The Weekly Wrap – Economic Data and COVID-19 Continued to Girate the Markets

The Stats

It was a relatively quiet week on the economic calendar, in the week ending 10th July.

A total of just 30 stats were monitored, following the 74 stats from the week prior.

Of the 30 stats, 20 came in ahead forecasts, with 9 economic indicators coming up short of forecast. 1 stats were in line with forecasts in the week.

Looking at the numbers, 24 of the stats reflected an upward trend from previous figures. Of the remaining 6, all 6 stats reflected a deterioration from previous.

For the Greenback, it was a 3rd consecutive week in the red. In the week ending 10th July, the Dollar Spot Index fell by 0.54% to 96.652. In the week prior, the Dollar had fallen by 0.27%.

COVID-19 updates drew greater focus, with a lighter economic calendar unable to distract the markets.

For the U.S, the daily COVID-19 numbers continued to spike to fresh highs in the week. At the end of the week, news of progress towards a successful treatment drug delivered riskier assets with support, however.

Looking at the latest coronavirus numbers

At the time of writing, the total number of coronavirus cases stood at 12,604,895 for Friday, rising from last Friday’s 11,175,074 total cases. Week-on-week (Saturday thru Friday), the total number of cases was up by 1,429,821 on a global basis. This was higher than the previous week’s increase of 1,290,881 in new cases.

In the U.S, the total rose by 399,290 to 3,285,550. In the week prior, the total number of new cases had risen by 338,384. An upward trend was evident throughout the week once more.

Across Germany, Italy, and Spain combined, the total number of new cases increased by 7,406 to bring total infections to 743,215. In the previous week, the total number of new cases had risen by 6,464.

Out of the U.S

It was a relatively quiet week on the economic data front.

Key stats included June’s ISM Non-Manufacturing PMI, May’s JOLT’s job openings, and the weekly jobless claims.

The stats were skewed to the positive, with the U.S non-manufacturing sector expanding in June.

On the labor market front, JOLTs job openings increased from 4.996m to 5.397m. More importantly, the weekly initial jobless claims rose by 1.314m in the week ending 3rd July. This was down from 1.413m in the week prior.

While the stats were positive, COVID-19 updates from the U.S were particularly dire, providing the Greenback with some support.

In the equity markets, the NASDAQ rallied by 4.01%, with the Dow and S&P500 gaining 0.96% and 1.76% respectively.

Out of the UK

It was also a relatively quiet week on the economic calendar. June’s construction PMI, 1st quarter labor productivity, and house prices were in focus.

A sharp rebound in construction sector activity was positive, with the PMI jumping from 28.9 to 55.3.

House prices also bottomed out, with news of an adjustment to stamp duty thresholds also positive for the sector.

Ultimately, however, it was Brexit chatter that provided the Pound with support in the week.

Following the curtailed talks from the previous week, the EU hinted at a willingness to compromise, raising hopes of a deal.

In the week, the Pound rose by 1.11% to $1.2622, following a 1.19% gain in the previous week. The FTSE100 ended the week down by 1.01%, with a 1.73% slide on Thursday delivering the loss.

Out of the Eurozone

It was a relatively busy week economic data front, with Germany in focus.

Germany’s factory orders, industrial production and trade data for May were in focus in the week. On Friday, French and Italian production figures caught the market’s attention.

From Germany, the stats were skewed to the negative based on forecasts. Both factory orders and industrial production rose by less than forecast.

Germany’s trade balance came in ahead of forecasts, which provided some support.

Construction figures from Germany and the Eurozone’s retail sales figures for May had a muted impact in the week.

At the end of the week, industrial production figures from France and Italy delivered a boost.

For the week, the EUR rose by 0.46% to $1.1300, following a 0.26% gain from the previous week.

For the European major indexes, it was a mixed week. The CAC30 fell by 0.73%, while the DAX30 and EuroStoxx600 saw gains of 1.15% and 0.38% respectively.

For the Loonie

It was a relatively busy week on the economic calendar.

Key stats included June’s Ivey PMI, housing data, and the all-important employment figures for June.

The stats were skewed to the positive. The Ivey PMI jumped from 39.1 to 58.2 in June. More impressively, employment jumped by 952,900 following a 289,600 rise in May.

As a result of the jump in hiring, the unemployment rate fell from 13.7% to 12.3%.

While the stats were skewed to the positive, COVID-19 jitters and a negative monthly IEA report weighed.

The Loonie fell by 0.33% to end the week at C$1.3592 against the Greenback. In the week prior, the Loonie had risen by 0.27%.

Elsewhere

It was a relatively bullish week for the Aussie Dollar and the Kiwi Dollar.

In the week ending 10th July, the Aussie Dollar rose by 0.16% to $0.6950, with the Kiwi Dollar rising by 0.66% to $0.6574.

For the Aussie Dollar

It was a particularly quiet week for the Aussie Dollar, with no material stats to provide direction.

While there were no stats, the RBA was in action on Tuesday, standing pat on monetary policy. This was in line with market expectations, limiting any major moves by the Aussie Dollar.

In the week, the government closed down the border between Victoria and New South Wales due to fresh new cases…The latest spread pinned the Aussie Dollar back in the week.

For the Kiwi Dollar

It was also a relatively quiet week on the economic data front.

Key stats were limited to 2nd quarter business confidence figures and June electronic card retail sales figures.

While both were Kiwi Dollar positive, there was nothing impressive to give the Kiwi a major boost.

For the Japanese Yen

It was a quiet week on the data front.

Household spending figures for May delivered more bad news early in the week. Year-on-year, household spending was down by 16.2%, following an 11.1% decline in April.

Month-on-month, spending fell by 0.1%, following a 6.2% slide in April. In contrast to other economies, consumers appeared unwilling to loosen the purse strings, which will be of concern for the government.

While the stats were negative, concerns over COVID-19 delivered the upside for the Yen in the week.

The Japanese Yen rose by 0.54% to end the week at ¥106.93 against the Greenback. In the week prior, the Yen had fallen by 0.27% against the U.S Dollar.

Out of China

It was a quiet week on the economic data front, with June inflation figures in focus.

The stats were skewed to the positive, though ultimately of little influence.

A lack of chatter from Washington and Beijing allowed the markets to move beyond the recent war of words.

Tensions over Hong Kong are unlikely to abate anytime soon, however. Positive sentiment towards an economic rebound in China drove demand for equities in the week.

News had also hit the wires in the early part of the week of a reported priority to foster a “healthy” bull market.

In the week ending 10th July, the Chinese Yuan rose by 0.95% to end the week at CNY6.9994 against the Greenback.

The CSI300 rallied by 7.55% in the week, with the Hang Seng gaining 1.40%.

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.

Europe

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.

America

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.

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.

Euro

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.

Gold

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.

Oil

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.

The Weekly Wrap – Positive Economic Data Supported Riskier Assets in the Week

The Stats

It was a particularly busy week on the economic calendar, in the week ending 3rd July.

A total of 74 stats were monitored, following the 44 stats from the week prior.

Of the 74 stats, 45 came in ahead forecasts, with 25 economic indicators coming up short of forecast. 4 stats were in line with forecasts in the week.

Looking at the numbers, 52 of the stats reflected an upward trend from previous figures. Of the remaining 22, 20 stats reflected a deterioration from previous.

For the Greenback, it was a 2nd consecutive week in the red. In the week ending 3rd July, the Dollar Spot Index fell by 0.27% to 97.172. In the week prior, the Dollar had fallen by 0.19%.

COVID-19 remained in focus, as economic data delivered further support to riskier assets in the week.

For the U.S, the daily COVID-19 numbers continued to spike in the week.

Looking at the latest coronavirus numbers.

The total number of coronavirus cases stood at 11,175,074 on Friday, rising from last Friday’s 9,884,193 total cases. Week-on-week (Saturday through Friday), the total number of cases was up by 1,290,881 on a global basis. This was higher than the previous week’s increase of 1,126,459 in new cases.

In the U.S, the total rose by 338,384 to 2,886,260. In the week prior, the total number of new cases had risen by 250,686. An upward trend was evident throughout the week once more.

Across Germany, Italy, and Spain combined, the total number of new cases increased by 6,464 to bring total infections to 735,809. In the previous week, the total number of new cases had risen by 8,019.

Out of the U.S

It was a busy week on the economic data front.

Key stats in the week included consumer confidence, private sector PMIs, the weekly jobless claims, and June’s nonfarm payrolls.

The all-important consumer confidence and labor market stats were largely skewed to the positive.

The CB Consumer Confidence jumped from 85.9 to 98.1, with nonfarm payrolls jumping by a record 4.8m in June.

A surge in hiring in May and June led the unemployment rate back down to 11.1%.

The weekly jobless claims were disappointing, however, rising by 1.472m following a 1.482m jump in the previous week.

Following the release of the numbers, President Trump was quick to hold a press conference. The focus was on the jump in May and June nonfarm payrolls, consumer confidence, and spending.

It was expected and Trump delivered, with the President talking of records and the gains in the U.S equity markets since his election.

He also promised more for next year, as the administration looked to claw back some of Biden’s lead.

In the equity markets, the NASDAQ and S&P500 rallied by 4.62% and by 4.02% respectively. The Dow ended the week up by 3.25%.

Out of the UK

It was a relatively busy week on the economic calendar. Finalized 1st quarter GDP numbers and finalized private sector PMIs were in focus.

The stats were skewed to the negative. Downward revisions to 1st quarter GDP and business investment figures had a muted impact on the Pound, however.

In the 1st quarter, the UK economy contracted by 2.2%, revised down from 2.0%.

The markets have moved on from the 1st quarter, with a slower pace of contraction in the private sector positive.

The all-important services PMI jumped from 29.0 to 47.1, supported by the easing of lockdown measures.

While Angela Merkel sounded the alarm bells over Brexit, there was little for the markets to fret about. Risk appetite through the week added to the upside in the Pound.

In the week, the Pound rose by 1.19% to $1.2483, reversing a 0.11% fall in the previous week. The FTSE100 ended the week down by 0.03%, with a 1.33% slide on Friday delivering the loss.

Out of the Eurozone

It was another busy week economic data front.

Key stats included June private sector PMI for Italy and Spain and finalized PMIs for France, Germany, and the Eurozone.

Consumer spending figures from France and retail sales and unemployment figures from Germany were also in focus.

Both the manufacturing sector and service sector PMIs bounced in June, providing the EUR with support.

France’s private sector led the way, with both manufacturing and service sector activity expanding.

The Eurozone’s composite rose from 31.9 to 48.5 in June.

Germany’s unemployment rate rose to 6.4%, with just a 69k increase in the number of unemployed. In May, there had been a 238k increase in unemployed.

Consumer spending also bounced back in France and Germany as member states reopened.

For the week, the EUR rose by 0.26% to $1.1248, following a 0.37% gain from the previous week.

For the European major indexes, it was a bullish week. The DAX30 rallied by 3.63%, with the CAC40 and EuroStoxx600 gaining 1.99% and by 1.98% respectively.

Elsewhere

It was another bullish week for the Aussie Dollar and the Kiwi Dollar.

In the week ending 3rd July, the Aussie Dollar rose by 1.08% to $0.6939, with the Kiwi Dollar rising by 1.68% to $0.6531.

For the Aussie Dollar

It was a busy week for the Aussie Dollar on the economic data front.

Key stats included May trade and retail sales figures.

There was not much support from trade data, with the trade surplus narrowing from A$8.8bn to A$8.025bn.

At the end of the week, retail sales jumped by 16.9% in May, reversing most of a 17.7% slump from April.

Support ultimately came from better than expected economic data from China, the EU, and the U.S.

Progress towards a COVID-19 vaccine eased some of the market concerns over the recent spike in new COVID-19 cases.

For the Kiwi Dollar

It was also a relatively quiet week on the economic data front.

Key stats were limited to May building consents and June business confidence figures.

Both were Kiwi Dollar positive. Building consents surged by 35.6%, with the ANZ Business Confidence Index rising from -41.8 to -34.4.

The Kiwi Dollar also found support from the PMIs out of the EU, China, and the U.S and COVID-19 news.

For the Loonie

It was a relatively busy week on the economic calendar.

Key stats included May’s RMPI and trade data and April’s GDP figures.

The stats were skewed to the positive. The RMPI jumped by 16.4% to reverse a 13.4% slide from April. Canada’s economy contracted by 11.6% versus a forecasted 13.0% contraction. And, Canada’s trade deficit narrowed from C$4.27bn to C$0.68bn.

Positive data coupled with the positive stats from the U.S and hopes of a COVID-19 vaccine delivered the upside.

The Loonie rose by 0.27% to end the week at C$1.3547, partially reversing a 0.60% loss from the previous week.

For the Japanese Yen

It was a busy quiet week on the data front.

In the 1st half of the week, May retail sales and industrial production figures disappointed. Consumer spending continued to slide, with industrial production also seeing another hefty decline in May.

Mid-week, 2nd quarter Tankan survey figures were also skewed to the negative.

Service sector activity provided some hope, however, with the PMI rising from 26.5 to 45.0 in June.

Ultimately, however, the Yen was in the hands of market risk sentiment and COVID-19 updates. The “risk-on” sentiment in the week, left the Yen in the red, in spite of a softer Dollar.

The Japanese Yen fell by 0.27% to end the week at ¥107.51. In the week prior, the Yen had fallen by 0.33% against the U.S Dollar.

Out of China

It was a busy week on the economic data front, with June private sector PMIs in focus.

The stats were skewed to the positive, with both manufacturing and service sector activity picking up.

From the market’s preferred Caixin survey, the manufacturing PMI rose from 50.7 to 51.2. At the end of the week, the services PMI rose from 55.0 to 58.4.

In the week ending 3rd July, the Yuan ended the week up by 0.17% CNY7.0663 against the Greenback.

The CSI300 rallied by 6.78%, while the Hang Seng rose by 3.35%.

Geopolitical risk picked up in the week, with Hong Kong and China’s rule of law in focus.

The Weekly Wrap – Economic Data, COVID-19, and Geopolitics Left the Markets Struggling

The Stats

It was a quieter week on the economic calendar, in the week ending 26th June.

A total of 44 stats were monitored, following the 60 stats from the week prior.

Of the 44 stats, 29 came in ahead forecasts, with 13 economic indicators coming up short of forecast. 2 stats were in line with forecasts in the week.

Looking at the numbers, 33 of the stats reflected an upward trend from previous figures. Of the remaining 11, 8 stats reflected a deterioration from previous.

For the Greenback, it was a 1st weekly loss in 3 weeks. In the week ending 26th June, the Dollar Spot Index fell by 0.19% to 97.433. In the week prior, the Dollar had risen by 0.31%.

COVID-19 and geopolitical risk remained in focus, while economic data delivered support to riskier assets in the week.

For the U.S, the daily COVID-19 numbers pointed to a sharp rise in new coronavirus cases during the week.

As part of the U.S administration’s distraction tactics, Trump threatened the EU, including the UK, with fresh tariffs. This had come off the back of White House adviser Navarro spooking the markets earlier in the week. Navarro had said that the U.S – China trade agreement was over before then reversing the statement on the same day…

Looking at the latest coronavirus numbers.

The total number of coronavirus cases stood at 9,884,193 on Friday, rising from last Friday’s 8,757,734 total cases. Week-on-week, the total number of cases was up by 1,126,459 on a global basis. This was higher than the previous week’s increase of 1,039,054 in new cases.

In the U.S, the total rose by 250,686 to 2,547,876. In the week prior, the total number of new cases had risen by 181,871. An upward trend was evident throughout the week.

Across Germany, Italy, and Spain combined, the total number of new cases increased by 8,019 to bring total infections to 729,345. In the previous week, the total number of new cases had risen by 7,481.

Out of the U.S

It was a relatively busy week on the economic data front. U.S stats made up more than half of the economic calendar in the week.

Key stats in the week included prelim June private sector PMIs, May core durable goods orders, and the weekly jobless claims.

On the positive, there was a less marked contraction in private sector, which was aligned with a global trend. The all-important services PMI rose from 37.5 to 46.7 in June.

In May, core durable goods orders rose by 4%, with durable goods orders surging by 15.8%. Both came in well ahead of forecasts.

Jobless claims figures disappointed, however, with a 1.48m rise coming in above a forecasted 1.3m increase.

At the end of the week, personal spending, inflation, and finalized consumer sentiment figures had a muted impact. COVID-19 updates overshadowed the stats on the day.

In the equity markets, the NASDAQ fell by 1.90%, with the Dow and S&P500 declining by 3.31% and 2.86% respectively.

Out of the UK

It was a relatively quiet week on the economic calendar. June CBI Industrial trend orders and prelim private sector PMIs were in focus.

The stats were skewed to the positive, with the UK’s service sector PMI jumping from 29.0 to 47.0.

More impressive, was a return to expansion for the UK’s manufacturing sector.

The upside for the Pound was limited, however, with Brexit, COVID-19, and the threat of U.S tariffs weighing.

In the week, the Pound fell by 0.11% to $1.2336, following a 1.52% slide in the previous week. The FTSE100 ended the week down by 2.12%.

Out of the Eurozone

It was a busy week on the economic data front.

Key stats included prelim June private sector PMIs for France, Germany, and the Eurozone. June and July business and consumer sentiment figures for Germany were also in focus.

The stats were skewed to the positive, with all the economic indicators seeing an improvement from the previous month.

France saw its private sector return to expansion in June, with both manufacturing and service PMIs rising to above 50.

Germany and the Eurozone saw a marked improvement, but not enough to break through to 50 levels. The Eurozone Composite PMI rose from 31.9 to 47.5.

German business and consumer confidence improved further at the turn of the quarter, providing the EUR with support.

Negative sentiment towards COVID-19 and the threat of tariffs limited the upside, however.

For the week, the EUR rose by 0.37% to $1.1219, following a 0.69% decline from the previous week.

For the European major indexes, it was a bearish week. The DAX30 and EuroStoxx600 fell by 1.96% and by 1.95%, with the CAC40 declining by 1.40%.

Elsewhere

It was a bullish week for the Aussie Dollar and the Kiwi Dollar. The gains ended a run of 2 consecutive weeks in the red.

In the week ending 26th June, the Aussie Dollar rose by 0.44% to $0.6865, with the Kiwi Dollar rising by 0.25% to $0.6423.

For the Aussie Dollar

It was a quiet week for the Aussie Dollar on the economic data front.

There were no major stats to provide the Aussie dollar with direction. A lack of stats gave June’s prelim private sector PMIs a greater influence than normal…

Australia’s services PMI rose from 26.9 to 53.2, with the manufacturing PMI rising from 44 to 49.8.

The figures supported the RBA’s more optimistic outlook on economic recovery. A spike in new COVID-19 cases in the U.S and the threat of fresh tariffs on the EU were negative, however.

For the Kiwi Dollar

It was also a relatively quiet week on the economic data front.

Key stats were limited to May trade data that failed to support the Kiwi.

While the trade deficit narrowed in May, it was a 25.6% slid in imports, compared with May 2019 that led to the narrowing. Exports fell by 6.1%.

On the monetary policy front, the RBNZ delivered its June policy decision, standing pat on policy. There was talk of continued uncertainty, however, and the possible need for more support. In spite of this, there was no major influence on the Kiwi Dollar in the week.

For the Loonie

It was a particularly quiet week on the economic calendar. A lack of stats left the Loonie in the hands of COVID-19 and marker risk sentiment in general.

The Loonie fell by 0.60% to end the week at C$1.3688, following a 0.13% loss from the previous week.

For the Japanese Yen

It was a relatively quiet week on the data front.

June’s prelim private sector PMIs were in focus early in the week. The service sector saw conditions improve, with the PMI rising from 26.5 to 42.3. An easing of lockdown measures delivered support in June. It was a different story for the manufacturing sector, with the PMI falling from 38.4 to 37.8.

At the end of the week, Tokyo’s core annual rate of inflation held steady at 0.2%.

Ultimately, the stats had a muted impact on the yen, as market risk appetite continued to influence.

The Japanese Yen fell by 0.33% to end the week at ¥107.22. In the week prior, the Yen had risen by 0.47% against the U.S Dollar.

Out of China

There were no material stats to consider in the week. On the monetary policy front, the PBoC held loan prime rates unchanged at the start of the week.

A lack of stats left geopolitics and COVID-19 updates in focus.

Following news of China agreeing to ramp up imports of soybeans, ethanol, and corn, Navarro delivered uncertainty early in the week.

On Monday night, Navarro had stated that the U.S – China trade agreement was “Over.”

There’s no smoke without fire. While Navarro was quick to correct the statement, the coming weeks should prove interesting…

In the week ending 26th June, the Yuan ended the week down by 0.10% CNY7.0782 against the Greenback.

The CSI300 rose by 0.98%, while the Hang Seng fell by 0.38%.

A Quiet Economic Calendar Leaves Geopolitics and COVID-19 to Drive the Markets

Earlier in the Day:

It was a quiet start to the day on the economic calendar on Monday. While there were no material stats to provide direction, the PBoC was in action early on.

From elsewhere, an easing of new COVID-19 cases over the weekend was positive. The numbers remain higher than the previous weekend, however, so need monitoring.

Looking at the latest coronavirus numbers

On Sunday, the number of new coronavirus cases rose by 131,020 to 9,044,544. On Saturday, the number of new cases had risen by 155,790. The daily increase was lower than Saturday’s rise while up from 124,839 new cases from the previous Sunday.

Germany, Italy, and Spain reported 917 new cases on Sunday, which was down from 1,183 new cases on Saturday. On the previous Sunday, just 909 new cases had been reported.

From the U.S, the total number of cases rose by 26,079 to 2,356,657 on Sunday. On Saturday, the total number of cases had risen by 33,388. On Sunday, 14th June, a total of 19,920 new cases had been reported.

From China

The PBoC held the 5-year Loan Prime Rate (“LPR”) at 4.65% and the 1-year LPR at 3.85%. Economists had forecast cuts to 4.50% and 3.70% respectively.

The Aussie Dollar moved from $0.68407 to $0.68453 in response to the PBoC’s hold on rates. At the time of writing, the Aussie Dollar was up by 0.10% to $0.6842.

Elsewhere

At the time of writing, the Japanese Yen was down by 0.02% to ¥106.89 against the U.S Dollar, while the Kiwi Dollar was up by 0.12% to $0.6415.

The Day Ahead:

For the EUR

It’s a quiet day ahead on the economic calendar. There are no material stats due out of the Eurozone to provide the EUR with direction.

A lack of stats will leave the EUR in the hands of market risk sentiment on the day. News of easing tensions between the U.S and China and a fall in the daily number of new cases over the weekend are positives early on.

At the time of writing, the EUR was up by 0.09% to $1.1188.

For the Pound

It’s a relatively quiet day ahead on the economic calendar. June’s CBI Industrial Trend Orders are due out later today.

With a quiet economic calendar on the day, we can expect some influence from the numbers. While the numbers will draw attention, we would expect chatter on Brexit to have the greatest impact on the day, however.

At the time of writing, the Pound was up by 0.13% to $1.2366.

Across the Pond

It’s also a quiet day ahead on the U.S economic calendar. Key stats include existing home sales figures for May.

We don’t expect any influence from the numbers. The housing sector has been on a rebound with mortgage rates sitting at record lows. Inventories are expected to begin to limit upward momentum, however.

Away from the numbers, geopolitics and COVID-19 news from the U.S will remain the key driver.

At the time of writing, the Dollar Spot Index was down by 0.01% to 97.618.

For the Loonie

It’s a particularly quiet day ahead on the economic calendar. There are no material stats due out of Canada to provide the Loonie with direction.

A lack of stats will leave the Loonie in the hands of market risk sentiment and COVID-19 news and updates.

China’s agreement to ramp up the imports of soybeans, corn, and ethanol should ease some of the pain. The markets will want to see the number of new COVID-19 cases continue to drop back from last week’s highs, however.

At the time of writing, the Loonie was up by 0.08% to C$1.3596 against the U.S Dollar.

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

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.

Euro

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.

Gold

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.

Oil

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.

The Week Ahead – COVID-19 Numbers, Geopolitics and June PMIs in Focus

On the Macro

It’s a quieter week ahead on the economic calendar, with just 43 stats in focus in the week ending 26th June. In the week prior, 60 stats had also been in focus.

For the Dollar:

It’s a busy week ahead on the economic data front.

We are now moving beyond April and May and getting end of 2nd quarter numbers that will influence risk sentiment. The numbers will also give the markets a view of what the economic recovery will look like.

Prelim June private sector PMIs are due out on Tuesday and expect the services PMI to have the greatest influence.

The focus will then shift to a busy 2nd half of the week.

On Thursday, the weekly jobless claims and May’s core durable goods orders will have the greatest influence.

At the end of the week, we don’t expect too much direction from inflation and finalized consumer sentiment figures.

Personal spending numbers for May will draw interest, however… A pickup in consumption is key to the economic recovery that can only be fueled by a jump in hiring.

Other stats in the week include finalized 1st quarter GDP numbers and housing data. We expect these along with May inflation figures to have a muted impact on the Dollar and risk sentiment.

The Dollar Spot Index ended the week up by 0.31% to 97.623.

For the EUR:

It’s a relatively busy week ahead on the economic data front.

In the 1st half of the week, prelim June private sector PMIs for France, Germany, and the Eurozone will be in focus.

Expect the stats to have a material influence, with service sector PMIs likely to have a greater impact.

On Wednesday and Thursday, the focus will then shift to Germany. June’s IFO Business Climate Index and July’s GfK Consumer Climate figures are due out.

A pickup in both business and consumer confidence is needed to support the economic recovery.

Will there be fear of a 2nd pandemic or will both monetary and fiscal support be good enough…

If the U.S sees last week’s upward trend in new COVID-19 cases continue, expect risk aversion to return.

The EUR/USD ended the week down by 0.69% to $1.1178.

For the Pound:

It’s a quiet week ahead on the economic calendar.

Key stats are limited to June CBI Industrial Trends and prelim June private sector PMIs.

Expect the services PMI to garner the greatest interest on Tuesday. The UK economy has continued to struggle following a particularly dire April.

Last week’s BoE move failed to ease the pain so more will have to come from the British government.

Away from the economic calendar, expect Brexit negotiations to intensify, which should deliver a more volatile Pound.

The GBP/USD ended the week down by 1.52% to $1.2350.

For the Loonie:

It’s a particularly quiet week ahead on the economic calendar.

There are no material stats due out of Canada to provide the Loonie with direction. That leaves the Loonie in the hands of COVID-19 news and updates and chatter from Beijing and Washington…

We will also expect June’s PMI numbers from the EU and the U.S to give the markets an indication of demand for goods and services. This will have also have an influence on crude oil prices and the Loonie.

The Loonie ended the week down by 0.13% to C$1.3607 against the U.S Dollar.

Out of Asia

For the Aussie Dollar:

It’s a particularly quiet week ahead for the Aussie Dollar.

There are no material stats due out of Australia to provide the Aussie Dollar with direction.

A lack of stats will leave the Aussie in the hands of market risk sentiment throughout the week.

On the monetary policy front, RBA Governor Lowe speaks early on Monday. The PBoC is also scheduled to deliver its Loan Prime Rates on Monday. A surprise cut would provide some support.

While we will expect influence, it will ultimately come down to COVID-19. There remains a serious downside risk to the Aussie Dollar and riskier assets.

Private sector PMIs from the EU and the U.S will also have a material impact in the week.

The Aussie Dollar ended the week down by 0.45% to $0.6835.

For the Kiwi Dollar:

It’s a quiet week but a big week ahead on the economic calendar.

On Wednesday, the RBNZ is in action. While there is unlikely to be further easing, the promise of support will likely be there.

Much will depend on the news and views on the recent uptick in new COVID-19 numbers.

Over the weekend, New Zealand reported new coronavirus cases after having been free from the virus.

Prelim June PMI’s will also need consideration in the week. Central banks will likely consider the June numbers to get an idea of demand and likely activity in the summer months.

On Thursday, the focus will then shift to May’s trade data. We’ve seen resilience through the pandemic. Will this continue?

The Kiwi Dollar ended the week down by 0.59% to $0.6407.

For the Japanese Yen:

June’s Prelim private sector PMIs are due out in the 1st half of the week. We don’t expect too much influence from the numbers.

In the 2nd half of the week, June inflation figures will draw some interest.

For the Japanese Yen, however, expect support to continue should new COVID-19 cases continue to rise. Disappointing PMIs from the Eurozone and the U.S would also be Yen positive in the week.

The Japanese Yen ended the week up by 0.47% to ¥106.87 against the U.S Dollar.

Out of China

It’s a particularly quiet week ahead on the economic data front. There were no material stats due out of China to provide direction for the global financial markets.

That leaves updates from Beijing and beyond on COVID-19 cases and talk of trade wars in focus.

On the monetary policy front, the PBoC will set the loan prime rates on Monday. A surprise rate cut would be welcome.

The Chinese Yuan ended the week up 0.18% to CNY7.0710 against the U.S Dollar.

Geo-Politics

UK Politics:

Brexit remains a key driver for the Pound. Britain and the EU agreed that they would not extend the transition period. Negotiations are set to intensify and that means plenty of volatility for the Pound…

U.S Politics:

It’s going to be a tough week ahead for the U.S President, who hits the campaign trail.

Recently reopened U.S states are reporting spikes in new COVID-19 cases that risk a 2nd wave in the U.S.

Coupled with the recent riots, Trump needs to find solid ground to catch up with Joe Biden.

Expect plenty of distraction tactics from Trump, who continues to blunder his way through the 1st term.

The Coronavirus:

Over the weekend, the WHO delivered another warning, stating that the pandemic is accelerating… Of greater concern will be the upward trend of new cases seen in the U.S.

Germany and South Korea have also reportedly joined a list of countries reporting fresh outbreaks, raising the change of a 2nd wave.

From the market’s perspective, there are 3 key considerations that remain:

  1. Progress is made with COVID-19 treatment drugs and vaccines.
  2. There are no spikes in new cases as a result of the easing of lockdown measures.
  3. Governments continue to progress towards fully opening economies and borders.

With a rise in new cases being reported in a number of countries, the big question will be whether governments will reintroduce lockdown measures… The 2nd consideration is certainly causing market angst.

At the time of writing, the total number of coronavirus cases stood at 8,913,524. Monday to Saturday, the total number of new cases increased by 929,092. Over the same period in the previous week, the total number had risen by 773,853.

Monday through Saturday, the U.S reported 168,434 new cases to take the total to 2,330,578. This was up from the previous week’s 134,775, supporting concerns over a 2nd wave.

For Germany, Italy, and Spain, there were 6,841 new cases Monday through Saturday. This took the total to 722,509. In the previous week, there had been 5,262 new cases over the same period.

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. www.linkedin.com/in/robertlynch6 )

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.

Week Ahead – Market Recovery Under Threat?

The New Normal

This could be a sign of the fragility that remains in the markets but then, the NASDAQ hit new record highs in each of the prior four days and breached 10,000 for the first time ever. This comes before the end of what could be the worst quarter in a century for the economy. Incredible.

Speculation around new waves of coronavirus cases is going nowhere any time soon, as countries look to reopen their economies and save businesses and jobs. But next week also brings a plethora of interest rate decisions as well which means more rate cuts and more asset purchases. In other words, more fuel for the fire. The disconnect between the markets and the global economy isn’t going to improve any time soon.

Key Economic Releases and Events

Monday 15th June

Time (UK) Country Indicator Name Period
00:01 United Kingdom House Price Rightmove MM May
03:00 China (Mainland) Urban Investment (YTD)YY May
03:00 China (Mainland) Industrial Output YY May
03:00 China (Mainland) Retail Sales YY May
03:30 Singapore Unemployment Rate Final SA Q1
Indonesia Trade Balance (Bln of $) May

Tuesday 16th June

07:00 United Kingdom Claimant Count Unem Chng May
07:00 United Kingdom ILO Unemployment Rate Apr
07:00 United Kingdom Employment Change Apr
07:00 United Kingdom Avg Wk Earnings 3M YY Apr
07:00 United Kingdom Avg Earnings (Ex-Bonus) Apr
09:30 Hong Kong Unemployment Rate May
10:00 Germany ZEW Economic Sentiment Jun
13:30 United States Retail Sales Ex-Autos MM May
13:30 United States Retail Sales MM May
13:30 United States Retail Ex Gas/Autos May
14:00 Russia Industrial Output May
14:15 United States Industrial Production MM May
14:15 United States Capacity Utilization SA May
14:15 United States Industrial Production YoY May
15:00 United States Business Inventories MM Apr
21:30 United States API weekly crude stocks 8 Jun, w/e
Japan JP BOJ Rate Decision 16 Jun

Wednesday 17th June

00:50 Japan Trade Balance Total Yen May
01:30 Singapore Non-Oil Exports MM May
01:30 Singapore Non-Oil Exports YY May
07:00 United Kingdom Core CPI YY May
07:00 United Kingdom CPI YY May
08:30 Sweden Unemployment Rate May
08:30 Sweden Total Employment May
10:00 Euro Zone Construction Output MM Apr
10:00 Euro Zone HICP Final MM May
10:00 Euro Zone HICP Final YY May
12:00 South Africa Retail Sales YY Mar
13:30 United States Building Permits: Number May
13:30 United States Housing Starts Number May
13:30 Canada CPI Inflation MM May
13:30 Canada CPI Inflation YY May
14:00 Russia GDP YY Quarterly Revised Q4
15:30 United States EIA Weekly Crude Stocks 12 Jun, w/e
23:45 New Zealand GDP Prod Based QQ, SA Q1
23:45 New Zealand GDP Prod Based YY, SA Q1
23:45 New Zealand GDP Prod Based, Ann Avg Q1
23:45 New Zealand GDP Exp Based QQ, SA Q1

Thursday 18th June

02:30 Australia Employment May
02:30 Australia Full Time Employment May
02:30 Australia Participation Rate May
02:30 Australia Unemployment Rate May
08:30 Switzerland SNB Policy Rate Q2
09:00 Norway Key Policy Rate 18 Jun
12:00 United Kingdom BOE Bank Rate Jun
12:00 United Kingdom Asset Purchase Prog Jun
12:00 United Kingdom GB BOE QE Gilts Jun
12:00 United Kingdom GB BOE QE Corp Jun
12:00 United Kingdom BOE MPC Vote Hike Jun
12:00 United Kingdom BOE MPC Vote Unchanged Jun
12:00 United Kingdom BOE MPC Vote Cut Jun
13:30 United States Initial Jobless Claims 8 Jun, w/e
13:30 United States Jobless Claims 4-Wk Avg 8 Jun, w/e
13:30 United States Continued Jobless Claims 1 Jun, w/e
13:30 United States Philly Fed Business Indx Jun
14:00 Russia Cbank Wkly Reserves 8 Jun, w/e
15:00 United States Leading Index Chg MM May
Indonesia 7-Day Reverse Repo Jun
Indonesia Deposit Facility Rate Jun
Indonesia Lending Facility Rate Jun

Friday 19th June

00:30 Japan CPI, Core Nationwide YY May
00:30 Japan CPI, Overall Nationwide May
07:00 United Kingdom Retail Sales MM May
07:00 United Kingdom Retail Sales Ex-Fuel MM May
07:00 United Kingdom Retail Sales YY May
07:00 United Kingdom Retail Sales Ex-Fuel YY May
11:30 Russia Central bank key rate Jun
13:30 Canada Retail Sales MM Apr
13:30 Canada Retail Sales Ex-Autos MM Apr
Russia GDP YY Monthly May
Russia Retail Sales YY May
Russia Unemployment Rate May
Russia Real Wages YY Apr

Country

US

It seems a second wave of the coronavirus is hitting the US and could very well derail a lot of the reopening momentum that was taking place.  As states reopen and Americans return to pre-pandemic behavior, it is expected that a rise in new coronavirus cases would occur.

The White House is convinced they have yet to see any relationship between reopening and increased cases.  If hospitalizations continue to increase, you could see many individuals decide to remain a part of the stay-at-home economy.  If the virus spread intensifies, restrictions will be tightened and that will put a damper on the economic recovery prospects.

On Tuesday, Fed Chair Powell will follow his downbeat FOMC presser with his semi-annual monetary policy report to the Senate Banking Committee.  With little time between events, it is unlikely for Powell to deviate from Wednesday’s rate decision.  Traders will also pay close attention to the release of US retail sales, which is expected to show a rebound from the record low seen in April.

US Politics

Economic jitters and virus concerns will likely push the Trump administration into supporting a second round of stimulus payments for Americans.  Coronavirus relief talks were not supposed to happen until late July, but that should change given the recent jump in cases throughout the country.

On Friday, President Trump returns to the campaign trail in Oklahoma, his first live rally since March.

Democrats are eagerly awaiting former-VP Biden’s decision on his running mate.  Prior to COVID-19, the Democratic National Convention was originally scheduled in July, meaning we should have found out his decision by June.  Since the convention was delayed till August 17th, he will have more time to evaluate his candidates.  Biden will turn 78 a few weeks after the election, so his VP selection will be critical for many voters.

UK

The UK experienced its sharpest contraction on record in April, the first full month of the lockdown. The economy contracted by 20.4% at the start of the second quarter which is expected to be the worst month of the three.

Next week the Bank of England is expected to increase its bond buying in response to the pandemic, with £100-200 billion added to its quantitative easing program. This comes as government borrowing spikes to fund the crisis which would have otherwise risked pushing up borrowing costs.

Brexit

High level talks between Boris Johnson and Ursula Von Der Leyen are expected to take place next week, possibly as early as Monday, as the two sides look to reconcile the significant differences ahead of the 31 December transition expiry. As it stands, no deal is the default and the UK is expected to formally rule out an extension once again. We’ve seen this all before though and compromise tends to come late in the day. Still, business could very much do without this in a pandemic year.

Russia

The Central Bank of Russia is expected to cut interest rates by 50-100 basis points when it meets next week, from 5.5% where it currently stands. Like many others, the economy has been ravaged by the coronavirus crisis and contracted 12% in April, and May is not expected to be any better.

Switzerland

The SNB is not expected to cut interest rates next week, with the main policy rate remaining at -0.75%. The central bank is active in FX markets, with its holdings of foreign currencies recently rising above 800 billion Swiss francs – greater than the output of its economy – as it seeks to stop the currency rising too far as a result of safe haven flows. The central bank hasn’t set an official floor for the EURCHF pair – hopefully learning lessons of the past – but 1.05 is believed to represent the informal level.

Norway

The Norges Bank is not expected to cut interest rates next week, with the main policy rate currently sitting at 0%.

China

China Industrial Production (4.5%E) and Retail Sales (-2.0%E) on Monday. Poor number could see Asian markets weaken depending on Wall Street’s friday performance. Ongoing tensions with the US over HK, trade and Covid-19.

No other significant data this week.

Hong Kong

Protests have died down for now over the securities law. Possible resurgence this weekend. HSBC and Stan Chart under fire for backing China’s HK security law. No significant data this week.

India

Economy continues reopening but Covid-19 cases are spiking, markets negative. Standoff with China continues in the Himalayas but negotiations continue.

Australia

Australian stocks and Australian Dollar sold heavily on equity correction into the week’s end. Negative results on Friday for Wall Street should see that trend continue into the first part of the week. Australian markets are among most vulnerable to deep bull market correction. RBA minutes Tuesday. Will look for talk about negative interest rates.Potentially bullish for stocks. Unemployment Thursday (6.9% E) will drive intraday volatility. Otherwise what happens in the US will drive sentiment.

Japan

BOJ policy meeting Tuesday. Unchanged at -0.10% but looking out for more stimulus measures. Stocks positive. Tankan and Trade Balance Wednesday. Unlikely to impact markets. Markets will be led by Wall Street after sell-offs this week.

Market

Oil

Oil didn’t escape yesterday’s backlash, with crude falling more than 5% on apparent fears around rising case numbers. Again, we have to take this in the context of an asset class that has done rather well over the last couple of months. It’s been some rebound and I think some serious profit taking may have kicked in. It’s creeping higher again today but $40 may remain an upside barrier for WTI.

Gold

Gold has been range-bound for the last couple of months since it first tried to break $1,750 only to quickly run out of steam. It’s tried again a few times since, each as unsuccessful as the last, and it looks to be suffering the same fate again this time. It’s pushing a little higher again as it looks to capitalize on dollar weakness but we could see it run into difficulties once again, unless the greenback continues its journey south.

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

Craig Erlam, Senior Currency Analyst at OANDA


This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

The Week Ahead – Central Banks, Economic Data, COVID-19, and Brexit in Focus

On the Macro

It’s a busier week ahead on the economic calendar, with 60 stats in focus in the week ending 19th June. In the week prior, 48 stats had also been in focus.

For the Dollar:

It’s a relatively busy week ahead on the economic data front. We are also beginning to receive May and June economic indicators.

These are beyond the April lockdown and, with lockdown measures easing in May, an uptick is expected across the indicators.

As an absolute certainty, the markets are not expecting May figures to reflect a worsening economic environment.

Consumer confidence and spending are key, as are labor market conditions.

Expect May retail sales figures (Tue) and the weekly jobless claims (Thurs) to garner the greatest interest.

From the manufacturing sector, however, June’s NY Empire State Manufacturing Index (Mon) and the Philly FED (Thurs) will also be in focus.

Housing sector and industrial production and business inventory numbers should have a muted impact this time around…

Following last week’s FED Chair Powell press conference, the FED Chair is back in action this week. The FED Chair will be giving testimony to Congress on Tuesday and Wednesday. Will we see another dose of reality as the number of new coronavirus cases see a pickup?

Away from the stats, there’s always Trump and foreign policy that could spur demand for a struggling Dollar.

The Dollar Spot Index ended the week up by 0.39% to 97.319.

For the EUR:

It’s another quiet week ahead on the economic data front.

Expect the markets to brush aside May inflation figures and 1st quarter wage growth and any April numbers.

The focus will be on June’s ZEW Economic Sentiment figures for Germany and the Eurozone.

A surprise fall in optimism would be a test for a EUR that has been on a tear.

The ECB’s Economic Bulletin on Thursday will also draw attention.

Outside of the numbers, any chatter from member states on fiscal policy and geopolitical risk will also influence.

The EUR/USD ended the week down by 0.32% to $1.1256.

For the Pound:

It’s a particularly busy week ahead on the economic calendar.

In the 1st half of the week, we’ve got May claimant count and April unemployment figures and May inflation figures in focus.

Expect claimant counts to be the key driver.

In the 2nd half of the week, we’ve got the BoE’s MPC monetary policy decision… Last week, BoE governor Bailey talked of a willingness to support. If this week’s stats are anything like last week’s, there may even be the talk of negative rates…

Brexit will also be in focus as British PM Johnson gets involved…

The GBP/USD ended the week down by 1.01% to $1.2540.

For the Loonie:

It’s a relatively busy week ahead on the economic calendar.

With the markets brushing aside April numbers, expect very little influence from the stats, however.

Inflation figures for May will have an impact as the markets look towards consumption…

Market sentiment towards the economic outlook and demand for crude remains key near-term. Further cuts in output are likely to be needed following the recent string of economic projections…

The Loonie ended the week down by 1.24% to C$1.3589 against the U.S Dollar.

Out of Asia

For the Aussie Dollar:

It’s a relatively quiet week ahead for the Aussie Dollar.

The markets will need to wait until Thursday, however. May employment figures are due out and will garner plenty of attention. Another sharp slide in employment and expect the Aussie Dollar to come under pressure.

We have seen the RBA continue to rely on consumers to prop up the economy. Another tumble could test the RBA’s optimism from the previous meeting…

Housing sector data due out mid-week should have a muted impact on the Aussie.

On the monetary policy front, the RBA meeting minutes are due out on Tuesday.

From elsewhere, expect China’s industrial production figures for May and geopolitics to also influence. There’s also the threat of a 2nd wave COVID-19 pandemic to consider…

The Aussie Dollar ended the week down by 1.48% to $0.6866.

For the Kiwi Dollar:

It’s also a relatively quiet week ahead on the economic data front.

Key stats include consumer sentiment figures for the 2nd quarter and 1st quarter GDP numbers.

While 1st quarter GDP figures will draw attention, expect consumer sentiment to also have an impact. We continue to look towards consumer and business confidence as an indicator.

Weak consumer sentiment would test a more optimistic outlook on the economy and its recovery.

From elsewhere, industrial production figures from China, COVID-19 updates, and geopolitics will also provide direction.

The Kiwi Dollar ended the week down by 0.95% to $0.6445.

For the Japanese Yen:

It’s a relatively busy week for the Japanese Yen.

On Tuesday, the Bank of Japan is in action. Amidst the economic doom and gloom, is there more in the tank, or will the BoJ stand pat? Central banks may well need to sit back for now. There are too many uncertainties to make a move late in the 2nd quarter…

The focus will then shift to May trade figures due out on Wednesday. With the markets looking for a pickup in trade activity in May, the figures will garner plenty of attention. Exports to the U.S and China will be of particular interest…

At the end of the week, we aren’t expecting too much influence from the inflation figures, however.

Any risk aversion in the week should provide the Yen with support. Particularly if the U.S continues to see an upward trend in new coronavirus cases.

The Japanese Yen ended the week up by 2.02% to ¥107.38 against the U.S Dollar.

Out of China

It’s a relatively busy week ahead on the economic data front. Key stats include May industrial production and fixed asset investment figures due out on Monday.

With lockdown measures easing across developed economies in May, a 2nd consecutive monthly rise in production will be a must. May’s Manufacturing PMI survey had suggested weak overseas demand…

Away from the numbers, however, it will be chatter from Beijing and Washington in the week. We have not seen the end to the friction just yet…

The Chinese Yuan ended the week flat at CNY7.0835 against the U.S Dollar.

Geo-Politics

UK Politics:

Brexit will be in focus, with Boris Johnson and EU Commission President Ursula von der Leyen due to meet in the coming week. With the UK government having stated that there will be no extension, the outcome of talks will be key.

Intensive talks are due to take place to make progress, which will leave the Pound particularly sensitive to the news wires in the coming weeks.

U.S Politics:

Tensions between the U.S and China continue to linger and could escalate into more than a war of words.

News of a pickup in new COVID-19 cases following Trump’s call for states to reopen may keep him busy in the week, however.

The Coronavirus:

Over the weekend, news of Beijing taking measures to control a 2nd wave will be a cause for concern. The news follows reports from recently opened U.S states of a jump in new cases.

A pickup in the number of new cases would question plans to remove lockdown measures and spell more economic doom and gloom.

From the market’s perspective, there are 3 key considerations that remain:

  1. Progress is made with COVID-19 treatment drugs and vaccines.
  2. There are no spikes in new cases as a result of the easing of lockdown measures.
  3. Governments continue to progress towards fully opening economies and borders.

The latest news will put much greater emphasis on progress towards a vaccine. Expect any talk of reintroducing more stringent lockdown measures to spook the markets and the eternal optimists.

At the time of writing, the total number of coronavirus cases stood at 7,859,593.

Monday through Saturday, the U.S reported 134,775 new cases to take the total to 2,142,224. While this was down from the previous week’s 150,005, there was an upward trend in the week.

For Germany, Italy, and Spain, there were 5,262 new cases Monday through Saturday. This took the total to 714,759. In the previous week, there had been 5,887 new cases over the same period.

The Weekly Wrap – A Dose of Reality Hit Risk Appetite

The Stats

It was a relatively busy week on the economic calendar, in the week ending 12th June.

A total of 48 stats were monitored, following the 61 stats from the week prior.

Of the 48 stats, 25 came in ahead forecasts, with 21 economic indicators coming up short of forecast. Just 2 stats were in line with forecasts in the week.

Looking at the numbers, 28 of the stats reflected an upward trend from previous figures. Of the remaining 20, 19 stats reflected a deterioration from previous.

For the Greenback, a run of 3 consecutive weekly losses came to an end. A Thursday and Friday rebound reversed losses from early in the week. The U.S Dollar Spot Index rose by a relatively modest 0.39% to end the week at 97.319. In the week prior, the Dollar had fallen by 1.43%.

Doom and gloom over the economic outlook had hit the markets before Powell’s press conference. The World Bank got things going at the start of the week, projecting a 5.2% global economic contraction.

OPEC jumped on the bandwagon, also delivering doomsday like projections that sank crude oil prices…

News of a jump in new coronavirus cases from states recently reopened also spooked the markets mid-week.

Looking at the latest coronavirus numbers.

The total number of coronavirus cases stood at 7,718,680 on Friday, rising from last Friday’s 6,823,680 total cases. Week-on-week, the total number of cases increased by 895,000, on a global basis. This was higher than the previous week’s increase of 797,573 in new cases.

In the U.S, the total rose by 162,643 to 2,115,319. In the week prior, the total number of new cases had risen by 159,413.

Across Germany, Italy, and Spain combined, the total number of new cases increased by 5,842 to bring total infections to 713,845. In the previous week, the total number of new cases had risen by 6,992.

Out of the U.S

It was a relatively quiet week on the economic data front.

Key stats in the week were really limited to just the weekly jobless claims figures and consumer sentiment and expectations figures.

Much to the U.S President’s delight, the weekly jobless claims rose by 1.542m in the week ending 5th June. While still on the higher side, this was well below the previous week’s 1.877m.

It wasn’t enough to ease market panic on the day, however, as Powell’s comments echoed across the global financial markets.

On Friday, prelim consumer sentiment and expectations figures for June also garnered plenty of attention.

The Michigan Consumer Expectations Index rose from 65.9 to 73.1, with the Michigan Consumer Sentiment Index rising from 82.3 to 87.8. It was good enough to support the U.S majors on the day.

Away from the numbers, the FOMC June policy decision, economic projections, and press conference was the main event.

FED Chair Powell provided the markets with a reality check during the press conference. The markets responded in kind, with riskier assets taking a dive.

Remarkably, the very same riskier assets found support on Friday, though not enough to reverse losses from earlier in the week.

On the geopolitical risk front, tension remained high domestically following the murder of Floyd George. Tensions between the U.S and China also continued to simmer.

In the equity markets, the Dow slid by 5.55%, with the NASDAQ and S&P500 falling by 2.30% and by 4.78% respectively.

Out of the UK

It was a relatively busy week on the economic calendar. The markets had to wait until Friday for the numbers, however, for the lion’s share of the stats.

The stats were heavily skewed to the negative, with the UK economy contracting by an alarming 24.5%, year-on-year, in April.

Manufacturing production tumbled by 24.3%, month-on-month, as the lockdown led to a closure of all non-essential businesses.

The figures led to assurance from the Bank of England Governor Bailey that he is ready to take action. It was the UK’s largest contraction on record.

On the Brexit front, there was no talk of an extension to the transition period. This does lead to an increased risk of a hard Brexit should both sides fail to take a softer stance on demands.

In the week, the Pound fell by 1.01% to $1.2540, partially reversing a 2.63% gain from the previous week. The FTSE100 ended the week down by 5.85%.

Out of the Eurozone

It was a relatively busy week economic data front. While the stats were skewed to the positive, the stats were still a disappointment. May’s inflation figures, also released in the week, drew little attention.

There were some noteworthy numbers to consider amongst the stats:

In April, industrial production tumbled by 17.9% in Germany and by 17.1% in the Eurozone. Also dire was trade data from Germany, where the trade surplus narrowed from €12.8bn to €3.2bn in April.

While the data was quite dire, the EUR briefly visited $1.14 levels before falling into the red.

For the week, the EUR fell by 0.32% to $1.1256, following a 1.71% gain from the previous week.

For the European major indexes, it was a particularly bearish week. The CAC40 and DAX30 slid by 6.90% and 6.99% respectively, with the EuroStoxx600 falling by 5.66%.

Elsewhere

It was a bearish week for the Aussie Dollar and the Kiwi Dollar, bringing to an end a run of 3 consecutive weekly gains.

In the week ending 12th June, the Aussie Dollar fell by 1.48% to $0.6866, with the Kiwi Dollar declining by 0.95% to $0.6445.

For the Aussie Dollar

It was a quiet week for the Aussie Dollar on the economic data front.

Business and consumer confidence figures for May and June were the key stats of the week.

While the good news was that both consumer and business confidence improved, concerns over the economic outlook weighed.

Projections from the World Bank, OPEC, and the FED Chair all contributed to the Aussie Dollar’s demise.

For the Kiwi Dollar

It was also a quiet week on the economic calendar.

Key stats included business confidence, electronic card retail sales, and business PMI numbers for May.

All the stats were skewed to the positive.

In spite of a rebound in the numbers, business confidence and the business PMI remained at low levels.

A 78.9% rebound in retail sales was also not enough to support the Kiwi in the week.

It was the economic projections that led to an end to a 3-week rally.

For the Loonie

It was a particularly quiet week on the economic calendar. Economic data was limited to housing start figures for May that had a muted impact on the Loonie.

Direction through the week came from market risk appetite and crude oil prices.

OPEC’s doom and gloom certainly didn’t help and neither did news of the Saudis ending their extra cuts in output post-June.

OPEC + may need to be doing a lot more in terms of rebalancing supply and demand to restore price stability.

The Loonie fell by 1.24% to end the week at C$1.3589, following a 2.60% rally from the previous week.

For the Japanese Yen

It was a relatively quiet week on the data front.

In the 1st half of the week, finalized 1st quarter GDP numbers were in focus. While revised up from 1st estimate, it was a reminder of economic conditions and what lies ahead.

In the 2nd half of the week, the BSI Large Manufacturing Conditions Index tumbled from -17.2 to -52.3 in Q2.

Rounding off a bad week on the data front, finalized industrial production figures were revised down from prelim. In April, production slid by 9.8% following a 3.7% fall in March.

While the stats were negative in the week, it was risk aversion that finally delivered support for the Yen. Much of that was down to FED Chair Powell, who managed to further deflect Dollar demand.

The Japanese Yen rose by 2.02% to end the week at ¥107.38. In the week prior, the Yen had fallen by 1.63% against the U.S Dollar.

Out of China

Economic data included May trade and inflation figures. While exports fell less than expected, the trade data pointed to a likely slump in exports in the coming months.

Imports tumbled by 16.7%, following a 14.2% slide in April. Exports fell by just 3.3%, but with global demand in May likely to have been lackluster, exports in May could see a more marked slide.

In the 2nd half of the week, inflation and factory gate prices delivered further evidence of weak demand.

On the geopolitical front, it was a quiet week, with the U.S and China seemingly standing down for now…

It does remain to be seen, however, whether the recent semblance of calm will continue.

In the week ending 12th June, the Yuan ended the week flat at CNY7.0835 against the Greenback.

The CSI300 ended the week up by just 0.05%, while the Hang Seng fell by a relatively modest 1.89%.

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.

Europe

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.

America

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.

Monday Blues: Consolidation Threatened

US shares are firm, as is the 10-year yields, hovering near 92 bp. Core 10-year benchmark yields are a softer in Europe, while peripheral yields are edging higher to start the week. The Scandis and Antipodean currencies continue to lead the move against the dollar, while the other major currencies are less than 0.2% higher. Emerging market currencies continue their run higher, led by Russia, South Africa, and Mexico.

The JP Morgan Emerging Market Currency Index is extending its recovery for the eighth consecutive session. Gold has steadied below $1700 after falling 2.6% last week. Oil reacted favorably to the OPEC+ agreement to extend the maximum output cuts until the end of next month. July WTI is higher for the fifth straight session and briefly traded above $40 a barrel.

Asia Pacific

China reported May trade and reserve figures over the weekend. The reserves rose by about $10 bln, which is a little more than twice what economists had anticipated. Still, on a $3.09 trillion-base, it is little more than a rounding error and has no significance. On the other hand, the trade surplus jumped by more than a third, those economists had anticipated a small decline.

The rise in the trade surplus to a record of almost $63 bln is not a function of China’s economic prowess. Exports fell 3.3% year-over-year after a 3.5% increase in April. A Reuters poll found a median forecast of a 7% increase. Imports plunged 16.7%, worse than the 14.2% decline in April and the sharpest decline since January 2016. The Reuters poll looked for a 9.7% decline. It appears that weaker prices contributed to the decline in imports. For example, Bloomberg cites a 5.2% rise in oil import volumes so far this year, while the average purchase price has declined by over a fifth.

This, in turn, speaks to a positive terms of trade shock. China may indeed be pursuing an import substitution strategy, but it is not the key driver of the dramatic widening of the trade surplus in May. It will not feel like an import substitution strategy for Brazil. China appears to be the destination of a growing share of Brazilian exports, taking 54% of its outbound shipments in May. In the first five months of the year, Brazilian exports to China have risen by 128% year-over-year, according to data released last week. Much of what Brazil ships to China (agriculture and energy) compete directly with US exports to China.

Japan reported Q1 GDP contracted by 2.2% at an annualized pace rather than by 3.4% as initially estimated. The upward revision to capex (1.9% vs. -0.5%) more than offset the small downward revisions to private and public consumption and inventories. The world’s third-largest economy may contract by around 25% this quarter. Separately, Japan reported a JPY252 bln seasonally adjusted current account surplus in April despite a JPY966 bln trade deficit.

The dollar is trading in the upper end of the pre-weekend range (~JPY109.05-JPY109.85) and has been confined to about a 15 tick range on both sides of JPY109.55. It had risen for the previous four sessions. The market lacks near-term conviction. The Australian dollar is firm, but it is also trading within the pre-weekend range. It had risen to nearly $0.7015 before the weekend and rose above $0.7000 in both Asia and the European morning. It did not see much follow-through buying.

Support is seen in the $0.6950-$0.6960 area. The New Zealand dollar did edge to a new high, encouraged by reports that the pathogen has been eradicated from the country. While the Hong Kong dollar’s forward points continue to ease, flows, especially from the mainland, are keeping the HK dollar itself pinned at the strongest end of the band, forcing the HKMA’s hand. The PBOC dollar’s reference rate was firm at CNY7.0882 compared to the bank models, but the greenback slipped lower for the third consecutive session.

Europe

The US surprised Germany by indicating plans to withdraw a little more than a quarter of its troops (or around 9500). No official reason or notification has been delivered. US-German ties have been strained over various issues, including NATO, the Nord Stream II pipeline, and various trade issues. Before the weekend, Trump renewed his threat of auto tariffs if Europe did not reduce its tariffs on American lobsters. Some might argue that this is part of the US “isolationism,” but the troops might not be brought home but simply re-deployed in Europe.

Before the weekend, Germany reported a nearly 26% drop in April factory orders. The median forecast in the Bloomberg survey was for a 20% decline. Today, it reported a 17.9% fall in April industrial output. It was worse than expected. Aggregate eurozone figures will be reported at the end of the week, and a contraction of around 20% month-over-month is expected after March’s decline of a little more than 11%.

The latest round of UK-EU trade talks did not see much progress, and the next important step is a bilateral meeting between Prime Minister Johnson and EU President von der Leyen. Meanwhile, negotiations with Japan over a trade agreement continue today. Separately, Johnson is expected to brief his cabinet on the next stage of lifting social restrictions. The Prime Minister wants to expedite infrastructure and hospital spending. The latest polls show falling support for Johnson and the Tories.

The euro reversed ahead of the weekend, retreating from the $1.1385 area to about $1.1280. It has been confined through the European morning in a 20-tick range centered at $1.1300. There is an option for about 615 mln euros struck at $1.1365 that expires today, but the intraday technicals suggest it is unlikely to be in play.

A break, and especially a close below $1.1265 today, could signal a near-term test on the $1.1200-area. Sterling encountered selling in front of the pre-weekend high near $1.2730 and has drifted lower in the European morning. A break of $1.2650 signals a move toward $1.2600 initially, and maybe $1.2550 near-term.

America

The FOMC meeting conclusion and press conference on Wednesday is the main event this week. The week, though, begins slowly without US and Mexican data today. Canada reports May housing starts. Mexico will release its May estimate of CPI tomorrow, and a small uptick is expected.

The US reports its May CPI a Wednesday morning. In addition to its weekly sales, the US will auction 3-year notes today and 10-year notes tomorrow. Some $35-$40 bln of investment-grade corporate bonds are expected to be brought to market this week.

The market continues to digest the stronger than expected employment data reported by both the US and Canada ahead of the weekend. There are temporary and likely permanent job losses in recent months. Economists and policymakers cannot be sure of the precise mix. As cities and states relaxed the stay-in-place orders, it makes sense that food services and restaurants saw a jump in employment, and accounted for around half of the US job growth.

Health care gained ~310k jobs and construction,~465k jobs. In Canada, Quebec appears to account for the bulk of the job increase. The US unemployment rate was dragged down by misclassification of furloughed workers and the fact that the labor force shrank. Nevertheless, the first signs of stabilization are in place, and the long slog back has begun.

Mexico reluctantly agreed to 100k barrel a day cut in output after much arm twisting and a broad claim that the US would make up the difference between that and the 400k barrels that OPEC+ wanted it to cut in the April agreement. It does not seem so surprising that it has balked at joining the extension announced last week and confirmed over the weekend. Saudi Arabia feels so confident in its strategy that it hiked next month’s prices to Asia by $5.60-$7.30 a barrel.

This is well above the $4 increase the median of a small Bloomberg poll anticipated. However, two other developments should be noted. First, the largest oil field in Libya is coming back on-line and provided the cease-fire holds, can ramp up production to around 300k barrels a day the end of Q4.

Second, as we have noted, US shale output can rebound quicker than traditional crude wells. Shut-in production (wells drilled and capped) can be seen as in-ground storage that is relatively quick and cheap to extract now. If not this week, then soon, market participants should be prepared for US inventories and the drill count to rise.

The US dollar remains pinned near the pre-weekend lows just below CAD1.3400, where a $950 mln option is set to expire today. The US dollar’s momentum indicators are stretched, and a move above CAD1.3445-CAD1.3465 may be the first sign of consolidation or correction. That said, chart-support is not seen until nearer CAD1.3560. The greenback did extend its losses against the Mexican peso, falling to about MXN21.4770. However, the inability to maintain the downside momentum may suggest the corrective/consolidation phase is at hand. Initial resistance is seen in the MXN21.60-MXN21.70 area. A close above there could signal near-term greenback gains toward MXN22.00.

This article was written by Marc Chandler, MarctoMarket.

The Week Ahead – Geopolitics and the FED to Test the Theory of Gravity

On the Macro

It’s a quieter week ahead on the economic calendar, with 50 stats in focus in the week ending 12th June. In the week prior, 60 stats had also been in focus.

For the Dollar:

While it’s a relatively quiet week ahead on the economic data front. Once more, we will expect some stats to garner more attention than others.

The markets will almost certainly brush aside May inflation figures and April JOLTs job openings.

That leaves the weekly jobless claims on Thursday and June consumer sentiment figures on Friday in focus.

The big question is whether last week’s labor market stats and fall in the unemployment rate will continue.

The main event of the week is the FED interest rate decision on Wednesday. Expectations are that the FED will continue to write-off the chances of negative rates.

Some guidance on the bond-buying programs and what lies ahead is likely. One thing is for certain, with the unemployment rate sitting at 13.3%, expect the continued promise of support.

Geopolitical risk, civil unrest in the U.S, and COVID-19 updates will also need monitoring.

There is also the small matter of fiscal support and funds reaching the right hands.

The Dollar Spot Index ended the week down by 1.43% to 96.937.

For the EUR:

It’s also a quieter week ahead on the economic data front. With the markets uninterested in 1st quarter and April figures, there’s unlikely to be too much influence from the stats.

Stats include April industrial production and trade data out of Germany and 1st quarter GDP and April industrial production figures for the Eurozone.

While finalized inflation figures for May are also due out, we aren’t expecting any reaction to the numbers.

In the week, expect discussions on the disbursement of the COVID-19 recovery fund to garner plenty of interest, however.

While the more than €2tn is a huge plus, member states will need to disburse the funds to support the recovery. EU finance ministers are scheduled for a meeting on Friday, which will garner plenty of attention.

There is also geopolitical risk to consider, with any rise in U.S – China tensions will likely weigh on the EUR.

The EUR/USD ended the week up by 1.71% to $1.1292.

For the Pound:

It’s a relatively busy week ahead on the economic calendar.

The markets will have to wait until Friday, however. Key stats include April GDP, manufacturing and industrial production, and trade data.

While we will expect the markets to be somewhat forgiving of any dire numbers, there is the chatter of negative rates.

Particularly dire numbers could force the BoE into action. Not only is the UK economy grappling with the COVID-19 pandemic but also Brexit uncertainty.

On the Brexit front, we are expecting updates and there could be the talk of an extension to the transition period.

The GBP/USD ended the week up by 2.63% to $1.668.

For the Loonie:

It’s a particularly quiet week ahead on the economic calendar.

Economic data is limited to April and May building permits and housing starts. We’re not expecting the Loonie to be too responsive to the numbers.

Crude oil inventories, chatter from OPEC Plus, and the monthly OPEC meeting will influence.

Ultimately, risk appetite will continue to be the key driver. Economic data will need to support the market view of a pickup in economic activity. Geopolitics will influence that view in the week.

The Loonie ended the week up by 2.60% to C$1.3422 against the U.S Dollar.

Out of Asia

For the Aussie Dollar:

It’s a quiet week but an important week ahead for the Aussie Dollar.

Key stats include May business confidence and June consumer sentiment figures.

We continue to see the sentiment, employment, and consumer spending as the key drivers for the Aussie Dollar.

Disappointing figures would test the Aussie mid-week.

From elsewhere, trade data out of China and geopolitics will also influence.

The Aussie Dollar ended the week up by 4.53% to $0.6969.

For the Kiwi Dollar:

It’s a relatively busy week ahead on the economic data front.

Expect business and consumer sentiment figures to garner plenty of attention on Tuesday and Friday.

Following a 46.8% slump in electronic card retail sales in April, the markets will be looking for a pickup in spending in May. Retail sales figures for May are due out on Thursday.

New Zealand was amongst the first to be free of COVID-19. That will need to translate into a pickup in consumer and business confidence and spending.

At the end of the week, May’s Business PMI will also provide direction.

From elsewhere, trade data from China and geopolitics will also influence following last week’s surge.

The Kiwi Dollar ended the week up by 4.87% to $0.6507.

For the Japanese Yen:

It’s going to be another limbo week for the Japanese Yen.

On Monday, finalized 1st quarter GDP numbers aren’t likely to garner too much interest.

At the end of the week, finalized industrial production figures for April will also be brushed aside.

The markets will be asking what it will take for the Yen to break from its current stranglehold.

A reality check and a realization that the U.S economy is going nowhere fast and that Trump’s days are numbered, that would do it… Following last week’s labor market numbers, however, that may be a big ask.

The Japanese Yen ended the week down by 1.63% to ¥109.59 against the U.S Dollar.

Out of China

It’s a relatively busy week ahead on the economic data front. Key stats include May trade data on Monday and inflation figures on Wednesday.

While we will expect the numbers to have some influence on market risk sentiment, geopolitics could overshadow any pickup in economic activity.

The Chinese Yuan ended the week up by 0.74% to CNY7.0834 against the U.S Dollar.

Geo-Politics

UK Politics:

We continue to see Brexit as the key risk to the Pound and its recent upswing from sub-$1.21 levels.

While current risk sentiment is Pound positive that would shift should the chances of a hard Brexit spike.

The Pound, for now, is holding on to the hope of an extension to the transition period or, an EU trade agreement, at a minimum.

An eternal optimist may want both, which would bring $1.30 levels into play against the Dollar.

U.S Politics:

There is never a dull moment, with U.S President Trump in office.

While Trump may be looking to pass the buck, it’s going to be hard to do so.

He may want to distract the markets, should the riots continue into the week. Even the NFL backtracked on its decision to ban kneeling during national anthems. The reversal was made in response to the global reaction to George Floyd’s murder. Trump will be ignored in his call for all to stand tall during anthems.

China and U.S tensions remain the key risk for now, however. With HK in the spotlight, China could throw in new laws, particularly following the Tiananmen vigils of last week.

Either way, it was way too quiet last week.

The Coronavirus:

While the U.S and the EU have seen the number of new cases steady to acceptable levels, other nations continue to struggle.

The UK is one of those nations, with an unprecedented number of COVID-19 deaths. Over the weekend, the total number of deaths rose to more than 40,000. Only the U.S has more, while none of the most affected nations have such a high mortality rate.

For the UK, a mortality rate of close to 15% will raise questions over the government’s preparedness. Germany’s mortality rate, by contrast, sits at under 5%…

The U.S may have the highest number of cases and deaths but Brazil and Russia have seen a surge new in cases. As of Saturday, Brazil had 671,464 total cases, with Russia sitting at 458,689.

From the market’s perspective, there are 3 key considerations that remain:

  1. Progress is made with COVID-19 treatment drugs and vaccines.
  2. There are no spikes in new cases as a result of the easing of lockdown measures.
  3. Governments continue to progress towards fully opening economies and borders.

As the easing in lockdown measures continue, an effective treatment drug and vaccine must be the priority.

Countries are beginning to open up borders to support tourism, which does raise the threat of a 2nd wave…

At the time of writing, the total number of coronavirus cases stood at 6,961,938.

Monday through Saturday, the U.S reported 150,005 new cases to take the total to 1,987,175. This was up from the previous week’s 130,165.

For Germany, Italy, and Spain, there were 5,887 new cases Monday through Saturday. This took the total to 708,887. In the previous week, there had been 9,228 new cases over the same period.

The Weekly Wrap – Stimulus, Stimulus, and Stimulus. Who Needs Safe Havens?

The Stats

It was a particularly busy week on the economic calendar, in the week ending 5th June.

A total of 61 stats were monitored, following the 58 stats from the week prior.

Of the 61 stats, 44 came in ahead forecasts, with 13 economic indicators coming up short of forecasts. Just 4 stats were in line with forecasts in the week.

Looking at the numbers, 40 of the stats reflected an upward trend from previous figures. Of the remaining 21, 19 stats reflected a deterioration from previous.

For the Greenback, it was a 3rd consecutive week in the red, with demand for riskier assets sinking the Dollar. The U.S Dollar Spot Index slid by 1.43% to end the week at 96.937. In the week prior, the Dollar had fallen by 1.52%.

A downward trend in new coronavirus cases continued to support the easing of lockdown measures. With tensions between the U.S and China seeming to cool, the markets diverted attention to the stimulus.

The German coalition government impressed mid-week. At the end of the week, reports of another US$1tn from the U.S government also fueled demand for riskier assets.

This was all on top of the ECB adding to the frenzied demand for riskier assets…

Looking at the latest coronavirus numbers.

The total number of coronavirus cases stood at 6,823,680 on Friday, rising from last Friday’s 6,026,017 total cases. Week-on-week, the total number of cases increased by 797,573, on a global basis. This was higher than the previous week’s increase of 728,148 in new cases.

In the U.S, the total rose by 159,413 to 1,952,676. In the week prior, the total number of new cases had risen by 148,169.

Across Germany, Italy, and Spain combined, the total number of new cases increased by 6,992 to bring total infections to 708,083. In the previous week, the total number of new cases had risen by 10,736.

Out of the U.S

It was a busy week on the economic calendar.

In the 1st half of the week, the market’s preferred ISM private sector PMIs and the ADP nonfarm figures were in focus.

Both the manufacturing and non-manufacturing PMIs increased, reflecting a slower pace of contraction.

According to the monthly ADP report, nonfarm employment fell by 2.76m in May. This was far better than a forecasted decline of 9m and April’s 19.557m slide.

The focus then shifted to Thursday’s initial jobless claims and Friday’s labor market numbers.

While another 1.877m rise in jobless claims tested the markets, labor market stats on Friday supported riskier assets.

The unemployment rate fell from 14.7% to 13.3%, with nonfarm payrolls rising by 2.509m.

Economists had forecast an 8m fall in payrolls and an unemployment rate of 19.7%.

On the geopolitical risk front, there was very little chatter in the week on China, easing market jitters. There was also the talk of further fiscal stimulus that fueled demand for riskier assets in the week.

In the equity markets, the Dow rallied by 6.81%, with the NASDAQ and S&P500 gaining 3.42% and 4.91% respectively.

Out of the UK

It was a relatively quiet week on the economic calendar. Key stats included finalized private sector PMIs for May.

There was a slower rate of contraction across the manufacturing and services sectors in May. It was far from convincing, however, with the Composite PMI rising from 13.8 to 30.0.

The all-important services PMI trailed at 29.0, which must be a concern as lockdown measures continued.

While the stats were concerning, it was risk-on through the week, driving demand for the Pound.

There was also some hope of compromise at the Brexit negotiating table that contributed to the Pound’s upside.

Nonetheless, the transition period has yet to be extended, though the pressure is now on…

In the week, the Pound surged by 2.63% to $1.2668, following on from a 1.40% gain from the previous week. The FTSE100 ended the week up by 6.71%.

Out of the Eurozone

It was a particularly busy week economic data front, with key stats skewed to the positive.

Private sector PMIs for May and ECB monetary policy were the main areas of focus in the week.

While still particularly dire, a rise in the PMIs for May supported the market’s view that the worst is over.

The Eurozone’s Composite PMI jumped from 13.6 to 31.9, with the Services sector seeing a marked slowdown in the pace of contraction.

After the COVID-19 pandemic shutdown, Italy ranked at the top of the Eurozone table at the composite level. This is good news for the broader market, though a return to expansion may take some time yet. The focus must now shift to employment, confidence, and consumption.

Coupled with fiscal and monetary policy support and the easing of lockdown measures, the markets are expecting a speedy economic recovery, however.

On Wednesday, Germany’s coalition government led by example, agreeing to a €130bn COVID-19 stimulus package on Wednesday. Concerns over global demand, however, will likely linger until the stats start to reflect a pickup in demand.

On Thursday, the ECB expanded and extended its emergency purchasing program.

Risk appetite surged in the week, as the U.S and China seemed to hit pause in the week.

The news of further fiscal support from the U.S government was also positive.

For the week, the EUR rallied by 1.71% to $1.1292, following on from a 1.84% gain from the previous week.

For the European major indexes, it was a particularly bullish week. The CAC40 and DAX30 rallied by 10.70% and 10.88% respectively, with the EuroStoxx600 rising by 7.12%.

Elsewhere

It was yet another particularly bullish week for the Aussie Dollar and the Kiwi Dollar.

In the week ending 6th June, the Aussie Dollar surged by 4.53% to $0.6969, with the Kiwi Dollar jumping by 4.87% to $0.6507.

For the Aussie Dollar

It was a busy week for the Aussie Dollar on the economic data front.

On Monday, Manufacturing figures for May and the RBA were in focus.

In the 2nd half of the week, 1st quarter GDP data and April trade and retail sales figures drew attention.

Following recent commentary for the RBA, the markets were able to stomach the weak numbers.

There was even some hope within the RBA Statement that a recovery could be swifter than initially forecasted.

Coupled with better private sector PMIs out of China and fiscal and monetary policy support globally, riskier assets found strong demand to continue reversing losses from the pandemic…

For the Kiwi Dollar

It was a particularly quiet week on the economic calendar.

Key stats were limited to April building consents that drew little to no interest.

The upside in the week came from the hope of a more rapid global economic recovery, fueled by fiscal and monetary policy.

Economic data from China, the Eurozone, and the U.S contributed, as did easing tensions between the U.S and China…

For the Loonie

It was a relatively busy week on the economic calendar. In the 1st half of the week, the Bank of Canada was in action.

Leaving interest rates unchanged, the Bank also noted that the Canadian economy looks to have avoided the worst-case scenario projection.

In the 2nd half of the week, May employment and Ivey PMI numbers were in focus.

The unemployment rate rose from 13% to 13.7% in May, which was better than a forecasted 15%. Employment increased by 289.6k versus a forecasted 500k fall.

Tracking PMIs from elsewhere, the Ivey PMI rose from 22.8 to 39.1 in May.

For the Loonie, the continued recovery in crude oil prices added to the upside. WTI and Brent ended the week with gains of 11.4% and 19.7% respectively.

A continued easing in lockdown measures and improved economic data supported by fiscal and monetary policy ultimately drove demand for the Loonie.

April trade figures from Thursday and 1st quarter labor productivity numbers on Wednesday had a muted impact on the Loonie.

The Loonie rallied by 2.60% to end the week at C$1.3422, following a 1.54% gain from the previous week.

For the Japanese Yen

It was a relatively quiet week on the data front. Key stats included finalized May private sector PMIs and April household spending.

An upward revision to May’s service sector PMI was of little consolation. April stats also had a muted impact, with a 6.2% slide in spending coming as a result of the lockdown.

The downside in the week ultimately came from a jump in demand for riskier assets. Positively skewed data and fiscal and monetary policy drove demand for riskier assets, leaving the Yen in the red.

The Japanese Yen slid by 1.63% to end the week at ¥109.59. In the week prior, the Yen had fallen by 0.18% against the U.S Dollar.

Out of China

Economic data included May’s Caixin private sector PMIs that followed on from the NBS numbers from the previous weekend.

While the Manufacturing sector returned to expansion in May, it was service sector activity that impressed.

Beijing had targeted a domestically driven recovery and the numbers in May suggested just that.

Both surveys did reveal a continued deterioration in demand from overseas. Fiscal support may address this but it will need monitoring near-term.

On the geopolitical front, China continued to introduce new laws into HK but nothing severe enough to draw any particular attention.

It does remain to be seen, however, whether last week’s semblance of calm will continue.

In the week ending 6th June, the Yuan rose by 0.74% to CNY7.0834 against the Greenback.

The CSI300 and Hang Seng ending the week up by 3.47 and by 7.88% respectively.

Risk Taking Pauses Ahead of the ECB

The S&P 500 gapped higher yesterday, and that gap (~3081-3099) offers technical support. Benchmark 10-year bond yields are firmer. The US 10-year yield is rising for the fourth consecutive session around 74 bp is at the upper end of a two-month range. The dollar is trading higher against most currencies. Among the majors, those that have been among the strongest, like the Australian dollar, sterling, and the Scandi’s are the weakest today, adding to the sense of profit-taking and corrective forces.

Emerging market currencies are also softer, with the JP Morgan Emerging Market Currency Index struggling to extend a five-day rally. Gold is recovering from yesterday’s sell-off that saw nearly one-month lows (~$1690) and has resurfaced above $1700, the middle of a $100 range that largely confined it for the past two months. Oil is consolidating after the July WTI contract rose to nearly $38.20 yesterday, its highest in almost three months.

Asia Pacific

Hong Kong dollar forward points edged lower but bounced higher in late dealings, and the five-day drift lower has ended. Both the three-month and 12-month forward points rose today. We will continue to monitor them as a key gauge of tension. That said, we expect the Hong Kong band to remain in place for some time. Separately, the PBOC set the dollar’s reference rate (CNY7.1012) a little lower than the bank models suggested (~CNY7.1035).

After falling for four sessions, the dollar is firmer against the yuan for the second consecutive session. The yuan’s weakness is most evident against the basket (CFETS) that the PBOC is said to track. The yuan has fallen for the better part of three weeks and is at its lowest level against the basket since early January.

Under pressure from the US, China has resumed allowing foreign inbound flights. These had been canceled during the peak of the pandemic, and officials have been reluctant to normalize the situation. Yesterday, the US threatened to lift Chinese airline flights to the US to one for everyone China lets of US flights. Although we are sympathetic to the framing of the US-China relations as a “Cold War”– the multifaceted competition that is an organizing principle of international relations–this dispute is small beer. The tit-for-tat tactics, however, does illustrate the US penchant of unilateral action, where a coalition may have been possible as China’s asymmetrical actions impacted other countries as well.

Australia reported April trade figures. The surplus of A$8.8 bln was larger than expected, even if down from the A$10.4 bln surplus recorded in March. The 11% decline in exports was a bit less than forecast, while the 10% decline in imports was more than expected. The average monthly surplus through the first four months stands at A$7.1 bln. The average for the same period in 2019 was almost A$4.8 bln. Separately, Australia reported that retail sales fell by17.7% in April from March, mainly in line with forecasts.

The dollar’s surge against the yen continued. The greenback reached JPY109.15 in late Asian turnover before succumbing to mild profit-taking. Initial support is seen near JPY108.80, where a $1 bln option is set to expire tomorrow. On the upside, the next important technical target is near JPY109.50. Recall that the dollar finished last week near JPY107.80. The Australian dollar is trading comfortably inside yesterday’s range (~$0.6855-$0.6985). A loss today would snap a five-day rally that began from around $0.6620.

Europe

The ECB meeting is expected to result in an expansion of the Pandemic Emergency Purchase Program by 500 bln euros. Anything less would be disappointing. Roughly a third of the 750 bln euro allotment has been used. At the current pace, it will be exhausted by the end of Q3 or early Q4. The logic of expanding it now is that the staff’s updated forecasts will likely confirm Lagarde’s recent comment that the mild scenario can be ruled out. That implies an 8-12% contraction this year.

The staff forecasts themselves will be of interest, but the importance lies in providing the ECB will new “facts” that arguably will compel new action. There may be some other action the ECB considers, such as not only accepting bonds that have recently lost their investment-grade status as collateral but perhaps buying them outright, as the Fed has begun doing. It could also adjust the amount of reserves that are subject to negative rates. The ECB could also choose to make the terms of the Pandemic Emergency Long-Term Refinancing Operation more attractive, as the initial take-up was light.

Lagarde will likely be asked about the German Constitutional Court ruling on the ECB’s other bond-buying program and the euro, which is enjoying its longest advance since late 2013. Yesterday was day seven of the streak, and the 0.55% rally was sufficient to put higher on the year. On a purely directional basis, the euro is enjoying its highest correlation (~0.86) with the Dow Jones Stoxx 600 since May 2012. The 60-day correlation (~0.2) is not even at the highs for the year, indicating that the tighter co-movement is new.

This fits in well with our argument that it is a liquidity-driven story. And some argue that it is well discounted, but that might not do justice to the incentive structure that is ongoing and helps explain, for example, the incredible demand for the surprise sale by Italy of a ten-year bond yesterday. It announced the sale on Tuesday. Usually, Italy’s debt managers give more notice. Italy received bid for nearly 107 bln euros for a 14 bln euro syndicated offering, which is more 100x more demand that was seen for the ECB’s Pandemic Emergency Long Term Refinancing Operations (loans at minus 25 bp).

After much debate, the German government agreed on a 130 bln euro package (~4% of GDP) to support the economy. It includes several measures aimed at boosting consumption such as a temporary cut in the VAT (16% vs. 19%), 300 euros per child, and doubling the incentive to purchase electric cars. Germany is embracing counter-cyclical fiscal spending, something that it traditionally leans against (see ordoliberalism).

However, the crisis is extreme, and the headline figure is not quite what it may appear at first glance. Almost half (60 bln euros) is left over from the March supplemental budget, and not all the stimulus is targeted for this year. Nevertheless, it helps position Europe’s largest economy for a stronger recovery.

The euro’s longest advance in six and a half years is threatening to end with today’s pullback. It reached almost $1.1260 yesterday and has dipped below $1.12 in Europe today. The rally has been so sharp that initial support might be closer to $1.1170-$1.1180. Sterling poked above $1.26 briefly yesterday and stopped short of the double top from April in the $1.2640-$1.2650 area. It is testing the $1.25 area in late morning turnover in London. There may be some support around $1.2480, but stronger support is not seen until closer to $1.2400.

America

In our bizzaro world, the 2.76 mln private-sector job loss estimated by ADP is good news. The median forecast from the Bloomberg survey was for a 9 mln decline. April was revised to show 19.55 mln job loss instead of 20.23 mln. The non-manufacturing ISM employment showed little improvement (31.8 from 30.0). The official data will be released Friday. The median forecast in the Bloomberg survey is for a loss of 7.25 mln private-sector jobs in May, and 8 mln overall. Still, the “whisper number” will be less.

Note that the ADP data includes furloughed employees, while the monthly jobs report (Bureau of Labor Statistics) does not. Weekly jobless claims are expected to come down below 2 mln, for the ninth consecutive week of serial improvement. Separately, Canada and the US report April trade balances today, but it will be obscured by the weekly jobless claims and the ECB press conference.

If anything, the Bank of Canada was a bit more optimistic than anticipated. It noted that the country may have escaped the worst-case scenario and expects the economy to contract 12%-22% from peak to trough rather than the 15%-40% risk it previously saw.

It sees a 10%-20% decline this quarter. The Bank also indicated it could reduce some of its operations (frequency of repo operations decreased to once a week and the banker acceptances to twice a week) as it shifted from supporting the financial markets to supporting the economy. Deputy Governor Gravelle will deliver the Economic Progress Report tomorrow, and it allows more insight into the central bank’s thinking as Macklem takes the helm.

For the third session, the US dollar is finding support around CAD1.3480. It has not bounced much and remains stuck in the trough. It needs to move above the CAD1.3575-CAD1.3585 area to confirm a low is in place. The 200-day moving average is found near CAD1.3460, and the greenback has not traded below it since late February.

The US dollar fell to MXN21.51 yesterday before reversing higher, leaving a bullish hammer candlestick pattern in its wake. There has been some follow-through dollar buying. In fact, today is the first session since May 12 that the dollar has risen above the previous session’s high. The dollar has risen above MXN21.97 today. Initial resistance is seen near MXN22.10. The week’s high was set on Monday near MXN22.28, and a move above there would confirm a potentially important low is in place.

This article was written by Marc Chandler, MarctoMarket.

Forex Forecast for June – Dollar, Euro, JPY and GBP in Focus

Sentiment surveys, while mostly still depressed, were better than April readings. The long slog back has begun. There was also optimism over several different vaccines that had been initiated or soon will begin human tests. The hope is that with regulatory forbearance, a vaccine may be ready by year-end.

At the same time, the US-China rivalry escalated. The novel coronavirus added a new dimension to the older problems. Restrictions on Huawei were tightened. Nearly three dozen Chinese entities were sanctioned for human rights violations. The US may tighten rules on foreign company listings on the US exchanges that may force the delisting of some Chinese-based companies. The Trump Administration is urging that the government pension fund does allow investments in Chinese stocks or bonds.

China continues to press hard. It has struck out at Australia for seeking an independent investigation into the origins of the coronavirus. It successfully blocked Taiwan from being granted observer status at the World Health Organization. Border tensions with India have seen troop movements on both sides. Beijing also signaled that it would insist on changes to Hong Kong’s Basic Law to give local officials greater authority to repress dissent spurring fresh concern. The US announced intentions to curb Hong Kong’s special trade privileges after the State Department questioned its autonomy.

March was when the markets froze up. Governments and central banks around the world began responding in earnest to the pandemic. The MSCI All Country World Index (ACWI) bottomed on March 23. So did the S&P 500, while Europe’s Dow Jones Stoxx 600 bottomed a week earlier (March 16), and the MSCI Asia Pacific Index recorded its low a couple of days later (March 19).

April was about further policy response. Efforts were increased in terms of size, scope, and/or time. Officials were successful in removing the far left-hand tail risk. Punishing volatility in the markets eased. Stress in the funding markets relaxed. The compression of demand, supply chain disruptions, the contagion in the US meat processing industry, and some peculiarities with the settlement of the deliverable futures light sweet crude oil contract, distorted the commodity prices. The negative oil prices were quickly reversed and were near $20 a barrel by the end of the month.

May was when the high-income economies likely hit a trough as many countries begin relaxing their lockdowns. Part of the rise in the price of some industrial commodities, including gasoline and iron ore, reflects a marginal improvement in demand. Of course, the difference between relaxing lockdowns and economic recovery may be quite stark, but the first thing that happens is that contractions slow and stop.

The lack of a strong EU response and a German Constitutional Court ruling made it more difficult for the ECB to keep the peripheral premium from widening over Germany and throwing a spanner into its transmission mechanism. However, the ECB is likely to expand its Pandemic Emergency Purchase Progam of bond-buying and is undeterred by the controversial court decision. The European Commission incorporated that German-French proposal for a 500 bln euro grant facility funded by EU bonds and the desire to appease several Northern European creditor nations, with a 250 bln euro loan facility.

Several countries in eastern and central Europe already had strained relations with Brussels, and they were put-off by all three camps without having been consulted. A unanimous decision is required and this may difficult to reach next month and investors can be expected to punish Europe by withdrawing savings on disappointment (i.e., selling the euro, equities, and peripheral bonds)

Some countries, central banks that have not adopted negative rates, are explicitly considering them. The Bank of England and the Reserve Bank of New Zealand are the leading contender but will likely explore other policy options first. The Bank of England is likely to expand its bond-buying program in June. Several facilities that the Federal Reserve announced are beginning to be formally launched, and this will continue into June.

The Federal Reserve has pushed back against speculation that it would adopt negative rates. Targeting a longer maturity than overnight fed funds is under consideration. In the market’s vernacular, this is called yield curve control.

Several political decisions will be made in June as well that could have a meaningful impact in the months ahead. These include whether UK Prime Minister makes good on this threat to leave the free-trade talks with the EU if there was no substantive progress by June, or will OPEC+ extend its deepest output cuts or begin relaxing them? In the United States, emergency unemployment benefits expire at the end of July. Will they be extended?

Dollar

The early survey data for May showed a definite improvement over April. While it is commonly recognized that the US economy will contract sharply in Q2, data needs set the stage for a recovery in Q3 to validate expectations. The capital markets have continued to stabilize, and this has seen the Federal Reserve taper its Treasury purchases to $5 bln a day down from $75 bln a day at its peak in late March and early April.

Fed officials have made it clear that there is little interest in adopting a negative target rate. Besides scaling its programs, a yield curve control strategy, which would entail targeting a longer-dated maturity in addition to the overnight fund’s rate, could be the next innovation. The Bank of Japan, for example, targets the 10-year bond, while the Reserve Bank of Australia targets the 3-year yield. We suspect that if the recovery disappointed for any reason, it could be adopted by late Q3. There is some risk that the US trade relations Hong Kong is adversely impacted, and exposed businesses should test contingency plans.

Euro

The euro has remained rangebound against the dollar in May, and volatility has eased. Europe moves to center stage in June. First, the ECB meets on June 4 and is widely expected to increase its Pandemic Emergency Purchase Plan by 250-500 bln euros. The modest usage of the Pandemic Emergency Long-Term Refinancing Operation (less than one billion euros), some observers see the terms (-0.25 bp below the zero repo rate) could be made more attractive. Second, and not entirely unrelated, the ECB’s Targeted Long-Term Refinancing Operation, with a rate that could be as low as negative 100 bp if specific lending targets are met, could see strong demand of a billion euros or more.

The amount is likely to be inflated, but the rolling into the new facility some past operations that were made on less favorable terms. Third, the EU heads of state are expected to decide on the joint effort to promote economic recovery among competing proposals. A compromise between conflicting interests could prevent a unanimous decision and precipitate a crisis. Even if successful, a joint bond may not be the prelude to a fiscal union as partisans argue. The European Stabilization Mechanism and the European Investment Bank issue bonds that are collective obligations. Still, if Europe is the sum of its responses to the crisis, its collective action now is critical.

(end of March indicative prices, previous in parentheses)

Spot: $1.1100 ($1.0955)
Median Bloomberg One-month Forecast $1.1075 ($1.0925)
One-month forward $1.1110 ($1.0960) One-month implied vol 6.4% (6.3%)

Yen

The dollar-yen exchange rate was stable in May between JPY106 and JPY108. Violations were rare and shallow. Public support for Prime Minister Abe has fallen drop, and this may be invigorating plans for a JPY100 trillion (~$926 bln) economic relief package. The decline in energy prices, which Japan does not exclude from its core measure that the central bank targets, drove the core CPI back below zero in April. The BOJ expanded its corporate bond and commercial support efforts, but the gradual rise in equities allowed it to slow its ETF purchases in May. Interest rate differentials are also low and stable, leaving the broad risk appetites to be the main driver of the exchange rate.

Spot: JPY107.85 (JPY107.20)
Median Bloomberg One-month Forecast JPY107.60 (JPY107.10)
One-month forward JPY107.80 (JPY107.15) One-month implied vol 5.4% (7.1%)

Sterling

Nothing seemed to go in the UK’s favor in May, and sterling was dragged lower. Although sterling recouped some of its earlier losses that carried it to six-week lows in the middle of May (~$1.2075), it was still the weakest of the majors, depreciating nearly 2.75% against the dollar. The virus has hit the UK hard, and it is slower than many other countries to re-open. Several Bank of England officials have played up the possibility of adopting a negative target rate. It seems neither imminent nor inevitable. At the June 18 meeting, the BOE is more likely to increases is the bond-buying program by GBP100-GBP200 bln. Trade talks with the EU do not appear to be going particularly well, and this may also weigh on sterling.

Spot: $1.2345 ($1.2590)
Median Bloomberg One-month Forecast $1.2355 ($1.2375)
One-month forward $1.2345 ($1.2590) One-month implied vol 8.9% (8.6%)

Canadian Dollar

The combination of the risk-on attitude, reflected in the continued recovery of equities and the better supply/demand factor that lifted oil prices by 60% in May, underpinned the Canadian dollar. The US dollar fell to two-month lows in late-May near CAD1.3725. The Bank of Canada meets on June 3. There seems to be no urgency to adjust policy at Governor Poloz’s last meeting. Macklem will succeed him, but there is a strong sense of continuity. Headline CPI fell below zero in April for the first time since 2009, but this was driven by the drop in oil prices and exaggerates the deflationary pressure. Underlying measures remain steady. There appears potential toward CAD1.3500-CAD1.3600 if risk appetites remain strong.

Spot: CAD1.3780 (CAD 1.3945)
Median Bloomberg One-month Forecast CAD1.3810 (CAD1.4140)
One-month forward CAD1.3800 (CAD1.3945) One-month implied vol 6.9% (7.4%)

Australian Dollar

Since the end of March, the Australian dollar has been the best performing major currency, appreciating about 8.5% against the US dollar. Australian equities were also a significant beneficiary of the reflation-trade with the main benchmark up nearly 5% in May. The Federal Reserve had greater scope to approach the zero-bound than the Reserve Bank of Australia and this has resulted in the return of a normal relationship, where Australia offers an interest rate premium over the US.

Meanwhile, Australia’s push for an independent investigation of the origins of the coronavirus have earned it the ire of Beijing, with a high tariff (80%) levied on Australia’s barley exports to China and a ban on some beef. While China can find alternative supplies, the same cannot be said Australian’s iron ore (at least in the short-run), which may limit the fallout.

Spot: $0.6665 ($0.6510)
Median Bloomberg One-Month Forecast $.0.6575 ($0.6460)
One-month forward $0.6665 ($0.6510) One-month implied vol 10.8% (11.6%)

Mexican Peso

The Mexican peso was the world’s strongest currency in May, gaining nearly 9% against the US dollar. It still is off almost 15% year-to-date, making it the third-weakest behind the Brazilian real (~ -24.5%) and the South African rand (~- 19.5%). The shift in the peso’s fortunes is more the result of the broader risk environment than an improvement in Mexico’s economic or political outlook.

The calmer markets and the global liquidity encourages asset managers to re-establish positions to benefit from Mexico’s high real and nominal rates that they were forced to cut in the dark days in March. The peso also serves a proxy for many less liquid or accessible emerging markets currencies. The JP Morgan Emerging Market Currency Index rose about 3.7% in May, the best monthly performance in more than four years. The dollar has surrendered around half of this year’s gains against the peso. The momentum could carry toward MXN21.00-MXN21.50, depending on the broader environment.

Spot: MXN22.18 (MXN24.15)
Median Bloomberg One-Month Forecast MXN22.38 (MXN 24.10)
One-month forward MXN22.28 (MXN24.20) One-month implied vol 18.5% (19.6%)

Chinese Yuan

At the risk of taking Chinese macroeconomic data at face value, it does appear the economy is recovering. Nevertheless, more fiscal and monetary stimulus has been signaled. The year-over-year decline in producer prices warns that a profit squeeze is still materializing. As US-China tensions escalated, the dollar trended higher against the yuan. The dollar appreciated against the yuan for four consecutive weeks through the end of May. It is difficult to see how the tensions will ease in the coming months, especially given the US political cycle. In late 2019, the dollar rose to nearly CNY7.1850 and stopped just shy in late May.

However, given the tensions, the risk is for additional dollar gains, though tempered by China’s other objectives, such as deter capital flight and spur import substitution. In April, the Hong Kong Monetary Authority was intervening to stop the Hong Kong dollar from appreciating, which appeared to be in demand, given the interest rate pick-up. However, by the end of May, investors had become more concerned about the future of the peg that the forward points widened to the most in two decades.

Spot: CNY7.1365 (CNY7.0630)
Median Bloomberg One-month Forecast CNY7.1150 (CNY7.0620)
One-month forward CNY7.1350 (CNY7.0760) One-month implied vol 4.7% (4.3%)

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

Breakouts Need Confirmation

Only a handful of emerging market currencies fell against the dollar. Among these were the Chinese yuan, which, when everything was said and done, lost 0.1% against the US dollar. The Argentine peso was the weakest currency. It lost about half of one percent as its debt restructuring negotiations continued. That said, in places where the dollar appears to have broken out, we await confirmation.

In the big picture, what the dollar decline, rally in equities, the outperformance of the Russell 1000 value companies over Russell 1000 growth companies in the last two weeks, the dramatic rally in the Mexican peso and Brazilian real (almost 9% and a little less than 6%, respectively) in May, and the narrowing of the premium that southern Europe pays over Germany, have in common is liquidity. Investors are convinced that officials will continue to provide the one thing they can provide quickly and efficiently, liquidity.

Over the past two weeks, the market has become convinced that the ECB will expand its asset purchase program regardless of questions raised by the German Constitutional Court. Later in June, banks will have access to loans that pay them 100 bp to re-lend at a time the demand for credit is strong. China, Japan, and India have all announced rates cuts, new spending, or both. The Bank of England is expected to boost its bond-buying program later in June. Several Fed programs that were announced, like the Main Street Lending Facility, are just being launched now.

Dollar Index: The Dollar Index closed below its 200-day moving average (~9850) in the last two sessions. However, ahead of the weekend, it bounced smartly off of the 98.00 area, its lowest level since late March, and forged a potentially bullish hammer candlestick pattern.

The 97.80 area corresponds to a (61.8%) retracement of the explosive rally in March ( ~94.65 to ~103.00). A move above 98.70 would stabilize the technical tone, and move above 99.20 would lift the tone. The momentum indicators are getting stretched but have not turned higher. The Dollar Index managed to close just inside the lower Bollinger Band (~98.45) before the weekend after closed below it in the previous session.

Euro

The euro rose about 1.7% against the dollar last week. That is its best weekly performance in two months. Stops were triggered on the break of the $1.1000 area and then above $1.1100. However, as it approached the late March high (~$1.1165), the risk-reward considerations shift, and the euro fell to new session lows just before the weekend near $1.1070. It still managed to settle above its upper Bollinger Band (~$1.1080).

The 200-day moving average seems to check rallies in April and in May until the very end. It begins June a little above $1.1010. A break below there, which also is roughly the halfway point of the recent bounce, would leave the single currency back within its former range. On the upside, a break of $1.1165 signals a quick test on the $1.1200 area, and the next significant hurdle may be near $1.1265.

Japanese Yen

The dollar broke down to almost JPY107, a nine-day low, ahead of the weekend before reversing higher as month-end adjustments appeared to have been made around the NY fix. It jumped practically back to the week’s highs just shy of JPY108 before moving sideways again. The 200-day moving average, the upper Bollinger Band, and a (38.2%) retracement of the decline from late March to early May are all found in the JPY108.20-JPY108.35 area.

British Pound

Sterling had its best week in May with about a 1.25% gain. It sounds more impressive than it is. Only two major currencies did worse, the yen and Swiss franc. Sterling was easily the worst-performing major currency in May, falling more than 2%.

The next heaviest was the yen., which lost about 0.6%. Sterling overcame resistance near $1.2360 ahead of the weekend, which also marks the midpoint of May’s range ahead of the weekend, but could not sustain the momentum and quickly was able to be pushed back toward $1.2300. Key support is seen in the $1.2215-$1.2230 area in early June.

Canadian Dollar

The US dollar fell to a marginal new low ahead of the weekend, near CAD1.3715, its lowest level since March 12. It reversed higher and closed well above the previous session high (CAD1.3790), creating a potential key reversal.

The momentum indicators have not turned, but they are stretched or nearly so. A move above CAD1.3840 would be constructive, while additional resistance may be seen around CAD1.3880. The price action here seems to make it a better candidate than the Australian dollar to fade what appears to have been a breakout.

Australian Dollar

The Aussie largely coiled most within Tuesday’s range (~$0.6535-$0.6675) for the last few sessions, though it did make a marginal new high (~$0.6685) ahead of the weekend, which also corresponds to the March high, and the upper Bollinger Band. The Aussie was sold in the North American morning on Friday, easing to about $0.6620 before catching a good bid that lifted it back toward session highs.

It gained nearly 2% last week, which was the seventh weekly gain in the past eight. On the topside, if the breakout is genuine, the Aussie’s next challenge may lie near $0.6775-$0.6800. On the downside, a break of $0.6500-$0.6525 would be significant.

Mexican Peso

The dollar fell against the peso in all but six sessions in May. The peso was the strongest currency in the world in May, gaining 9% against the US dollar. The fact that the Mexican stock market is one of the few markets to have declined in May suggests another source of demand.

Mexico’s 10-year bond yield fell almost 50 bp in May (capital gains) on top of the high yield (more than 6%). Mexico’s two-year yield is near 5.1%. The one-month cetes pay closer to 5.3%. The dollar is fell to almost MXN22.00 ahead of the weekend. The technicals are stretched, and the Slow Stochastic looks poised to turn higher. Outside of interest rates, which is another element of our liquidity story, the fundamental case for Mexico is not there.

Chinese Yuan

Escalating tensions saw the dollar climb to nearly CNY7.1780 in the middle of last week. It had not been that high since last September. It slipped over the previous two sessions and saw the CNY7.1325 area before the weekend. When everything was said and done, the yuan was virtually unchanged on the week.

The top of the previous range (~CNY7.10-CNY7.1250) may offer support. However, after Trump announced plans to remove Hong Kong’s trade privileges and leave the World Health Organization, the dollar fell against the offshore yuan from around CNH7.16 to almost CNH7.13.

Gold

The correction that brought gold down from the multiyear high near $1765.40 on May 18 to about $1694.30 looks to have been completed. It closed the week above the recent downtrend line that came in around $1722. The impulsive nature of the $20 advance in the last two sessions warns of a run at the high.

Oil

Despite the unexpected build in US oil stocks and Russia balking at the need to extend the maximum OPEC+ output cuts past June, the price of July light sweet crude oil rose 6.5%, the fifth consecutive weekly increase. Over this advance, it has risen from about $21.20 on April 24 to almost $35.50 at the end of May. The more than 61% rally in the calendar month is a record.

The MACDs are trending higher still, but the Slow Stochastic has flatlined and looks to be turning lower. However, the momentum is strong. Look for a reversal pattern before picking a top.

US Rates

The 10-year note yield was confined to the previous week’s range (~62 bp to 74 bp), and did not close above 70 bp during the holiday-shortened weeks. It closed the month at 65 bp, more or less the middle part of the trading range. Looking at the September futures note, technically higher prices (lower yields) looks like the most likely near-term scenario. The Treasury market is quiet and stable.

S&P 500

The benchmark finished the week on a firm tone, recovering from early weakness to close on the session highs set late in the session. The market seemed to rally after President Trump talked about taking away Hong Kong’s special trade privileges and denying visas to Chinese officials.

It seemed to be relieved that harsher measures were not taken, and ostensibly the trade deal is still intact, though each passing day seems to make it less likely that China can fulfill its obligations. The S&P 500 continues to press against the upper Bollinger Band, which will start the new week and month near 3058. A close below 3000 would be disappointing and could be a warning that the momentum is faltering. On the upside, the next technical area is 3100-3110.

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

The Week Ahead – Stats, Geopolitics, and Central Banks to Test the Markets

On the Macro

It’s a busy week ahead on the economic calendar, with 60 stats in focus in the week ending 5th June. In the week prior, 58 stats had also been in focus.

For the Dollar:

While it’s another busy week ahead on the economic data front. Some data will garner more attention than others, however.

In the first half of the week, we have May’s ISM Manufacturing and Non-Manufacturing PMIs.

Expect the Non-Manufacturing PMI to have a greater impact. Lockdown measures have eased throughout the month, what has this meant for the services sector and consumption?

At a minimum, a slower decline in output, and a pickup in hiring will be needed.

On Wednesday, ADP nonfarm employment change figures for May will also draw attention.

The continued surge in jobless claims, however, should numb the effects of another slump…

In the 2nd half of the week, the weekly jobless claims and nonfarm payroll figures will be in focus. A marked decline in the number of weekly claims would ease the shock factor that Friday’s labor market numbers will likely deliver.

The big question is whether the markets can swallow an unemployment rate of 20%?

Expect market risk sentiment toalso play a hand in the Dollar’s week ahead…

The Dollar Spot Index ended the week down by 1.52% to 98.344.

For the EUR:

It’s yet another busy week ahead on the economic data front.

May’s private sector PMIs are in focus through the 1st half of the week. Service sector activity in Spain and Italy will need to see a marked slowdown in the pace of contraction.

Upward revisions to French, German, and Eurozone sector PMIs will also be needed.

Weak numbers would raise questions over the market’s optimistic view that the economy bottomed in April.

On Wednesday, German employment figures for May will also have some influence.

The focus then shifts to the ECB monetary policy decision on Thursday. Will the ECB stand pat in spite of the dire economic outlook?

Expect the press conference to have the greatest impact. That is assuming, of course, that there is no surprise move…

On Friday, the markets will likely brush aside April factory order figures out of Germany.

We’ve moved beyond the doom and gloom of April and are now in search of a steadying in May and pick up in June…

The EUR/USD ended the week up by 1.84% to $1.1102.

For the Pound:

It’s a relatively busy week ahead on the economic calendar.

Finalized private sector PMIs for May are due out on Monday and Wednesday. Upward revisions would provide the Pound with some support though much will depend on the news wires.

On Thursday, May’s construction PMI should also garner some interest.

Away from the economic calendar, however, we are now in June. That’s 30-days before Johnson’s deadline for a Brexit blueprint to be in place…

Expect plenty of chatter. The markets will also be wanting to see a more significant easing of lockdown measures… We could also get some firm dates on a Johnson – Trump trade summit…

The GBP/USD ended the week up by 1.40% to $1.2343.

For the Loonie:

It’s a relatively busy week ahead on the economic calendar.

In the 1st half of the week, the BoC interest rate decision will be the main event. A gloomy economic outlook suggests that BoC will need to maintain its dovish stance.

They’re unlikely to deliver further easing, however. Members will want to assess the impact of both fiscal and monetary policy support before making any further moves.

Crude oil prices have also been on the rise as lockdown measures ease, which should give the BoC some breathing space.

In the 2nd half of the week, the focus will then shift to April trade figures on Thursday. Don’t expect too much from the numbers, however, with May’s employment and Ivey PMIs on Friday far more significant.

Any risk aversion from Trump’s moves against China on Friday will be Loonie negative.

The Loonie ended the week up by 1.54% to C$1.3780 against the U.S Dollar.

Out of Asia

For the Aussie Dollar:

It’s a busy week ahead for the Aussie Dollar.

Key stats include 1st quarter GDP numbers on Wednesday and April retail sales and trade figures on Thursday.

We don’t expect too much downside in response to the numbers, however. The RBA is expecting a marked contraction through to the end of Q2 before an economic recovery begins.

The figures will give the markets an idea of how bad things are, however, which should put some pressure on the Aussie Dollar.

On the monetary policy front, the RBA is in action on Tuesday, which is the main event of the week.

While there is a willingness to provide further easing, there’s unlikely to be a move this month.

From elsewhere, PMI numbers out of China, COVID-19 news, and geopolitics will also have a material influence.

The Aussie Dollar ended the week up by 1.99% to $0.6667.

For the Kiwi Dollar:

It’s a particularly quiet week ahead on the economic data front.  April building consent figures are due out on Tuesday that will have a muted impact on the Kiwi.

In the week ahead, market sentiment towards the economic outlook and geopolitics will have the greatest impact.

Expect PMIs from key economies, COVID-19 news, and chatter from Beijing and Washington to be the main areas of focus.

The Kiwi Dollar ended the week up by 1.82% to $0.6205.

For the Japanese Yen:

It’s a relatively quiet week ahead on the economic data front.

In the 1st half of the week, May’s finalized private sector PMIs are due out. Any downward revisions would test support for the Yen ahead of April household spending figures on Friday.

We’re not expecting anything other than more decline in spending. Japan was under a state of emergency in April.

The Japanese Yen ended the week down by 0.18% to ¥107.83 against the U.S Dollar.

Out of China

It’s a relatively quiet week ahead on the economic data front. Key stats include the market’s preferred Caixin private sector PMIs for May.

Expect the numbers to influence risk sentiment, though much will depend on U.S – China tensions. China’s response to Trump’s moves from Friday will be key.

Any pickup in private sector activity could be considered short-term as the U.S imposes greater restrictions on Chinse firms. There are also sanctions and a marked shift in the U.S relationship with HK to consider.

The Chinese Yuan ended the week down by 0.10% to CNY7.1364 against the U.S Dollar.

Geo-Politics

UK Politics:

Talks of a Brexit Summit are not going to ease jitters over a hard Brexit. A U.S – UK trade agreement would ease the pain but even that looks unlikely to happen near-term.

Updates from the UK government’s intentions, vis-à-vis negotiations will be key. Johnson had been clear of his intent to walk away should a Brexit blueprint not be in place by the end of June. There are just 30 days remaining. Will Johnson call for an extension for the transition period? He has yet to back down on any promises…

U.S Politics:

It’s getting ever more precarious for the U.S President who continues to distract the American voter.

Last week, the U.S ended its relationship with the WHO and responded to China’s security law for HK.

Trump did retain the phase 1 trade agreement, however, which will be an attempt to push China into a breach.

With protests rocking the U.S over the weekend, the U.S President will have his hands full in the week ahead.

Beijing is unlikely to sit back, which would put U.S tech companies and farmers in China’s sights… That may even test the willingness of firms to begin rehiring…

All in all, we may begin to hear a build-up of election chatter that may question Trump’s chances of a 2nd term.

The Coronavirus:

As easing measures continue across the EU and the U.S, we now need to keep an eye on the new coronavirus cases.

If a 2nd wave of the pandemic is to hit the respective economies and uptick in new cases would begin to show.

From the market’s perspective, there are 3 key considerations that remain:

  1. Progress is made with COVID-19 treatment drugs and vaccines.
  2. The downward trend in new coronavirus cases continues.
  3. Governments continue to progress with the easing of lockdown measures.

At the time of writing, the total number of coronavirus cases stood at 6,150,262.

Monday through Saturday, the U.S reported 130,165 new cases to take the total to 1,816,601. This was down from the previous week’s 138,592.

For France, Germany, Italy, and Spain, there were 15,269 new cases Monday through Saturday. This took the total to 890,891. In the previous week, there had been 14,778 new cases over the same period.