its largest single-day increase in infects in a couple of months, but Aussie found support near $0.6850 after peaking earlier this week around $0.6975. Look for offers in the $0.6880-$0.6900 to cap it today.


French President Macron has proposed a new furlough program that could cover a large share of lost income for up to two years starting next month. If employers and unions agree on fewer hours to protect job security, the government will pay 85% of the costs for up to two years. The government would cover 80% of the deals struck after October 1. The government will also foot 80% of the bill for re-training.

The ECB took a fresh initiative today that caught the market by surprise and is helping lift the European financial shares today. The central bank will establish a new precautionary facility to provide euros to central banks outside of EMU to help address liquidity issues that may arise from the crisis. The new backstop, EUREP, will be available until the middle of next year. It will lend euros against collateral of euro-denominated paper from eurozone governments and supranationals. This is an important initiative. The ECB had been criticized during the Great Financial Crisis for not doing enough to help ease the liquidity crisis in eastern and central Europe.

The ECB will reportedly give the Bundesbank documents that it had previously shared with the European Court of Justice regarding its considerations of proportionality. The Bundesbank will then share with the German parliament. While this all seems very rational, the problem is that it still allows the German court ruling to impinge on the European Court of Justice ruling, and leaves open the challenge to the primacy of EU law. Separately, note that Macron and Merkel will meet on June 27, apparently to talk about German taking over the rotating EU presidency in H2 and the EU Recovery Fund. Lastly, despite cries that the US decision to remove troops from Germany was an “abandonment” of Europe, there are reports today suggesting a redeployment, like we suggested, to Poland.

The euro peaked Tuesday near $1.1350 and fell to about $1.1250 yesterday and a little below $1.1220 today, where a 775 mln euro option expires today. The $1.1200 area itself may be more formidable. There is a 1.6 mln euro option there today that rolls off and an expiring 1.9 bln euro option there tomorrow. Initial resistance is now seen near $1.1240 and then $1.1260.

Sterling found support ahead of $1.24 in Asia and early European activity today after peaking this week near $1.2550. However, the buying interest faded around $1.2465, and another try at $1.2400 looks likely. Note that Turkey’s central bank decision on rates is still awaited. It is expected to announce a 25 bp rate cut to bring the one-week repo rate to 8%. The lira is slightly weaker for the third consecutive session.


Fitch took away Canada’s AAA rating yesterday, citing the pandemic-inspired increase in the country’s deficit and debt. The other two major rating agencies see Canada as a triple-A credit. Fitch says almost, but not quite at AA+. This year’s deficit of around 12.5% this year (~1% in 2019) will lift Canada’s debt to about 115% of GDP. It leaves Germany as the only AAA-rated sovereign by the three main agencies in the G7.

The market may not have been surprised as much as some media outlets suggest. As investors and economists thought through the implications of Canada’s fiscal response, it was not so far-fetched. We had highlighted the risk in our May monthly. If anything, after the announcement, the pullback in the Canadian dollar accelerated. The 10-year yield finished unchanged a little below 55 bp. Owing to a rise in the consumer staple sector, the S&P/Toronto Stock Composite Index fell by around 1.75% (S&P 500 fell by about 2.6%).

The US reports weekly jobless claims, which have been stickier than many expect. More than 1.3 mln new filings are expected after 1.5 mln previously. May durable goods orders are expected to have jumped back in May (~10%) after collapsing by 17.7% in April. Also, the May trade balance will be reported. The deficit is expected to be around $68 bln. The GDP estimate for Q1 is unlikely to change much from the 5% previously reported. Mexico reports April retail sales (median forecast in the Bloomberg survey is for an 18% decline (-0.8% in March). However, the highlight for Mexico today will be the Banxico rate decision. Most expect a 50 bp cut to bring the overnight target to 5.0%.

The US dollar bottomed near CAD1.3485 two days ago and rose to CAD1.3640 yesterday. It edged up to CAD1.3665 in Asia before pulling back to almost CAD1.3600 in Europe. It could ease a little more, but the upside may be the path of least resistance, especially if equities remain soft.

The greenback made a marginal new high for the month against the Mexican peso, reaching almost MXN22.9750. A break of MXN23.00 would initially target the MXN23.25 area. Support is seen around MXN22.70. The S&P 500 approached its 200-day moving average (~3020) yesterday, and a break targets the month’s low set on June 15 around 2965.50. On the upside, the gap created by yesterday’s sharply lower opening (~3115 to 3127) offers important resistance.

For a look at all of today’s economic events, check out our economic calendar.

This article was written by Marc Chandler, MarctoMarket.

Dollar Begins Week on Back Foot

Europe’s Dow Jones Stoxx 600 is recovering from an early dip to four-day lows. US shares are trading higher after the S&P 500 closed below 3100 ahead of the weekend after reaching 3155. That may provide a cap, while it takes a move above 3181.50 to signal the bull move has resumed. The bond market is quiet, and peripheral European bonds continue to outperform the core. The US benchmark is virtually unchanged near 69 bp. The dollar is softer, with the Scandis and Antipodeans leading the move.

The dollar is though holding its own against the Japanese yen. Emerging market currencies are mixed. The Mexican peso and central European currencies are advancing, while Asian currencies, Turkey, and South Africa are heavy. Gold set a new high for the month (~$1758) and backed off before testing last month’s high (~$1765). August WTI continues to flirt with the $40-a-barrel level but has been unable to close above it.

Asia Pacific

China suspended some imports from Tyson Foods after a cluster of the virus was discovered. A Pepsi snack-making factory was closed Sunday because of the virus. The number of new cases in Beijing reportedly declined. Germany is also experiencing a flare-up of cases and infections rose Sunday for the third consecutive day. US infections rose by the most in three weeks on Saturday, concentrated in the Sun-Belt states and California. Brazil has over a million cases, and fatalities surpassed 50k. Mexico has reported its second-highest daily deaths.

Hong Kong unions and students failed to get the support that they required to strike against the security law. At the same time, the coronavirus restrictions prohibit large gatherings and prevent securing the necessary permits. A new spark may be needed, but the kindling remains dry. The first actions under the security law could serve the purpose.

Still, some suspect that the lack of widespread demonstrations will hint at a different strategy: emigration. Meanwhile, Hong Kong forwards, which is where the negative pressure is seen, normalized or nearly so, but appear poised to rise again. Separately, HKMA has had to fight a sustained campaign to prevent the US dollar from falling through its lower end of the currency band. The pressure comes from the mainland for HK IPOs and some flows drawn to the higher yields.

Intra-regional Asian trade remains challenged. South Korea reported exports in the first 20-days of June fell 12% year-over-year, which represents an improvement of over a nearly 20% fall in the first 20-days of May. However, the slowing chip exports (2.6% vs. 13.4%) was troubling and may have weighed on both the Kospi and the won. On Saturday, Taiwan disappointed with a May export orders rose 0.4% year-over-year, after a 2.3% gain in April.

The dollar has been confined to about a quarter of a yen below JPY107.00. It is going nowhere quickly. Last week’s range was roughly JPY106.65-JPY107.65. The Australian dollar finished last week on its lows, and initial follow-through selling saw it reach a five-day low near $0.6800 before rebounding. The pre-weekend high was set just north of $0.6910, and a push through here today, especially on a closing basis, would be constructive.

That said, the intraday technicals warn that it may be stretched. The PBOC set the dollar’s reference rate a touch firmer than the models suggested and kept its Loan Prime Rate unchanged. Note that the PBOC is one of the few large central banks not engaged in quantitative easing (long-term asset purchases), and the premium it pays over 10-year Treasuries is around 220 bp, the most since 2011.


Wirecard, the wunderkind of German finance, collapsed. The CEO resigned, unable to account for a quarter of the balance sheet (~1.9 bln euros). Ahead of the weekend, its bonds offered similar yields as Hertz, according to Bloomberg. This is the third corporate challenge to the German corporate governance and regulatory regime after the emissions scandal and the billions in fines and legal settlements levied against Deutsche Bank.

The new Bank of England Governor Bailey has indicated his first break from his predecessor Carney. Carney wanted to wait until rates had risen to 1.5% before allowing the balance sheet to shrink. Bailey argued that the balance sheet should be trimmed before rates increase. It still seems the eventuality is still some time off, as in more than a year.

Meanwhile, the Chancellor of the Exchequer Sunak is considering an emerging cut in the value-added tax to help spur the economy. Separately, the UK signaled it will relax trade controls that will apply to the EU (but not Northern Ireland) for the first half of next year and will boost spending by GBP50 mln to prepare the necessary customs intermediaries. It may need to hire 50k more custom agents. Sensitive products that involve products of plant or animal origins, and especially poultry and fish, may still face delays. Prime Minister Johnson suggests an agreement by the end of next month is possible.

Italy is also reportedly considering an emergency cut in the VAT for some strikes parts of the economy, including restaurants, tourism, clothing, and cars. It is preparing for a larger budget shortfall this year. Separately, the ECB’s record (minutes) from its recent meeting will be published later this week, and it may contain a section that discusses proportionality that the Bundesbank can pass on to Berlin to address the German Constitutional Court ruling. However, if it is too overt, it would seem to give credence to the idea that the German Constitutional Court can overrule the European Court of Justice.

The euro held its pre-weekend low by a hundredth of a penny ( a little below $1.1170), according to Bloomberg, and rose briefly through $1.1225in early European turnover. The intraday technicals are stretched, and optionality may help cap the upside. There are options for about 1.75 bln euros struck in the $1.1200-$1.1205 area that expire today and about 850 mln more euros at $1.1250. In addition, there are options for 1.8 bln euros at GBP0.9060 that expire today. The euro ran out of stream near GBP0.9070 earlier. The pre-weekend low was near GBP0.9000, and that maybe the near-term risk. Sterling itself is snapping a four-day downdraft against the dollar after first extending the losses to about $1.2335 before finding bids that lifted a cent off its lows before sellers reemerged.


The fact that the Fed’s balance sheet shrank last week for the first time since the end of February has little significance. The normalization of market functions has reduced the need for the swap lines by foreign central banks. Only a fraction of the maturing swaps is rolled forward. Still, the signal should not be lost. The Federal Reserve still has the monetary spigot wide open, and its balance sheet will increase. Treasuries, with purchases at $80 bln a month, will account more a smaller part of the new asset accumulation. Balance sheet growth is still the signal. Don’t be distracted by the noise. Meanwhile, the Treasury will be bringing to market $155 bln in coupons and around $170 bln in bills this week. Into the end of the month, quarter-end, some auctions may appear “sloppy.”

The US reports existing home sales for May. Recall last week, housing starts disappointed. Existing home sales are expected to have fallen for the third consecutive month. The anticipated pace of 4.09 mln (seasonally-adjusted annual rate) would be the lowest since 2011. Tomorrow sees the preliminary PMI, where the composite is expected to rise for the second consecutive month, and the median forecast in the Bloomberg survey is for the manufacturing PMI to reach the 50-level. Canada has a light economic calendar this week. The highlight for Mexico is the Banxico meeting on June 25 that is expected to result in a 50 bp rate cut (to 5.0%). Note that Argentina has extended the deadline for bondholders for the fifth time, now until late July, as it tries to reschedule its dollar debt.

The US dollar rose to a five-day high of CAD1.3630 earlier today but has come back offered. It was sold down to about CAD1.3560 in the European morning. The intraday technical indicators warn that the greenback may recover in the North American morning. The CAD1.3600 area is the middle of today’s range. The dollar traded in MXN22.1960 to almost MXN22.83 range on June 18 and remained in the range ahead of the weekend and thus far today. It needs to resurface above MXN23.00 to confirm a low is in place.

For a look at all of today’s economic events, check out our economic calendar.

This article was written by Marc Chandler, MarctoMarket.

Corrective Forces Still Dominate

Markets were calmer. The three-month implied volatility of all the major currencies fell, led by the usually high-beta dollar bloc. The VIX, which measures the volatility of the S&P 500 snapped a five-day decline ahead of the weekend. The volatility of the Treasury market (MOVE) also eased. The risk is of higher volatility into the end of what has been an historic first half.

The continued support that central banks and governments are providing underpins risk assets. However, a technical correction was signaled, and the momentum indicators warn it may not be complete. One symptom of this in the foreign exchange market is the fragmentation of some close currencies pairs. The Norwegian krone was the best performer of the majors, rising about 1% against the dollar, while the Swedish krona was the second-worst of the major currencies, losing about 0.8%.

The Australian dollar’s roughly 0.4% gain put it in third place (behind Nokkie and the yen), while the Kiwi was essentially flat in the middle of the pack. And consider that: The top two majors consisted of one risk-on currency and one risk-off currency. We see this move as corrective in nature, and therefore, want to remain sensitive to downside targets and levels that would suggest what we think is the underlying trend is resuming.

Dollar Index

The Dollar Index reached 97.70 ahead of the weekend, its highest level in two weeks. We had suggested it was retracing the drop that began on May 25 (~100.00), and at the high, it had retraced almost half of these losses. The next upside target is in the 97.85-98.15 area. The MACD and Slow Stochastic are trending higher, and the euro is near the middle of its Bollinger Band (i.e., close to the 20-day moving average). A week and a half uptrend line starts the new week around 97.15, and a break of 96.80 would likely confirm the correction is over.


The single currency was sold from about $1.1420 on June 10 to a little below $1.1170 before the weekend, and settled below $1.12 for the first time in nearly three weeks. Has the correction been completed, and is the euro ready to resume is recovery? The $1.1215 area was our initial retracement objective.

The next target is closer to $1.1150, and as we suggested last week, a move toward $1.1025 cannot be ruled out yet. The MACD and Slow Stochastic have only recently turned down from extreme levels. The downtrend line off the month’s high starts the new week near $1.1285, and the $1.1305-level is the midway point of the decline. A move above there warns of a running start back to the highs.

Japanese Yen

Despite gains in equities, the dollar could not sustain even modest upticks against the yen. It finished the week near its lows and below JPY107 for the first time in six weeks. Some attributed the yen’s strength to real or anticipated repatriation related to Softbank’s divestment of part of its stake in T-Mobile (~$20 bln). For a week and a half, the dollar has barely ventured out of a JPY106.50-JPY107.50 range. A half a yen range extension in either direction still leaves flat. The momentum indicators signals are not clear, but on balance, buying into dollar weakness may be preferred.

Britsh Pound

A relatively upbeat central bank, which boosted the bond-buying by the minimum expected (GBP100 bln), with a single dissent by the chief economist in favor of steady policy, signs of a thaw in UK-EU trade talks, and considerably stronger than expected rise in May retail sales (12%), were unable to lend sterling support. It reached a high near $1.2690 on Tuesday (June 16) and finished the week below $1.24, seeing its lowest level (~$1.2345) since June 1.

We had thought sterling was also correcting the move that began on May 25, but with its pre-weekend losses, it surpassed the (61.8%) retracement objective (~$1.2410). If instead, if it is correcting the larger move that began on May 15, sterling met the objective. Still, the momentum indicators are falling quickly, and the trend line from the March and May lows was broken on a closing basis on June 18 and served as resistance on June 19. It will start next week near $1.2475. The next technical target on the downside is around $1.2280, and if that goes, a test on the mid-May lows near $1.2150 would come into view.

Canadian Dollar

The greenback has been mired in the June 16 range (~CAD1.3500 to CAD1.3625) for the last few sessions. The momentum indicators continue to favor the Big Dollar. Perhaps a close above the 20-day moving average (~CAD1.3600) would help recharge the recovery. On the other hand, it requires a move through CAD1.38 to signal anything important. On the downside, a break of the CAD1.3460-CAD1.3480 area warns the US dollar’s downtrend may be resuming.

Australian Dollar

The Australian dollar has also been consolidating within its June 16 range (~$0.6835-$0.6875) for the last few sessions. The sell-off to start the week, violated the trendline off the March and May low, but follow-through selling fizzled near $0.6785, the (50%) retracement objective of the leg up since May 25. The momentum indicators suggest the correction may not be over. A move above $0.6915 would suggest a new test on the $0.7000 area.

Mexican Peso

The dollar closed higher against the peso for the second consecutive week. Except for a couple hours on June 16, the greenback stayed on the MXN22-handle last week. The momentum indicators are giving conflicting signals. The MACD is pointing higher, while the Slow Stochastic is leveling off. The upper Bollinger Band (two standard deviations above the 20-day moving average) is near MXN22.8550.

The near-term trend line begins the new week a little below MXN22.24. Banxico is widely expected to deliver a 50 bp rate cut next week. Assuming the central bank says nothing to discourage expectations for additional monetary stimulus, Mexico’s cites (bills) that pay a little less than 5% will continue to saw funds.

Chinese Yuan

The US dollar traded quietly between CNY7.07 and CNY7.10 last week. It finished near the lows, but the dollar’s better tone in North America suggests a breakout might not be imminent. And even if it does, it is still stable in a CNY7.05-CNY7.12 range. Although the PBOC cut the 14-day repo rate by 20 bp, the benchmark one-year Loan Prime Rate may be unchanged at 3.85% when it set on June 22 via submissions by banks. Reaffirmation of the commitment to the Phase 1 trade deal may have blunted some harsher rhetoric from the US.


The precious metal firmed above $1745 before the weekend, which is the upper end of its range ($1700+/- $50). It posted its highest weekly close since mid-May. The momentum indicators caution against playing for a breakout. Recall in mid-May, gold pushed to $1765 and reversed lower. The MACD is neutral, and the Slow Stochastic looks poised to turn lower. That said, many are looking for a move to $1800. In the Great Financial Crisis, gold bottomed around Lehman’s demise, but it did not get above the March 08 high a little above $1000 until Q4 09.


August WTI poked above $40.60 ahead of the weekend and reversed lower. It was almost a repeat of the June 8 price action, however, this time it closed more than a dollar above the intrasession of seen near $38.60. News that Arizona and Florida reported the Covid cases since the crisis began weakened hopes that an increase in demand and the heightened compliance with OPEC+ cuts.

The momentum indicators are not generating a strong signal, with the MACD not confirming the high and the Slow Stochastic leveling off after pulling back from the overextended territory. The stop on shorts is clear, at the potential double high near $40.70. A move through there would bring it into a band of resistance that extends from around $41.25 to $42.20 On a pullback, the $34.60 area is important, and a break of it would confirm the double top and suggest a measuring objective around $29.50.

US Rates

The US two and 10-year yields were virtually unchanged last week at 18 bp and 70 bp, respectively. The Federal Reserve and foreign central banks continue to buy Treasuries on a weekly basis. The Treasury’s high cash balances should begin easing when Q3 gets underway, but in the short-term, it is raising more money than it is spending. Consider next week’s deluge. It will raise about $155 bln in coupons and around $170 bln in bills. That said, our near-term bias is toward lower rates.

S&P 500

Two bearish technical developments drive our view. The first is is the four-day island top that is marked by the gap lower opening of June 11. The gap was entered last week but not closed. The top of it is near 3181.50. The second was the downside reversal after making a marginal new high since June 10 and entering that gap a bit more. It broke below the previous session’s low (3093.50) but settled a little above it. Initial support is near 3060 and if it does not hold 3020-3040 beckons.

For a look at all of today’s economic events, check out our economic calendar.

This article was written by Marc Chandler, MarctoMarket.

Markets Finding it Difficult to Rebuild Bullish Momentum

Asia Pacific equities were mixed, though, of note, China, Hong Kong, Taiwan, and Indian markets rose. European bourses are down small, and US stocks have turned lower as well. Bond markets firm, though and peripheral bonds are outperforming after the results of the ECB’s TLTRO operation. The US 10-year yield is hovering around 71 bp.

The dollar has a firmer bias. The currency market showed little reaction to the Swiss National Bank and Norway’s Norges Bank leaving policy unchanged, while sterling is around 0.5% lower ahead of the Bank of England meeting outcome. Emerging market currencies are firm.

The South Korean won recouped most of yesterday’s losses, and the Indian rupee and Indian bonds shrugged off Fitch’s decision to cut its outlook to negative from stable (BBB-). Gold has edged up but is flat on the week, and oil prices are recovering from yesterday’s decline. July WTI is near $38.40, putting it up about $2 on the week.

Asia Pacific

There is too much being made of the fact that China did not appeal the WTO decision that it is not automatically a market economy. On procedural grounds, we have to recognize that the appellate process has been eviscerated by the US, blocking the appointment of new judges. On substantive grounds, nothing changes. Europe and the US act as if China is not a market economy, which means it is easier to take anti-dumping action against it.

The US tariffs, mostly still in place under the two-year Phase 1 agreement, seem to make China’s market status a moot point. While Europe has not erected new tariff barriers, it is tightening its direct investment rules, making it more difficult for (Chinese) state-owned businesses. Meanwhile, US officials have indicated they will change their WTO tariff schedule. The real take away is that in the new Cold War will be waged on many fronts, including the multilateral institutions.

Some link the demand for yen that saw the dollar fall to JPY106.70 to approach last week’s lows in early Tokyo to the news that Softbank may repatriate the proceeds from its sale of 2/3 of its holding in T-Mobile (~$20 bln). Separately, the Nikkei reported that the Japanese government may lift its economic assessment that will be issued tomorrow.

Australia’s jobs data was worse than expected. The country lost almost three times more jobs than economists projected. Employment fell by nearly 228k jobs in May. It has lost a revised 607k jobs in April. The unemployment rate was revised to 6.4% in April from 6.2% and rose to 7.1% in May. The participation rate fell to 62.9% from 63.6%. The job losses were concentrated among part-time positions (~-138k), but the 89k loss of full-time positions was greater than the total job loss economists forecast. Separately, New Zealand reported Q1 GDP contracted by 1.6% compared with forecasts of a 1% decline.

It is the seventh session that the dollar has not traded above JPY108, and today it is struggling to sustain upticks above JPY107.00. Below the JPY106.70 session low are the one-month lows set last week a little under JPY106.60. However, stronger support is not seen until closer to JPY106.00. The Australian dollar recovered from the initial selling that took it to about $0.6840.

The week’s low, seen Monday near $0.6775, and the 20-day moving average is around $0.6825 today. Resistance is seen ahead of $0.6925, where a A$530 mln option is set to expire. The PBOC set the dollar’s reference rate a little above the bank models, but the greenback is softer for a third consecutive session. Hong Kong Monetary Authority continues to intervene to support the dollar at the lower end of the band. Still, the smaller amount may be among the first signs that pressure is easing following the recent IPOs.


The Bank of England is expected to keep its base rate at 10 bp, but increase the amount of bonds it is buying. While two dissents last month favored a GBP100 bln increase, many expect a larger amount to be agreed upon shortly. Note that the earlier this week, the Bank of Japan boosted the zero-rate loans it will make to corporations from JPY75 trillion to JPY110 trillion. The Federal Reserve announced the launching of the Main Street lending facility for small and medium-sized businesses, and its corporate bond-buying program would include individual issues (not just ETFs) according to a new index it created. And then there is the ECB.

The ECB allotted 1.31 trillion euros in its three-year targeted lending program. The three-year loans will be at a rate of minus 100 bp if certain lending targets are achieved. The loans can also be repaid after one year. Banks rolled previous loans into this new generous facility, but there was net new borrowing of 548.5 bln euros, which was a bit more than expected (~400 bln). The ECB’s balance sheet will rise by this net figure.

The Swiss National Bank left its policy rate at minus 75 bp and underscored that its main tool to counter the franc’s strength will be intervention. The euro found support near CHF1.0660, just above the low for the month near CHF1.0650 seen last week. Norway’s Norges Bank also did not change policy and indicated that it anticipated neither asset purchases nor negative rates. However, the forward guidance it provided implies no change in rates for two years. Separately, recall that the central bank sells krone every day. Here in June, it sells NOK2.3 bln a day after NOK2.1 bln a day in May. The krone rallied after the central bank announcement.

The euro is trading in a 15-tick range on either side of $1.1245, where a 640 mln euro option expires today. Another option for a little more than 710 mln euros is struck at $1.1260 and also expires today. The narrowing peripheral bond premium over Germany coincides with a firmer euro. Yesterday’s high was a little below $1.13, and that may be sufficient to cap the single currency today. Sterling is slipping through $1.25 ahead of the outcome of the BOE meeting.

The week’s low was set Monday near $1.2455, but then it was above the 20-day moving average, which now is near $1.25, which is also the (50%) retracement objective of the rally since May 25. The next retracement is near $1.2415, but we suspect sterling will stabilize after the BOE meeting.


The US formally announced it was withdrawing from negotiations on efforts to coordinate a digital tax. It is important because it is a front in the US-Europe trade confrontation that is simmering below the surface. It erupted recently as part of the US decision to withdraw troops from Germany. The geopolitical signal was exaggerated. The US troops act as a tripwire, and the precise number is not so important. The importance of the move lies in how it was done (unilaterally) and the reasons (German not respecting its commitment to boost NATO spending, the gas pipeline from Russia, and unspecified German trade practices).

Most countries considering a digital tax are in Europe, but there are a few, including India, which broadened theirs a couple months ago, Indonesia, and Brazil. The US appears to be blocking efforts to coordinate under the OECD. Countries want to tax internet companies based on the sales within their borders and have a minimum global tax to minimize incentives for tax arbitrage.

While Canada and Mexico’s calendars are light, the US reports the June Philadelphia Fed manufacturing survey, which is expected to rise for the second consecutive month, and the weekly jobless claims that will likely continue to decline from still high levels. May’s Index of Leading Economic Indicators is expected to have jumped by around 2.4%. During the session, OPEC will report is compliance assessment, and it should improve now that Iraq seems to be adhering to the agreement. Lastly, we note that as anticipated, Brazil delivered a 75 bp rate cut yesterday and seemed to suggest that there was still room for another small cut. Talks between Argentina and its creditors stalled again.

The US dollar continues to trade within Tuesday’s range against the Canadian dollar (~CAD1.3505-CAD1.3625). The week’s high was set on Monday, near CAD1.3685. The intraday technicals suggest the greenback’s upside may be favored in the early North American activity. Meanwhile, the US dollar is near the middle of this week’s range against the Mexican peso (~MXN21.8950-MXN22.75), and that range is likely to hold.

Lastly, turning to the S&P 500, we note that the gap created by the lower opening a week ago remains unfilled and casts a pall over the market. The gap extends to 3181.50. Also adding to the technical caution is the fact that the five-day moving average has slipped below the 20-day moving average for the first time since early April, illustrating the corrective/consolidative phase it has entered.

For a look at all of today’s economic events, check out our economic calendar.

This article was written by Marc Chandler, MarctoMarket.

China’s Digital Currency

(co-authored with Bob Lynch, a global macro strategist, focusing on currencies, interest rates, and cross-asset solutions. He consults and provides investment advisory for institutional money managers, corporations, family offices, and high net worth individuals. He previously worked with J.P. Morgan Private Bank, HSBC, and BNP Paribas. )

China’s digital currency project has been underway since 2014

Reports just before the COVID outbreak suggested it could be introduced as soon as this year. Under normal circumstances, a successful digital currency would reduce payment frictions and demonstrate China’s ongoing efforts in technological advancement. But in the post-COVID era, when reviving economic growth will be paramount, the potential for enhanced commerce/consumption via a streamlined payment system becomes even more appealing.

To achieve relative stability, the digital currency would have to be more like a “stablecoin,” linking the currency’s value 1:1 to the renminbi and essentially creating a digital yuan. That construct would likely be more stable than one linked to a basket of currencies such as Facebook’s proposed Libra project, let alone one without any fiat currency linkages such as Bitcoin or Ethereum. It would be tantamount to a digital expression of the paper and coin form.

It is not yet clear exactly how the digital yuan will work

Likely it will be an app on a smartphone that one registers. There would, of course, be robust security and a record of every transaction both locally and someplace else. Henceforth when you get paid or receive funds, it would go directly into your secured account. When you pay, it would be withdrawn from the same account.

Chinese consumers are already more familiar than many westerners with paying for nearly everything from a smartphone. Alipay is ubiquitous, and a digital currency seems to be a modest evolutionary step. Even now, tourists in China need to access the local apps to do basic things, like secure a ride or purchase food or drink in many places.

The sheer size of China’s population and economy gives it a unique advantage to establish scale, turnover, and usage of a new digital currency. Sweden plans to introduce its own digital krona next year as part of its broader effort to ban cash transactions in 2023. Still, Sweden is a relatively small economy with a fairly homogeneous population where social trust measures run high.

China is pushing hard to be the first large country to adopt a digital currency, and the pandemic may accelerate its efforts. There may not be the same kind of first-mover advantage with a digital currency as there was with selling books on the internet. Nonetheless, a digital currency, based on its patented technologies, is a prestigious accomplishment for the status-conscious Chinese elite.

A digital currency recognizes that a payment system is a utility. In an earlier era, electricity, gas, oil, coal, telephones were utilities, but perhaps we need to re-think what are their modern equivalents. It replaces this function of banks and credit cards and their derivatives (payment systems that depend on them). It allows for instantaneous payments. It squeezes the underground economy, even if human ingenuity finds some workarounds. Tax avoidance is also made more difficult.

At the same time, in an illiberal society, the digital currency can also become an instrument that extends command and control. Every transaction now becomes part of the public record. The line, already blurred between what is personal/private, could be obliterated by the digital currency. The surveillance state can be further empowered. In a society that rates social trust, is it a stretch to think about fines as well as rewards?

One thing that the digital currency will not do is to make the yuan convertible. And barring full convertibility, it will not have any meaningful bearing on the role of the yuan in the global economy. It is currently a [very] minor reserve currency, though included in SDRs. It has less than a 2% share of SWIFT transactions. The Dim Sum bond market and yuan deposits in Hong Kong are well off their highs set several years ago. A digital yuan by itself does nothing to enhance its position in the rivalry with the dollar.

Moreover, the COVID-induced financial market stresses—like the 2008 financial crisis—demonstrated the global market’s preference for the US dollars during periods of extreme duress and uncertainty. That’s not merely a function of inertia; it also reflects the market’s confidence in the transparency and management of US currency, monetary and fiscal policies, relative to those in most of the rest of the world.

A successful, digital, convertible yuan could advance the internationalization of the renminbi. But China’s management of its financial system and economy as well as its interactions in global affairs do not consistently build the kind of trust and confidence that global investors have favored most in times of severe financial stresses.

For a look at all of today’s economic events, check out our economic calendar.

This article was written by Marc Chandler, MarctoMarket.

Dollar’s Upside Correction to Continue

The Federal Reserve confirmed what investors already knew. After all, the implied interest rates for the December 2021 fed funds futures implied a negative yield at the start of the month, and a rate hike was not reflected in the derivatives markets until 2023.

It may not have been what the Fed said or did, but simply the old “buy the rumor sell the fact” trigger of what we have suggested the charts implied: the bull run in the risk assets was getting stretched. Nor can the increase in the Covid cases as stay-at-home orders are rescinded really be much of surprise. After all, the virus has not been cured, and shutting down the economy was a way to avoid overburdening the public health infrastructure. Moreover, some assets markets had rallied, like the equities and currencies in Latam, as cases and fatalities increased.

Although markets stabilized ahead of the weekend after the drama on June 11, we suspect that corrective forces will carry over into next week. Below we suggest some corrective targets while being sensitive to levels that would indicate the trend moves have resumed.

Dollar Index

The MACD and Slow Stochastic indicators have begun to turn higher. The 97.35 area was overcome ahead of the weekend—the next target immediate target 98.00. The 200-day moving average and the (61.8%) retracement of the leg down since the May 25 high (~100.00) are found near 98.40. A convincing move above there would be significant. A break of the 96.20-96.30 area would likely signal the end of the corrective bounce.


The single currency peaked in the middle of the week a little above $1.1420 and pulled back to nearly $1.1210 before the weekend. The euro tried to rally after the June 11 drop and made it up to $1.1340, stopping shy of the area (~$1.1350-$1.1375) that would have signaled the resumption of the rally. The Slow Stochastic did not confirm the high, and the MACD is turning lower.

The next important target is near $1.1150, and then, possibly, a test on the 200-day moving average (~$1.1025). Three-month implied volatility has begun trending higher, and the risk-reversals (skew between calls and puts) have also started increasing. This suggests that euro calls are being bought and may reflect rolling spot positions into calls by levered accounts.

Japanese Yen

After reaching almost JPY110.00 after the US employment data on June 5, the dollar backed off in the first four sessions last week before stabilizing ahead of the weekend. The greenback found bids near JPY106.60. A break would signal a test on JPY106, which is more significant support. It recovered to around JPY107.60 ahead of the weekend.

The Slow Stochastic is still headed lower while the MACD is still overextended after pulling back but looks to have flattened out. The JPY107.85 area is the first retracement objective (38.2%), and a move through there would signal an extended correction. The dollar would likely enter the JPY108.15-JPY108.55, which houses the other retracement objectives and the 200-day moving average.

British Pound

Sterling peaked in the middle of last week a little above $1.28. The trendline drawn from last December’s election high and the March high came in near $1.2855. It sold off on June 11 and was unable to sustain upticks ahead of the weekend, falling to $1.2475 area. The other important trendline is drawn off the March and May lows and begins next week around $1.24, which is also near the (61.8%) retracement objective of sterling’s rally since May 25. A break could signal a move toward $1.2180. The MACD and Slow Stochastic have turned down. It takes a move back above $1.2650 to stabilize the technical tone.

Canadian Dollar

The price action of the US dollar in the middle of last week seemed to be a bullish hammer candlestick forewarning of the bounce that lifted the greenback to CAD1.3665 before the weekend. It had made a three-month low near CAD1.3315 on June 10. The MACD and Slow Stochastic have turned higher. The CAD1.3680 area corresponds to the (50%) retracement of the decline since the May 22 high (~CAD1.4050) and the 20-day moving average. A move above there targets the CAD1.3800-CAD1.3830 area. On the other hand, a break of the CAD1.3450-CAD1.3470 warns the US dollar’s down move has resumed.

Australian Dollar

The drop in recent days from around $0.7060, the high for the year set on June 10 to $0.6800 ahead of the weekend, is likely to be only the first leg down in the Aussie’s long overdue correction. A move lower would violate an uptrend line drawn off the March panic lows. The MACD and Slow Stochastic have turned lower. If it is correcting the rally that began on May 15, then it met the initial (38.2%) retracement target. The next retracement target (50%) is around $0.6735, but we suspect the next retracement objective (61.8%) near $0.6655, a little below the 200-day moving average ($0.6665) may offer stronger support. A move above the $0.6950 undermines this bearish technical view.

Mexican Peso

The dollar put in the lows for the week prior to the FOMC meeting and on June 11. However, its recovery ahead of the weekend was sharp as it retraced half of the week’s loss in one fell swoop. That retracement objective was near MXN22.2050, held on a closing basis. A break of the MXN22.00 area would suggest the dollar’s downtrend has resumed. Nevertheless, the technical indicators suggest the upside correction of the dollar has just begun. The first leg of the correction was to almost MXN22.95, and the second one could target the MXN23.60 and possibly the MXN24.00 area.

Chinese Yuan

Chinese officials say that they want a stable currency, and many doubt them. Nevertheless, they have achieved it. The yuan fell almost 1.7% in Q1, which covers both the trade agreement with the US and the pandemic. So far this quarter, it is flat. However, this month it has gained about 0.75%, and the PBOC’s fixings seemed to be aimed at moderating the dollar’s decline. The dollar did fall to around CNY7.0550 last week, its lowest level since the end of April. As we have suggested, the technical indicators favor corrective dollar gains in the days ahead, and this could see it could rise toward CNY7.12.


The precious metal bounced off the $1670 area seen after the US employment data and reached almost $1745 when risk assets got hammered. It consolidated ahead of the weekend. Broadly speaking, gold remains in a two-month range of $1650 to $1750. The MACD and Slow Stochastic have room for another probe of the highs. In mid-May, when it pushed through the top, it got as far as $1765.40 before reversing lower. Above there, the bigger target is $1800. From the middle of March through the middle of May, the 30-day correlation between gold and the S&P 500 (percentage change) was positive, and it has switched to its more common relationship.


Two candlesticks bookend last week’s oil trade. The July contract began the week with a brief look above $40 a barrel and then beaten back, leaving a shooting star. Ahead of the weekend, the contract slipped below $34.50 before recovering smartly, leaving a bullish hammer candlestick. Nevertheless, the momentum indicators have turned lower and are still in overextended territory. This suggests that upticks are not to be trusted. The $37.50 area may offer a nearby cap. A break of that $34.50 area could signal a pullback toward $32.

US Rates

After rising every day in the first week of June, the US 10-year yield fell for the first four sessions last week before stabilizing on Friday. The yield fell almost 20 bp last week. It had been flirting with 90 bp after the employment data, having reached 65 bp in the equity carnage on June 11. The momentum indicators on the futures contract are positioned for additional gains. However, the economic data that will likely be reported will likely fan hopes of an accelerating recovery. Most of the decline in the 10-year yield was not matched by the short-end, and the 2-10 year yield curve flattened by almost 18 bp last week.

S&P 500

The gap lower on June 11 is a critical technical development, leaving a four-day island top in its wake. The gap (~3123.5-3181.50) may not be filled any time soon. If the S&P 500 is retracing the last leg up from the middle of May, then it met the 50% target near 3000 (200-day moving average is 3015), overshooting it a little on an intraday basis ahead of the weekend. The next retracement target (61.8%) is near 2945. If instead, it is correcting the move off March’s low, the initial retracement objective (38.2%) is near 2835. The MACD and Slow Stochastic have just turned lower, suggest the deeper correction may be more likely.

For a look at all of today’s economic events, check out our economic calendar.

This article was written by Marc Chandler, MarctoMarket.

Big Week Ahead

The ECB offers its most generous long-term targeted loan that is bound to see earlier loans rolled into this new one. Further evidence that the world’s largest economy has taken a baby step toward recovery.

Let’s unpack next week’s events. But first, let’s note that the events will take place as the recovery in risk assets appears to have come to an end with a flourish last week. That correction, which seemed overdue, appears to have more room to run. Also, the Covid virus continues to spread globally, and businesses, investors, and policymakers are sensitive to the so-called second-wave as countries and states re-open. Below are thumbnail sketches of the events and data that shape the macro picture.

EU Summit

The European Council (heads of state) hold a virtual meeting on June 18 to ostensibly discuss the EU’s May 27 Recovery Fund proposal. Some have heralded the proposal as a key turning point in the evolution of Europe, and the possibility of a so-called Hamiltonian moment, a major set toward fiscal union, has been suggested. We have been less sanguine; recognizing the potential scaffolding for a greater union, but also that projecting emergency actions into the future is fraught with danger.

Austria and Denmark, which have pushed back against grants instead of loans, could be won over by assurances that their rebates will remain intact. Others, including Eastern and Central European members, may be more difficult to persuade. Although expectations are running high, we suspect an agreement will remain elusive, in which case another try will be at the July summit, which, with a little luck, could be in person. Disappointment could weigh on the euro.

Johnson-von der Leyden

With the last round of negotiations failing to unblock the logjam, it is hoped that political leadership can intercede and reinvigorate the talks. A discussion between the two leaders and EU Council President Michel will take place at the start of next week. An extension of the standstill agreement is theoretically possible but it must be requested by the end of the month and Johnson has been adamant this was not going to happen. That leaves two possible scenarios; either a successful conclusion of negotiations or an exceptionally disruptive exit on January 1. We think the latter is more likely.

Johnson has threatened to walk away from the negotiations if there was no substantial progress by midyear, but this is likely a bluff. It might help in the political fallout from the disruption to say that the UK tried its best, which does not mean terminating negotiations midway. Several European countries, including Ireland and Belgium, are pressing the EU to accelerate preparations for no agreement.


The ECB will offer the most attractive terms to date on its Targeted Long Term Refinancing Operation. These three-year loans will be available at minus 100 bp if certain relatively easy lending targets are met. There will be huge participation as banks roll some of their past borrowings into this facility with such attractive terms. Under such programs, the ECB has loaned around 1.02 trillion euros. This will inflate the gross figure.

The net figure, the new borrowings, these could also be substantial. The ECB’s balance sheet is about 5.6 trillion euros. New borrowings of 400 bln euros would expand the balance sheet to over 50% of EMU GDP. By comparison, the Fed’s balance sheet is about a third of GDP. The cheap funds will fuel peripheral bond-buying and the narrowing spreads are the ECB’s transmission mechanism in operation.

Bank of England

The Monetary Policy Committee meets on June 18. Unlike the Federal Reserve that has dismissed adopting a negative policy rate, the BOE purposely kept the option alive. Still, it is not imminent. More likely, the Bank of England will boost its asset purchase target. Recall MPC members Saunders and Haskel favored a GBP100 bln increase last month. However, the risk is asymmetrically in favor of a larger boost., especially after the UK reported April GDP contracted by a little more than 20% month-over-month. Many who see the risk of a negative base rate around the possible disruption early next year when it is outside of the EU.

Bank of Japan

The Bank of Japan meets on June 16. Most do not expect it to take fresh action but could make small adjustments in its support of commercial paper and corporate bonds. The pandemic has aggravated the disinflationary forces and Japan reports May CPI figures a couple days after the BOJ meets. In April, the core rate (which excludes fresh food prices) slipped back into negative territory for the first time since the end of 2016. Tokyo prices suggest a better national report in May.

Norges Bank

Norway’s central bank will likely shrug off the firm May CPI readings when it meets on June 18 and stand pat. Headline inflation rose to 1.3% from 0.8% in April. The core rate, which excludes energy and adjusts for tax changes rose to 3%, the most since September-October 2016. The krone has come storming back. It performed miserably in Q1, losing 15.5% against the US dollar, the most among the major currencies. Here in Q2, it has appreciated by around 11.5%, trailing behind the Australian dollar’s 14.25% rally to lead the majors. The central bank has stepped up its daily currency buying to NOK2.3 bln a day here in June from NOK2.1 bln as it converts its oil proceeds to fund the government.

EM Central Banks

At least six emerging market central banks will meet. In the Asia Pacific region, Indonesia and Taiwan central banks meet. Indonesia has scope to cut at least 50 bp in its 4.5% key seven-day reverse repo rate. The rupiah is the strongest emerging market currency here in Q2, appreciating by about 16.7% after falling 15% in Q1. Taiwan has deflation in the headline CPI and the core is just above zero.

Its benchmark interest rate is at 1.125%. A small cut cannot be ruled out. In eastern and central Europe, the Polish and Russian central banks meet. Poland’s base rate is 10 bp and is well below inflation where CPI is a little less than 3.0%. Russia, on the other hand, is in desperate need of more supportive policies. Its key rate is at 5.5%, more than double the CPI.

It delivered a 50 bp cut in April and the rouble appreciated by nearly 8.4% since the end of April. A 75 bp move would not surprise. In South America, Chile may be reluctant to cut its 50 bp overnight target rate, but the Chilean peso is the third strongest emerging market currency this quarter behind Indonesia and Russia, with an 11.25% gain. With falling inflation and a 6% recovery in the Brazilian real, the central bank may be bold enough to cut the Selic Rate by 75 bp to 2.25% when it meets on June 17.

US Data

While a second wave of the virus cannot be ruled out by any means, it does look the US economy has begun the long process of recovering from a steep contraction. There will be more evidence next week as the US reports May retail sales and industrial output figures. Retail sales fell 16.4% in April and may have risen by 7.5%-8.0% in May.

Investors already learned that auto sales rose more than economists expected (12.2 mln saar from about 8.6 mln in April and median forecast in the Bloomberg survey for 11.1 mln). Industrial production is expected to rise 2.5%-3.0% after the 11.2% drop in April. Separately, May housing starts and permits are likely to jump after three months of declines. The Empire State and Philadelphia Fed surveys start the cycle of high-frequency June data. Both surveys are expected to show improvement for the second consecutive month.

For a look at all of today’s economic events, check out our economic calendar.

This article was written by Marc Chandler, MarctoMarket.

Are Risk Appetites Satiated, or Simply Taking the Day Off?

Moreover, some near-term trends were already in place. Although the MSCI Asia Pacific Index snapped its longest advance in three years today, Europe’s Dow Jones Stoxx 600 is lower for the fourth consecutive session, and the S&P 500 will likely fall today for the third successive session. Both of these streaks are the longest since the first half of March. Bond yields are tumbling.

The US 10-year yield, which had been flirting with 90 bp at the end of last week, is struggling now to hold above 70 bp. European benchmark yields are 2-5 bp lower after the Australian and New Zealand yields fell 8-9 bp. The dollar itself is mixed against the majors.

The recently high-flying dollar-bloc and Scandis are down the most, while the Swiss franc and yen are higher. The euro is holding its own, while sterling is in the high beta camp of weaker currencies today. Led by the liquid and accessible currencies, like the Mexican peso, Russian rouble, and the South African rand, the JP Morgan Emerging Market Currency Index is off for the third consecutive session. Meanwhile, gold is consolidating is gains that carried it to almost $1740 yesterday, and July WTI is unwinding its recent gains to return to where it settled last week (~$38.20).

Asia Pacific

The Abe government is considering extending its cash payment of JPY100k (~$940) to Japanese citizens living abroad. It would be funded out of the second supplemental budget. The requirement is the person would have to be on the resident register as of late April. The latest figures available showed 1.39 mln Japanese were on the register at the end of 2018. It raises the question of whose economy will be stimulated by the measures: the Japanese economy as the payment is in yen or will it boost spending in the current locale of the ex-pat.

Separately, Japan reported that last week, investors bought more than JPY1.06 trillion of foreign bonds. This was the most since the first week of March. We are reluctant to read much into it. The buying seems to be seasonal at the start of the quarter. For their part, foreign investors sold almost JPY740 bln of Japanese bonds. This is the largest weekly divestment since late March and offsets the purchases of the past three weeks in full. Equity transactions were unremarkable.

Chinese yuan

Hong Kong Monetary Authorities appear to have continued to intervene to prevent the US dollar from falling through the lower band. The recent inflows appear drawn to the new IPOs. This demand is likely to ease over the next week. The greenback initially extended its loss against the Chinese yuan, falling to about CNY7.0560, the lowest since the end of April, before bouncing to CNY7.0750 and running out of steam. The reference rate was set a little above CNY7.06, which was a bit firmer for the dollar than the models suggested.

Japanese Yen

The US dollar extended its losses against the yen to about JPY106.80. It is the fourth consecutive session the greenback is moving lower after peaking at the end of last week shy of JPY110. While the JPY106.45 may offer some support, the next important level is near JPY106.00. The JPY107.30 area now maybe resistance. The Australian dollar’s seven-rally ended Tuesday, and it has been consolidating, albeit choppily, since. Today’s setback saw it approach the week’s low (~$0.6900), and recover toward the middle of the roughly one-cent range today or around $0.6955 in the European morning. It settled last week near $0.6970.


European finance ministers meet again today to try to see if a meeting of the minds is possible ahead of next week’s heads of state summit to ideally agree on a European Recovery Fund. It seems as if some of the objections were largely negotiating tactics.

Denmark, for example, has indicated that while it is still skeptical of the subsidy component (grants), its priority is that it maintains its EU budget rebate. Austria suggested a similar approach is possible. There are still some principled objections for others, including Eastern and Central Europe. Note too that Eurogroup (finance ministers of the eurozone) head Centeno term ends next month, and he has indicated he will step down. Spain’s finance minister Nadia Calvino seems to be the early favorite.

The US threatened tariffs on European autos if it did not cut the tariffs on US lobsters recently, but that may be a sideshow to the coming clash over the digital tax of several European countries. The issue slowly working its way through the US channels, and it is getting closer to the surface. It could become the next important flashpoint.


The euro initially rallied to new highs after the FOMC meeting and briefly poked above $1.1420 before pulling back in late Asia to test yesterday’s lows near $1.1325. It has climbed back to $1.1400 in the European morning. While the North American session has seen the euro bid more often than not over the past few weeks, the intraday technicals warn that consolidation may be the most likely scenario today.

British Pound

On the upside, many have their near-term sights set at $1.15, where there are some chunky options that expire next week. Sterling rose to almost $1.2815 after the FOMC meeting and drifted down until reaching the $1.2650 in the European morning. It was bid back to yesterday’s lows (~$1.2725). It needs to get above $1.2750 to signal a retest on the highs. The downtrend line that connects last December’s election highs and the early March high is found near $1.2875 now. Consolidation here too looks likely.


The Federal Reserve confirmed that US rates will remain low for some time. Only two of the 17 Fed officials expect that a hike before the end of 2022 will be warranted. Its growth forecasts are a bit above others (OECD forecast the US economy would contract by 7.4% this year compared with the median Fed forecast a 6.5% decline in output).

Still, it committed to buying no less than $80 bln a month of Treasuries and $40 bln of mortgage-backed securities (which is the current pace). Although unemployment may not have peaked, the median forecast is for 9.3% at the end of this year and 6.5% at the end of next year. The headline PCE, which the Fed targets at 2%, is forecast (median) at 0.8% in 2020 and 1.6% next year.

While last week’s May employment report may have led some, including in Congress, to question the merits of more fiscal support, this is not a majority view. Powell also advocated more fiscal stimulus is needed as there were limits on monetary policy (lend but not spend). Treasury Secretary Mnuchin also has endorsed more measures. That is what is being negotiated. Not if to spend, but how and where. Mnuchin cited the need for support for retail, travel, and leisure. The $600 extra weekly unemployment compensation is set to expire at the end of next month.

The battle over it is likely to intensify. We suspect a compromise will be found to extend it but perhaps at a reduced level. Separately, it still seems premature to look past the virus despite (or because) of the relaxations that seem to be going forward. There is a spike in several re-opened states. Texas reported its highest one-day number of infections, and Florida reported the most new cases in a seven day period. Hospitalizations in California have risen for nine of the past 10 days top reach their highest in nearly a month.

The US reports May producer prices today. Deflation is expected to be evident in the headline rate. Excluding food and energy, producer prices are forecast to slip closer to zero from 0.6% in April. However, at the same time, weekly jobless claims for last week will be reported. Around 1.5 mln Americans may have filed unemployment benefits for the first time down from nearly 1.9 mln the previous week. Canada has no economic reports, while Mexico publishes its April industrial output figures. In March industrial production fell by 3.4% on the month. In April, the decline is expected to be around 15%.

Mexican Peso and Canadian Dollar

The US dollar appears to have left a bullish hammer candlestick yesterday, and follow-through buying lifted it to CAD1.35 today. It reached almost CAD1.3315 yesterday. A move above CAD1.3515 would target the CAD1.3630 area initially. The dollar has carved a base around MXN21.45-MXN21.50 in recent sessions. We suspect there is potential toward MXN23.00-MXN23.25 in the coming days. One step at a time, though, and today it has tested the MXN22.32 area. The nearby resistance is around MXN22.40. Initial support is likely around yesterday’s highs (~MXN22.00).

For a look at all of today’s economic events, check out our economic calendar.

Corrective Forces Still Seem in Control Ahead of the FOMC Outcome

It has fallen once past two and a half weeks. The Dow Jones Stoxx 600 opened higher but is falling for the third consecutive session. It has fallen 1.5% over the past two sessions, and US shares are trading a little lower. Benchmark 10-year bond yields are narrowly mixed. The US 10-year yield that was flirting with 90 bp at the end of last week is struggling to hold above 80 bp now. North American operators sold into the dollar’s bounce that was seen in Asia and the European morning yesterday.

The greenback is under pressure today, falling against all the majors but the Scandis and most emerging market currencies. The dollar made new lows for the move against the yen and British pound. The Indonesian rupiah, which has been the strongest of the Asian emerging market currencies over the past month (6.7%), is lower for the third consecutive session. Nevertheless, corrective/consolidative forces, perhaps ahead of the FOMC meeting, still seem to grip the foreign exchange market.

Gold, which saw $1670 last week, is back testing $1720. Nearby resistance is seen near $1725 and then $1734, a four-week downtrend line. Crude oil prices are giving back yesterday’s gains. The API reported an 8.4 mln barrel build, which, if confirmed by the EIA, would be the largest in nearly two months.

Asia Pacific

China’s data reports included May CPI and PPI, and lending figures. The May CPI fell to 2.4% from 3.3% in April, and the decline was more than economists expected. Pork prices fell on the month, and food prices in general moderated. In May, they were up 10.6% from a year ago, 3.5 percentage points lower than in April. Non-food prices rose 0.4% year-over-year. Separately, the deflation in producer prices, which is also a proxy for income and profits of producers, continued.

Producer prices were 3.7% lower than a year ago, after falling 3.1% in April. These reports help fan expectations that the PBOC will continue to ease monetary policy. Meanwhile, aggregate lending remained strong (CNY3.19 trillion) in May, which represents a small acceleration from April (CNY3.09 trillion). Bank lending slowed, implying that the non-bank financial institutions (shadow banking) increased.

Japan also reported deflation in producer prices. The 2.7% year-over-year decline in May producer prices was a bit faster than expected after a 2.4% decline in April. Separately, core machinery orders, a proxy for capital expenditures, fell 12%, considerably more than the 7% decline projected by the median forecast in the Bloomberg survey. The BOJ meets next week, and at most, economists see the possibility of tweaking the support for large businesses.

The Hong Kong Monetary Authority continues to defend the upper end of the Hong Kong dollar’s band. In contrast, the forward points continue to unwind the surge seen after the US began looking into removing its special trade privileges. The lack of follow-up has eased anxiety, while flows drawn to IPOs and interest rates keep the HK dollar firm. The PBOC set the dollar’s reference rate a little above where models suggest, as it tries to slow the dollar’s fall. The greenback fell to about CNY7.0625, its lowest level since the end of April.

The US dollar fell below JPY107.30 to set a new low here in June. It has stabilized in the European morning, but the trendline off the May lows has been broken, and now may serve as resistance near JPY107.65. A break of JPY107 would target the JPY106 area. The Australian dollar traded on both sides of Monday’s range yesterday, and the close was 1/100 of a cent below Monday’s low. It bounced back to straddle the $0.7000-area today. Still, corrective/consolidative pressures are still evident. Yesterday’s high was near $0.7040.


The first 3-month dollar-swap between the Fed and the ECB expires tomorrow. It was for almost $76 bln. At today’s auction, European banks took only $480 mln. This is confirmation of the normalization of the funding markets. Yesterday, the demand at the BOJ’s dollar-auction to replace the three-months swap saw demand halved.

French industrial output for April was horrific. It imploded by 20.1% on the month, with manufacturing tanking nearly 22%. The German figures were reported last week and showed an approximately 18% contraction. The aggregate data for the eurozone will be published ahead of the weekend, and a 20% drop in expected.

The UK, which was the first G7 country to join China’s Asian Infrastructure Investment Bank, is making a significant diplomatic u-turn. It is going to gradually reduce ties with Huawei. It is looking like others have done, to tightened direct investment rules to deter state-owned companies from taking over UK businesses.

It will also look to reduce its reliance on imports from China. The UK has also offered to take more immigrants from Hong Kong. Meanwhile, trade talks with the EU are not going well, and some EU countries, including Ireland, are urging the region to prepare the disruption that is likely if the UK and EU do not reach a new trade deal. Prime Minister Johnson and EU President von der Leyen could talk soon to see if politicians can break the stalemate.

The euro recovered smartly yesterday and posted a big outside up day. It has extended its recovery today but has stopped shy of last week’s high near $1.1385 in the European morning. There is an option for about 715 mln euros at $1.1390 that expires today. Initial support is seen a little above $1.1330. There is an option for one billion euros at $1.13 that expires today. Sterling also saw a brilliant recovery yesterday, and follow-through buying today has lifted it to about $1.2785. The next important chart resistance is near $1.30. Support is seen near $1.27, and the 200-day moving average is just below there.


The FOMC meets today amid an incredible rally in equities and a bearish steepening of the yield curve. No doubt the Fed welcomes the preliminary evidence that the economy has begun to recover. However, the FOMC is likely to be more cautious last week’s employment data than the speculators who used it as yet another reason to buy risk assets.

They know full well that reaching its objectives will be a formidable struggle, and this will likely be borne out by the new economic forecasts that were eschewed during in fog of March. Officials recognize that additional action from the central bank may still be needed. Yet, more than lending is necessary. Spending is required, and Chair Powell is likely to reiterate the need for more fiscal support and extending existing efforts. There are many unknowns, and the course of the virus remains uncertain.

Powell has shown a sensitivity to the disparity of income and wealth. Besides pushing further on full employment, there may be little a central bank can do about the disparity of income. The disparity of wealth is more complicated because its reach is limited. It has innovated in this crisis by having facilities that encourage lending to small and medium-sized businesses, which it did not do during the Great Financial Crisis.

Monetary policy has been asked to do a great deal, but there are still limits. However, it can target something further out the curve than overnight money. While we increasingly expect that yield-curve control will be adopted, we think it might not be quite ready now. That said, it may be preferable to do it from a position of strength rather than being perceived to have been backed into it by speculators, so the narrative would go, that previously tried to force the adoption of negative interest rates.

The US reports May consumer prices. They are expected to be flat at both the headline and core levels. This will keep the year-over-year rate at about 0.3% for the headline and around 1.3% (from 1.4%) at the core level. There is no policy implication. The Fed targets the PCE deflator and often talks about the core PCE deflator. The headline PCE deflator stood at 0.5% in April, and the core deflator was at 1.0%. Inflation and market-based inflation measures suggest the Fed can continue to focus on 1) ensuring the capital markets and bank lending functioning and 2) support the nascent recovery.

The US dollar is finding support ahead of CAD1.3350, but the upside seems capped near previous support near CAD1.3460, which is also where the 200-day moving average is found. Initial resistance is around CAD1.3430. The greenback rose from about MXN21.47 yesterday to almost MXN22.00. Since breaking below MXN22.00 on June 2, it has not resurfaced above it. Although it closed on its highs, there was no follow-through dollar buying. Still, corrective forces are evident. Initial support is now seen near MXN21.70.

This article was written by Marc Chandler, MarctoMarket.