Darkest Before Dawn

The MSCI Asia Pacific Index fell for the fourth consecutive session today and many markets (India, Shenzhen, Taiwan, and Korea) fell more than 2% and most others were off more than 1%. Europe’s Dow Jones Stoxx 600 is giving back the past two days’ gains. The S&P 500 could gap lower at the open. Benchmark 10-year yields are a little softer but have remained subdued in the face of the dramatic moves in equities.

The US yield is little changed near 0.66%. Practically no currency could escape the clutches of the rebounding dollar, though the yen and sterling are little changed. The JP Morgan Emerging Market Currency Index is lower for the fifth consecutive session. Gold remains heavy and is approaching the (38.2%) retracement of this year’s rally which is found near $1837. Crude oil is consolidating at lower levels. November WTI is in narrow range below $40 a barrel.

Asia Pacific

Hong Kong and New Zealand report trade figures. Economists did a good job forecasting New Zealand imports and exports. As expected, the formers rose a little and the latter slipped. The takeaway is that New Zealand reported its first trade deficit (~NZD353 mln), snapping a six-month period of trade surpluses. Economists had a harder time with HK figures. Exports pared their decline to 2.3% year-over-year from 3%, but the bigger miss was in the weakness of imports. These fell 5.7% year-over-year after a 3.4% decline in July. The net result was that HK’s trade surplus was halved from the HKD29.8 bln to HKD14.6 bln.

China continues to harass Taiwan with incursions into its air defense zone. The bullying practice has escalated in the past week or so. Beijing’s aggressiveness comes as the US some European countries have stepped up their interactions, including high-level visits. It is hard to say that it is having an economic impact but as a potential flashpoint, it is drawing attention.

Japan may have a new prime minister, but the government’s assessment of the economy remained little changed from last month. The economy is said to be in a severe place but some areas, namely, exports, production, business failures, and jobs, are improving (four of 14 categories). The median forecast in the Bloomberg survey expects the economy to expand 15% this quarter, the first expansion since Q3 19.

The dollar is in less than a third of a yen range today above JPY105.20. The $1.4 bln in expiring options between JPY105.10 and JPY105.25 have been neutralized. The next set is for almost the same amount at JPY105.70-JPY105.75. A four-day uptrend on the hourly bar charts comes in a little above JPY105.20 by the North American open. A break could see JPY104.60-JPY104.80. The Australian dollar is lower for the fifth consecutive session. It dipped below $0.7030 for the first in two months. A break of $0.7000 could see $0.6950 quickly.

The $0.7080 area now offer resistance. The PBOC set the dollar’s reference rate a little softer than the bank models in the Bloomberg survey anticipated. Although some observers see it as a sign that officials are seeking to stop the yuan from strengthening, the fact of the matter is that the dollar remained bid. The greenback is at its best level since the start of last week, a little below CNY6.83. Note that after the US market close today, FTSE-Russell will announce whether it will include Chinese bonds in its indices. A year ago, it refused, but China has reduced barriers to enter and exit.


European banks took 174.5 bln euros from the ECB’s latest Targeted Long-Term Refinancing Operation. These are loans that can have a rate of as much as minus 100 bp providing the funds are lent to households and businesses. It was at the high end of expectations and follows a 1.3 trillion operation a few months ago. This will lead to another jump in the ECB’s balance sheet. Recall that the ECB’s balance sheet has been slowing increasing as it continues to buy bonds under its APP and PEPP operations. The extra liquidity in the Eurosystem is a factor that is pushing three-month Euribor a little below the minus 50 bp deposit rates. When observers say that central banks are out of ammo, few anticipated the deeply negative loans offered and the introduction of the dual rates.

Neither the Swiss National Bank nor Norway’s Norges Bank altered policy at today’s meetings. The pullback in the Swiss franc in recent weeks is too small to register for officials, who remain concerned about its strength. The OECD regards it as the most over-valued currency in its universe. The threat of being identified by the US as a “currency manipulator” is not a strong enough deterrent as intervention remains one of its key tools. Some had expected the Norges Bank to bring forward its first hike from the end of 2022, but it did not. On the other hand, Hungary raised the one-week deposit rate 15 bp to 75 bp, catching the market by surprise and giving the forint a lift.

The German September IFO survey edged higher. The current assessment rose to 89.2 from 87.9, while the expectations component firmed to 97.7 from a revised 97.2 (from 97.5 initially). The overall assessment of the business climate rose to 93.4 from 92.6. The preliminary PMI data showed the manufacturing sector continues to rebound, while the service sector is stalled.

In the UK, Chancellor Sunak canceled the fall budget and is expected to present a new jobs support program to Parliament today. Speculation in the press is for a German-like arrangement, where the government picks up some of the wage bill for employees that are retained but on shorter hours. Meanwhile, the British Chamber of Commerce estimate suggest over half of UK firms have not completed the government’s recommended steps to prepare for the end of the standstill agreement with the EU.

The euro is extending its decline for a fifth consecutive session. It has dipped below $1.1635 in European turnover. For the first time this quarter, the skew in the one- and two-month options (risk-reversals) favor euro puts over calls. The $1.16 area corresponds to a (50%) retracement of the Q3 gains. The $1.1600-$1.1610 area holds about 1.6 bln euro in options that expire today.

There is another option for nearly 525 mln euro at $1.1625 that also will be cut today. A move above $1.17, where an 845 mln option is struck (expiring today) would help stabilize the tone. Sterling is firm within yesterday’s range, when it tested $1.2675. It is near $1.2750 in late London morning turnover. A push above $1.28 is needed to begin repairing some of the recent technical damage.


The US reports new home sale (August) and the KC Fed manufacturing survey (September), but it will be the weekly jobless claims that capture the attention. Seasonal factors encourage expectations for a continued gradual decline. However, note that around in November, the seasonal adjustment will add rather than subtract. The markets will be particularly sensitive to an unexpected increase in weekly jobless claims, especially given the lack of fresh measures by either the Fed or Congress. In fact, some observers attribute the Fed’s somber assessment to prompt more stimulus as a factor that helped spur the down move in equities.

Canadian Prime Minister Trudeau unveiled funding for a wide range of initiatives, including daycare, pharma, housing and environment. None of the three major opposition parties endorsed it. Trudeau leads a minority government and the budget needs to be approved or it could potentially trigger new elections.

Mexico’s central bank meets today. Yesterday’s retail sales report showed a solid 5.5% increase in July, but it was still less than expected. Inflation is running just north of the upper end of Banxico’s 2-4% target. The cash rate target is 4.5%. The peso’s six-week rally is ending with a bang this week and it is off over 5%. After five 50 bp rate cuts, Banxico is widely expected to cut 25 bp today. We suspect the odds of standing pat is greater.

The US dollar poked above CAD1.34 today for the first time since early August. The next important chart area is near CAD1.3440. Initial support is likely around CAD1.3360. If the equity market stabilize the Canadian dollar will likely strengthen. After jumping over 3% yesterday, the greenback extended its gains to MXN22.53 in Asian turnover but has gradually firmed through the European morning. The first area of support is seen in the MXN22.00-MXN22.20 area.

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

This article was written by Marc Chandler, MarctoMarket.

Dollar’s Bounce: Nearly Over?

Sterling’s weakness is a phenomenon of its own making. US-China tensions continue to run high as Washington has ratcheted up pressure on China and is insisting on the September 15 deadline for TikTok to change ownership or be banned. Beijing would rather see it shuttered than sold.

The high-flying US NASDAQ has pulled back from the record highs set at the start of the month by 10%, but bottom-picker have been met with overhead supply and profit-taking. Oil prices moved sharply lower for the second consecutive week. November Brent fell around 12%, and October WTI tumbled 14% over the past two weeks to levels not seen in three or four months.

Then there is the dynamic within the foreign exchange market itself. On September 1, the euro pushed above $1.20, sterling was approaching $1.35, and the Australian dollar poked above $0.7400. The greenback push below CAD1.30 for the first time since January. Comments by the ECB’s Lane about the role of the exchange rate as an input into its economic models and forecasts spurred a dollar short-squeeze rally.

We had anticipated that after the ECB meeting was out of the way, the market’s attention would turn to the FOMC meeting (September 15-16), where the outcome is likely to reinforce the dovish implications of adopting an average inflation target, around which there is extensive “strategic ambiguity.” Below we fine-tune this scenario.

Dollar Index

With a couple of minor even if notable exceptions, the Dollar Index has been confined to a 92.00-94.00 trading range since late July. It has been trending broadly sideways. It traded at its highest level in nearly a month in the middle of last week near 93.65, just above the upper Bollinger Band for the first time in several months.

The MACDs are trending higher, and the Slow Stochastic is just below overbought territory. The 92.70 level seen around last week’s ECB meeting corresponds to a (50%) retracement of the rally from September 1. A move above the 94.00 area would target 94.75-95.50.


The euro snapped a six-day slide in the middle of last week, a day before the ECB meeting. It will begin the new week with a three-day advance in tow. Lagarde’s effort to downplay the euro’s strength saw the market bid it a few ticks through the (61.8%) retracement objective of the slide that began after it poked above $1.20 on September 1. Both the MACD and Slow Stochastics have nearly completely unwound the stretched condition and appear poised to turn higher in the coming days. We continue to believe the break from this range takes place to the upside, but the range affair can persist a bit longer.

Japanese Yen

The dollar has been in an exceptionally narrow trading range against the Japanese yen. The nearly 60 pip range was among the smallest weekly ranges of the year. It did not stray more than 30 pips in either direction of JPY106.10. For the third consecutive week, the dollar recorded lower highs and higher lows. The momentum indicators do not appear helpful. More broadly, the dollar is hovering around the middle of a JPY105 to JPY107 trading range.

Britsh Pound

Sterling was pounded last week. It was marked down by almost 3.7%, the most in six months. Part of it was dollar strength. After all, the greenback strengthened against most of the major currencies. However, the real driver was reneging on the Withdrawal Agreement that is seen as making a disorderly exit from the standstill agreement more likely.

The Bank of England meets next week, and some groundwork for additional easing as early as November seems reasonable to expect. Sterling was pushing toward $1.35 on September 1 and made a low ahead of the weekend just below $1.2765. The 200-day moving average is near $1.2735, and the (61.8%) retracement of the rally since the end of June is about $1.2710. The (38.2%) retracement of the rally since the March low is a little below $1.2700. The next important retracement (50%) is closer to $1.2455. Initial resistance now is likely around $1.2950.

Canadian Dollar

The US dollar rose in four of last week’s five sessions to snap an eight-week slide against the Canadian dollar. It was only the second weekly advance here in Q3. The bounce faded in the middle of the week near CAD1.3260, a few ticks ahead of the (38.2%) retracement of the decline since the end of June. The next retracement objective (50%) is around CAD1.3320. The five-day moving average has crossed above the 20-day for the first time since July, and the momentum indicators are trending higher. A loss of CAD1.3100 would confirm the correction is over.

Australian Dollar

The pullback from the high above $0.7400 on (September 1) stopped at the (38.2%) retracement of the leg up from the end of June found near $0.7190. Initial support is now pegged around $0.7240. The MACD is still headed lower, but the Slow Stochastic appears to be bottoming. A move above last week’s high near $0.7330 would likely confirm the correction is over, and another run higher has begun.

Mexican Peso

The greenback’s slide was extended for the fifth consecutive week against the Mexican peso. In an outside down day on Wednesday, the dollar was pushed below the 200-day moving average (~MXN21.59) for the first time since before the pandemic. It has not been able to resurface above it. The next big target is MXN21.00. The momentum indicators are not helpful here, but it has been fraying the lower Bollinger Band (~MXN21.30). A modest bounce just to the 20-day moving average (~MXN21.82), the middle of the Bollinger Band, would be a large move of a couple percentage points.

Chinese Yuan

The greenback’s downtrend against the redback has now extended for the seventh consecutive week. It has risen in only one week so far in Q3. Since the end of June, the dollar has fallen by about 3.5% against the yuan. Given that it is so highly managed, one must conclude that officials see the modest strength as desirable.

Some benefits cheaper imports from the US may attract international capital, as market-liberalization measures, some of which are part of the US-China trade agreement, are implemented. It is difficult to know how far officials will allow things to go, but a near-term trading range between roughly CNY6.81 to CNY6.86 may be emerging.


The lower end of the recent trading range around $1900 was successfully tested last Tuesday, and the precious metal recovered to almost $1967 before consolidating ahead of the weekend. The MACD and Slow Stochastic appear poised to turn higher. While a gain above $1970 will appear constructive, gold has not been above $2000 for a month now.


October WTI fell for the second week for the first time since April. However, in recent sessions, a shelf has been carved in the $36.00-$36.60 area, and the Slow Stochastic appears set to turn higher. That area also corresponds to a (38.2%) retracement of the rally since those April lows. The next retracement target (50%) is around $33.50. It managed to finish the week above the lower Bollinger Band (~$37.05). The $39-$40 area may offer a formidable cap.

US Rates

Both the core PPI and CPI readings were above consensus forecasts, but it did not prevent the 10-year yield from falling five basis points last week to about 66 bp. In early August, the yield spent a few days south of 60 bp, but since the middle of June, it has mostly held above it. At the same time, it has not been above 80 bp either, which is well below the current rate of CPI (1.3% and 1.7%, for the headline and core, respectively).

The Treasury re-opens previously sold 20-year bonds and 10-year TIPS in next week’s auction. The 2-10-year yield curve eased to about 54 bp by the end of the week, which captures primarily the softer 10-year yield. The curve is at its 20-day average. The market anticipates a dovish Fed, noting downside risks and the lack of fiscal stimulus.

S&P 500

An outside down day on Thursday saw follow-through selling ahead of the weekend that took the S&P 500 to a new low since the record high on September 2. The benchmark bounced back after approaching 3300. It closed slightly higher ahead of the weekend, but not higher than it opened. The momentum indicators are still pointing lower.

The 3277 area houses the (38.2%) retracement of the gains since the mid-June low. Pushing through, there could signal another 2% decline. A move back above 3420 would stabilize the technical tone. A rally to new record highs was beyond the imagination in the dark days of March, and many have doubted it ever since–the gap between Wall Street and Main Street makes it unsustainable.

The question is whether this pullback marks the end of the rally, or is it a correction? While we still see it as most likely a correction, it does not mean that a bottom is in place.

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

This article was written by Marc Chandler, MarctoMarket.

Dollar Sits on the Precipice

However, profit-taking by momentum traders turned into a rout as some ECB officials seemed to push back, and the greenback ended on a firm tone.

Although equities continued to rise for a day or so after the dollar bottomed, broad corrective forces were unleashed. Three question face market participants: How deep is the correction? How long will it last? What are some events that could help facilitate a resumption of the underlying trend?

Dollar Index

The Dollar Index fell below 92.00 for the first time since April 2018. It rebounded to 93.25 ahead of the weekend. The 93.50 area capped upticks in the second half of August, and it did not trade above 94.00 in the first half of last month. The 94.00 is also a (38.2%) retracement of the DXY decline since the end of June. The next retracement objective (50%) is near 94.75. The MACD and Slow Stochastic have turned higher.


The euro’s shooting star candlestick on September 1, reversing lower after trading above $1.20 for the first time since May 2018, signaled the subsequent correction. In the sell-off before the weekend, the euro held above the previous week’s low (~$1.1765). The euro spent most of August in a two-cent range (~$1.1700-$1.1900).

The upside breakout was rejected, and a test on the lower end of the range ought not to surprise at this juncture, given market positioning. Stops are likely below $1.17, and triggering them could be worth another half-cent. The momentum indicators are moving lower. The downside pressure could persist until the middle of the new week or even into the ECB meeting, but once that is out of the way, the ball comes back to the US court with the FOMC meeting on September 15-16.

Japanese Yen

The dollar spent the entire week within the range set on August 28 (~JPY105.20-JPY106.95). Within the range, the dollar edged higher every day last week. The drama in the equity market did spur yen gains as it often does. Rising long-term US yields could support the greenback, but net-net, the 10-year yield was practically unchanged last week near 70 bp. The technical indicators do not appear to be generating robust signals. Unexciting as it may be, continued range trading is the most likely near-term scenario.

British Pound

Sterling peaked on September 1, near $1.3480. It fell to about $1.3175 before the weekend, a whisker below the 20-day moving average (~$1.3180). A trend line connecting the June and July lows since found near $1.3135 at the start of next week as sterling has a three-day losing streak into tow, its longest slump in a month. The lower end of the August range is near $1.30, and that (~$1.3015) corresponds to a (38.2%) retracement of the rally here in Q3. The momentum indicators did not confirm the new highs. The Slow Stochastic is moving lower, and the MACD has been moving sideways but is now softening.

Canadian Dollar

The Canadian dollar was the only major currency to hold its own against the resurging greenback. It was the eighth consecutive weekly slump for the US dollar. The US dollar’s bounce from the dip below CAD1.30 on September 1 fizzled near CAD1.3165 on September 3, just in front of the 20-day moving average (~CAD1.3175). The greenback has not closed above the 20-day moving average since July 14.

The MACD has flatlined, and the Slow Stochastic is turning higher from oversold territory. The Canadian dollar’s resiliency in the face of the dramatic drop in equities is noteworthy. The US dollar’s lows for the year was set on January 7 near CAD1.2955, and that is the next important target. The Bank of Canada meets on September 9. It is not expected to change policy but will confirm it is prepared to do so, if needed.

Australian Dollar

The move signaled by the shooting star candlestick pattern on September1, after briefly trading above $0.7400, may have ended with a hammer candlestick ahead of the weekend. The Aussie recovered from a low near $0.7220, near where a trendline off the late June, July, and August is found, to the $0.7290 area, despite evaporating risk appetites. The lower end of its previous range was closer to $0.7150. Momentum indicators warn that the correction may not be over, but a move above $0.7330-$0.7340 would suggest otherwise.

Mexican Peso

The Mexican peso was the second stronger currency in the world last week, gaining almost 1% against the US dollar. Only the Brazilian real was stronger, gaining nearly 1.5%. It was the fourth consecutive weekly advance. Ahead of the weekend, and despite the weakness in equities, the dollar traded below its 200-day moving average against the peso (~MXN21.5180) for the first time in six months.

The June lows in the MXN21.46-MXN21.47 region beckon. Below there, the next important chart area is near MXN21.22. The technical indicators look stretched, but there is no indication they are ready to turn higher. Resistance is now seen in the MXN21.70-MXN21.80 area.

Chinese Yuan

The dollar fell to new lows for the year against the yuan on September 1, near CNY6.8125. The broader dollar bounce saw it trade up to almost CNY6.8470 ahead of the weekend. Chinese officials have accepted the dollar to decline six weeks in a row and ten of the past 11 weeks.

While the strengthening of the yuan may go contrary to the direction of monetary policy, it would seem to serve its trade needs. The yuan’s appreciation could be confirmed that it plans to step up its imports, and, if true, could support commodity prices. The CNY6.90 area that served as support previously may now function as a near-term cap.


The record high was set on August 7, near $2075. The correction began. It was repulsed in the middle of August when it tried to recapture $2000, and in last week’s attempt was turned back from about $1992.50. Support is seen near $1900. The MACD and Slow Stochastic suggest the correction could continue. If the major central banks are engaged in an uncoordinated effort to convince investors that they are serious about pushing inflation higher and that in part, it means lower rates for longer, it is difficult to envision a deep or sustained decline in gold prices.


Oil had a tough week, even though US inventories continued to fall. At first, OPEC’s plan to boost output seemed to weigh on sentiment, and then at the end of the week, demand concerns and falling equity markets dragged prices lower. The outside down day ahead of the weekend was like an exclamation point for the price action.

The 6.7% drop in October WTI was the largest weekly loss since early June. It had been trading mostly between $41.50 and $43.50 since early August and bumping against the 200-day moving average (now near $42.85). It had posted its peak on August 26, nearThe momentum indicators are trending lower. A break of the late July low near $39.00 could spur losses toward $36.00.

US Rates

The US 10-year yields drifted lower for five sessions in a row through September 3, as what seemed like an exaggerated response to the FOMC’s average inflation target was unwound. However, the sharp drop in the unemployment rate to 8.4% from 10.2%, beyond what many economists forecast for year-end, saw the yield jump back and finished the week little changed.

The Treasury will auction $108 bln in coupons next week (roughly split between the three-year notes and 10- and 30-year bonds), and there are expectations for more investment-grade issuance. The 10-year break-even, which has been trending higher since bottoming in March, stalled around 1.80%, the high for the year. It has not been above 2.0% since late 2018.

S&P 500

From the midweek record high near 3588, the S&P 500 fell roughly 6.7% to about 3350 ahead of the weekend. At one point, the NASDAQ traded 10% below its record high. US equities began recovering around the time European markets closed for the week. The S&P 500 reached 3450 in late turnover. Its drop appeared to complete a (61.8%) retracement of the last leg up that began in late July (from around 3205).

The constructive close may encourage buyers after the long holiday weekend. A move above 3470 would lift the tone and above 3500, and a run to new record levels will be anticipated. The recovery bodes well for foreign markets at the start of the new week.

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

This article was written by Marc Chandler, MarctoMarket.

September Monthly

New lows for the year against the euro, Swiss franc, the British pound, Swedish krona, and the Australian dollar were recorded in recent weeks. The Dollar Index (DXY), which is heavily weighted toward Europe, fell by over 4% in July, the largest monthly decline in a decade, and another 1.25% in August. In fact, the Dollar Index has not risen on a monthly basis since March. The surge in gold (reached a record high near around $1975 an ounce) was also seen in some quarters as an expression of dollar bearish sentiment.

The interest rate support for the dollar has fallen. Of course, with around $14.5 trillion of negative-yielding bonds, mostly in Europe and Japan, the US still offers a premium, but the premium has narrowed, and when hedging costs are included, it has disappeared. Growth differentials also had favored the dollar, but it is not so clear anymore. The eurozone’s August Purchasing Managers Survey disappointed, and as the month ended, the virus appears to be growing faster in Europe than the US. Yet, as with the interest rate differentials, growth differentials are simply less dollar supportive, and that is the takeaway.

It is not as if all things were equal. The relevant pre-existing conditions in this context were two-fold. First, after trending higher for several years, by various metrics economists use, the dollar was over-valued prior to the pandemic. At the end of last year, according to the OECD’s measure of purchasing power parity (a rough approximation of value in a world of currencies that are no longer backed by gold), the dollar was terribly rich against most of the major currencies.

The euro was estimated to be a little more than 26% undervalued against the US dollar Sterling was next, nearly 11% undervalued. The Canadian dollar was almost 9% undervalued, and the Japanese yen was 7% cheap to the greenback. As of June, the Economist’s “Big-Mac” model of purchasing power parity had the euro more than 16% undervalued, and sterling was 25% undervalued.

The second pre-existing condition was that growth and interest rate differentials attracted significant portfolio flows into the US. US stocks have outpeformed European shares handily over the past 3, 5, and 10-years. The narrowing of yield differentials means that US Treasuries have outpeformed German, British, and Japanese bonds over the past couple of years. This suggests that many asset managers are overweight US exposure. One estimate (13D Global Strategy and Research) suggested is that there has been “nearly $10 trillion of global capital concentration into US assets in less than a decade.”

Still, European stocks (Dow Jones Stoxx 600) outperformed US shares (S&P 500) on the downside in the first three months of the year and has underperformed in the recovery. June was the only month so far this year in which the Stoxx 600 outperformed the S&P 500 (~2.8% to 1.8%). In August, the S&P 500 gained around 7.2%, more than twice the Dow Jones Stoxx 600 3% gain. Year-to-date, the S&P 500 is the only G7 equity market index positive for the year.

Equity portfolio investment tends to carry low currency hedge ratios, and the greenback’s decline adds a tailwind for dollar-based investors in European markets. The Swedish stock market, for example, performed marginally better for unhedged dollar-based investors than the S&P 500 so far this year (~8.6% vs. 8.2%).

In a nutshell, the dollar’s main supports have weakened, it was overvalued, and it was a crowded trade. The adjustment has been nearly relentless. The euro has fallen in only five weeks since the end of April (19 weeks). Speculators in the futures market have amassed record net and gross long euro positions, and still, the biggest pullback has been limited to about 2.5-cents.

Most of the major central banks did not meet in August, and their September meetings will draw attention. Several central banks, including the Federal Reserve, the European Central Bank, and the Bank of Japan, will update their economic forecasts. The Federal Reserve may be the most likely to adjust policy as a follow-up to its formal decision to target the average rate of inflation.

Still, on balance, it might not be prepared to move quite yet to cap interest rates or boost it bond-buying, even though Congress has been unable to provide fresh fiscal stimulus. The Fed has not achieved its 2% inflation target since 2012. As of August 25, the Fed’s balance sheet was nearly $180 bln (~2.5%) below its peak in mid-June.

Many emergency measures were initially for six months or so, and governments and central banks will face some difficult choices. Most of the Fed’s facilities, though used less than anticipated, have been extended until the end of the year. The ECB has extended its Pandemic Emergency Purchase Program. The thrust of monetary policy is shifting from its initial efforts to ensure orderly markets to supporting the recovery.

Without a vaccine, a partial and uneven recovery may be the best that can be expected over the coming months. This means that elevated unemployment levels will prevail, even if partially hidden or socialized through furlough and short-time schemes. Canada has announced both a four-week extension of its emergency income program (through mid-September) before modifying initiatives to put them on a more sustainable basis. It has also extended its loan program for businesses.

In Germany, Finance Minister Scholz, who will be the Social Democrat candidate for chancellor next year, has pushed through an extension of its short-term work program (~government picks up about 2/3 of the wages for households with children) for 24 months from 12. France is preparing a large stimulus effort. UK Chancellor Sunak is under increasing pressure to extend funding for the furlough program that is supporting around four million people, but parts of Her Majesty’s Treasury is pressing for some funding through new taxation.

That said, with numerous vaccines in various stages of development, optimism is running high. Many governments are relaxing some of the procedures around creating vaccines to expedite the process. Until a vaccine is available of which people can be confident, flare-ups may be unavoidable, but they can be minimized and limited in scope. That will be the challenge in September. As the US flare-up appears to be being brought under control in late August, the contagion is rising in the Asia Pacific region and parts of Europe.

The US-Chinese relationship has deteriorated on many fronts, two issues that had been flashpoints, trade, and currency, have become less so. China has stepped up its imports of US agriculture goods, and with 19 tankers carrying a combined 37 mln barrels of oil from the US (~$1.55 bln), its energy imports will surge in September. Although many observers have emphasized that China is far behind its numerical commitments, top US officials (including Navarro, Lighthizer, and Kudlow) all publicly stated that the agreement was intact, and China was adhering to the deal.

A year ago, the US was citing China as a currency manipulator as the dollar rose above CN7.0. However, the link between the geopolitical competition and the yuan has loosened. The yuan traded at seven-month highs against the dollar at the end of August. Its nearly 2% gain makes it the strongest in the region last month. The JP Morgan Emerging Market Currency Index fell a little more than 0.5% in August, paring July’s roughly 2.4% rise. Regionally, South America underperformed, alongside the Turkish lira, which fell to new record lows in August (~-5.2%). After the lira, the next three emerging market currencies were Brazil real (~-4.7%), Argentine peso (-2.5%), and the Chilean peso (~-2.2%).


After trending lower since March, the dollar traded weakened broadly in the second half of August. Sentiment remains bearish as growth and interest rate differentials supports have been undermined. Although there has been some impact of the loss of the $600 a week in federal unemployment insurance and the fading effect of other fiscal efforts, the economic data have been mostly better than expected. Estimates for Q3 GDP around a little above 20% at an annualized rate. That said, there is concern that a quarter or more of the jobs there were lost temporarily will turn into permanent losses.

The Federal Reserve meets on September 16. The steepening of the yield curve through a relative increase in long-term yields cannot come as a surprise to Fed officials after adopting the average inflation rate target. Yet, on balance, it does not seem quite ready to move to cap rates either through yield curve control or through increased bond buying. The political campaigns get into full swing after Labor Day (September 7). It has yet to become much of a market factor except that investors appear to be buying options for protection, and this is seeing the volatility curve steepen.


The euro has not been the best performing major currency this year, this quarter, or last month. Its 6.6% advance through the first eight months puts in fourth place within the top ten major currencies against the US dollar. Most of those gains were registered here in Q3, where it is in fifth place. It was appreciated by a little less than 1.5% in August. Speculators have amassed a record net and gross long euro positions in the futures market.

The ECB meets on September 10 and is not expected to take new action. The economy has generally performed in line with the staff forecasts last updated in June when it forecast an 8.3% expansion here in Q3. The WTO may announce its preliminary ruling on EU charges that Boeing received illegal government assistance and could be a new flashpoint in the evolution of the trade relationship. In late August, the EU ended its controversial tariff on US lobster in exchange for reduced levies on around $200 mln of EU consumer goods.

(end of March indicative prices, previous in parentheses)

Spot: $1.1935 ($1.1780)
Median Bloomberg One-month Forecast $1.1905 ($1.1570)
One-month forward $1.1945 ($1.1785) One-month implied vol 7.9% (7.8%)


The dollar traded between JPY104 and JPY108 in July and a narrower JPY105-JPY107 range in August. On a purely directional view, the yen tends to weaken when US yields rise and/or when the S&P rally. The three-quarter contraction that began in Q4 19 with the sales tax increase and typhoon appears to be ending here in Q3.

Prime Minister Abe will step down due to health reasons around the middle of September when the LDP picks his successor. The situation is still fluid, and Cabinet Secretary Suga seems may get the not, which would underscore the continuity we see as the most likely outcome. The Diet’s term is up in a year, but the LDP may want a sooner election.

While there may be an alternative to Abe, there may not be for Abenomics, which is arguably the traditional policy thrust of the Liberal Democrat Party of loose monetary policy, deficit spending, and raise the consumption tax. A supplemental budget for the second half of the fiscal year (begins October 1) seems more likely that fresh initiatives from the Bank of Japan, which meets on September 17. BOJ Governor Kuroda is seen likely to fulfill his current term, which ended April 2023.

Spot: JPY105.90 (JPY105.85)      
Median Bloomberg One-month Forecast JPY105.95 (JPY106.50)     
One-month forward JPY105.90  (JPY105.90)    One-month implied vol  7.4% (7.3%)


The pound fell by about 6.5% in H1 20 and rebounded by about 7.8% through the first two months of Q3.  Sterling made a new marginal high for the year in late August, a little below $1.34 on the back of a softer US dollar. The UK economy shrank by a fifth in Q2, the most in the G7, but appears to be gaining traction, though there is still pressure to extend the employee furlough program.  There has been little progress in trade negotiations with the EU.
A break-through is needed in the coming weeks in time for the mid-October EU summit and allow members sufficient time to ratify the agreement. This continues to seem unlikely. The potential disruption may already be a factor underpinning implied volatility.  Yet, August was the second consecutive month that sterling rose against the euro, and is near its best level in two-and-a-half months at the start of September.
Spot: $1.3370 ($1.3085)   
Median Bloomberg One-month Forecast $1.3285 ($1.2820) 
One-month forward $1.3370 ($1.3090)   One-month implied vol 8.7% (8.6%)

Canadian Dollar

The Canadian dollar was one of the strongest major currencies in August, appreciating about 2.9% against the US dollar.  Rising equities speaks to the elevated risk appetites that are correlated with the Canadian dollar. Rising commodity prices (CRB Index rose about 6.8% in August, its fourth consecutive monthly gain and now is above its 200-day moving average for the first time since January) have also been supportive.
Since the middle of March, the US dollar has fallen by about 11.3% against the Canadian dollar, but speculators in the futures market continue to carry a net short futures position. The Canadian dollar is the only major currency that is depreciated against the US dollar this year.  A scandal over favoritism and a dispute over fiscal policy led to the resignation of Finance Minister Morneau, but it did not derail the Canadian dollar’s recovery.
Canada has been more cautious than the US in lifting containment measures while seeing a slightly higher percentage of returning workers. The Bank of Canada meets on September 9 and is not expected to change policy. New fiscal initiatives are likely to be outlined on September 23, when the new session of parliament begins.  Ottawa’s decision about Huawei, on the one hand, and how to respond to the new US tariffs on Canada’s aluminum, on the other hand, risks escalating tensions with both Beijing and Washington.
Spot: CAD1.3045  (CAD 1.3410)
Median Bloomberg One-month Forecast  CAD1.3100 (CAD1.3515)
One-month forward  CAD1.3000  (CAD1.3415)    One-month implied vol  6.5%  (6.3%) 

Australian Dollar

The recovery of the Australian economy seemed to lag behind others even before the flare-up that led to the lockdown in Victoria.  Australia lost about 375k full-time positions between February and June and only gained 43.5k back in July (~11%).  However, the government has reduced the JobKeeper and JobSeeker payments.  Still, in the fiscal year that began July 1, the government anticipates a boost in spending and a reduction of tax revenues of around A$185 bln.

The Australian dollar gained about 3.3% in August, its fifth consecutive monthly increase, and is up about 5.1% for the year.  Reserve Bank Governor Lowe admitted to preferring a weaker currency, but suggest intervention would only be effective if there was a valuation misalignment. The OECD’s model of Purchasing Power Parity puts fair value at closer to $0.6950 (~5.7% over-valued), which represents a relatively modest deviation.

Spot:  $0.7375 ($0.7145)       
Median Bloomberg One-Month Forecast $0.70315 ($0.7035) 
One-month forward  $0.7380  ($0.7150)     One-month implied vol 9.8%  (10.4%)   

Mexican Peso:

The peso gained about 1.8% against the dollar in August, making it among the strongest of the emerging market currencies. The peso is off around 13% year-to-date, and the substantial depreciation that could still feed through to domestic prices.  Consumer prices have firmed in recent weeks and are now at the upper-end of 2%-4% target range.  After cutting the overnight rate by 50 bp at the past five meetings to 4.5%, Banxico sees itself with limited scope for additional easing.
The next meeting is on September 24, and it will likely standpat.  Outside of the auto sector, Mexico’s economy is still reeling from the virus and the limited policy response.  A new corruption scandal in President AMLO’s family may complicate next year’s local and state elections, but had little impact on the Mexican peso.

The dollar has been trading between MXN21.85 and MXN23.00 since the middle of June.  It edged lower to MXN21.74 into the end of the month before bouncing back to nearly MXN22.00 where it finished the month.  In the low interest-rate environment, the 4.5% available on short-term Mexican bills (cetes) is attractive and keeps the peso stronger than the macroeconomic considerations would suggest.

Spot: MXN21.89 (MXN22.27)  
Median Bloomberg One-Month Forecast  MXN21.92 (MXN22.12) 
One-month forward  MXN21.96 (MXN22.37)     One-month implied vol 13.4% (14.7%)

Chinese Yuan

The recovery of the world’s second-largest economy is being stymied by floods and weak domestic demand. The floods are disrupting food supplies and elevating prices.  By late August, and estimated $26 bln of damage has been inflicted and four million people displaced.
Agriculture imports have been boosted to meet the shortage of domestic supply.   Many expect the PBOC to continue to ease policy in a targeted way while holding back from the asset purchases that other major central banks are undertaking.  Since late May, the dollar has depreciated by around 4.7% against the Chinese yuan.   Chinese officials have allowed the yuan’s exchange rate to become decoupled from the ongoing political tension.
The yuan strengthened in seven of the nine weeks of Q3 through the end of August to finish near seven-month highs.  We suspect there is a limit to how much Beijing will allow the US to depreciate the dollar, but the 1.7% depreciation thus far this year is modest by any measure, and still fits the official rhetoric about the yuan’s stability.
Spot: CNY6.8485 (CNY6.9750)
Median Bloomberg One-month Forecast  CNY6.8815 (CNY7.0165)
One-month forward CNY6.9050  (CNY7.0795)    One-month implied vol  4.9% (4.4%)
For a look at all of today’s economic events, check out our economic calendar.

This article was written by Marc Chandler, MarctoMarket.

A Look at the Price Action

Make no mistake about it. After a wobble, the dollar fell. It recorded new lows for the year against the British pound, Australian dollar, and Swedish krona ahead of the weekend. New lows for the month recorded against the Canadian dollar and Norwegian krone. The euro and yen flirted with the edges but remained within their well-worn ranges.

It is the interest rate markets that saw a more nuanced response. The implied yield of the December 2022 Eurodollar futures contract rose 1.5 bp last week. The five-year yield also rose (less than a basis point), as the Fed signaled it would be more accepting of an inflation overshoot as a type of forward guidance meant to underscore its commitment to keep rates low for the foreseeable future.

The long-end of the curve backed up, with the 10-year yield rising 10 bp, and the 30-year yield increased 13 bp. However, the upside momentum was unsustainable, and yields pulled back from their best levels ahead of the weekend despite stronger than expected income, consumption, and deflator numbers.

Dollar Index

Ahead of the weekend, the Dollar Index approached the two-year low set in the middle of the month near 92.00. There was no meaningful bounce, and the broad sideways movement seen in the past few weeks has alleviated the over-extended momentum indicators.

A break of 92.00 would set the stage to test the 91.00 area, which has more technical significance. It is also the initial (38.2%) retracement of the rally in the Dollar Index from the historic lows in 2009 (~70.70). A move above 93.50 is needed to neutralize the negative technical tone.


Here in August, the euro has traded above $1.19 in six sessions and closed above it exactly twice and once was before the weekend. Perhaps it is a question of market positioning, where speculators in the futures market had amassed a record-long gross and net position and extended it further in the week ending August 25.

The broad, sideways movement in recent weeks ($1.17-$1.19) has seen the momentum indicators trend lower, but the firmer tone in recent days has steadied the MACD and Slow Stochastic, which now appear poised to turn higher. The upper Bollinger Band will begin the new week near $1.1925. A close above $1.20, is probably needed to signal a breakout. Support appears to have been carved around $1.1755-$1.1760 area.

Japanese Yen

The combination of the FOMC and Abe’s resignation saw the dollar transverse nearly its entire month’s range (~JPY105-JPY107) ahead of the weekend. Momentum traders have been whipsawed. The outside up day on August 27 was followed by an outside down day on August 28. The momentum indicators are not particularly helpful now. The dollar spiked to about JPY104.20 at the end of July, which was a four-month low and that is the obvious target on a break of JPY105.00, but the measuring objective of the chart pattern may be closer to JPY103.00.

British Pound

Sterling motored to new highs for the year ahead of the weekend a little above $1.3350. It has not ended a month above $1.33 since April 2018. The strong close leaves it in good shape to continue its run (three consecutive weeks and it has only fallen in two weeks here in Q3). While the MACD is uninspiring, the Slow Stochastic is turning higher after correcting from over-extended levels. The next important technical area is near $1.35. A caveat is it closed well above its upper Bollinger Band (~$1.3280).

Canadian Dollar

Nothing has been able to derail the greenback’s steady decline against the Canadian dollar, which has now been stretched into the seventh consecutive week. It has risen in one week here in Q3 and that was by about 0.3%. The US dollar pushed through CAD1.3050 briefly to fall to its lowest level since January, but it recovered a traced out a possible bullish hammer candlestick.

The long downtrend has left the momentum indicators stretched and do not appear to have confirmed the pre-weekend low. The downtrend line from March’s high will begin the new month near CAD1.3215. Only a break of this trend line is noteworthy, while CAD1.3000 has psychological significance and about CAD1.2985 is $0.7700. The lower Bollinger Band begins next week near CAD1.3080.

Australian Dollar

The Aussie was nearly flat coming into the start of last week and it gained almost 2.6% in the five-day rally that lifted it to almost $0.7360. It has not been at such levels since mid-December 2018. The next important technical objective is near $0.7500. It has fallen in only one week of the past 10 and that was by less than 0.2%. The Slow Stochastic corrected and is now turning higher. The MACD appears to be turning higher from its lowest level in a couple of months. On the other hand, the Australian dollar closed well above it upper Bollinger Band (~$0.7290), which also looks to be initial chart support.

Mexican Peso

The dollar appeared to have staged a key upside reversal on August 27 in the aftermath of the Fed’s statement. However, as cooler heads prevailed, the prospect of a faster-growing US economy and a softer inflation target by the Fed was understood to be good for emerging market currencies in general.

The JP Morgan Emerging Market Currency Index rallied a little more than 1% before the weekend, the most in a month. Its 1.5% gain for the week was the largest in nearly three months. The dollar lost about 1.4% against the peso ahead of the weekend to ensure its third consecutive weekly decline. The next target is the June low near MXN21.4650, around where the 200-day moving average is also found. The technical indicators offer little insight. Resistance is seen near MXN22.20.

Chinese Yuan

The dollar fell nearly 0.8% against the Chinese yuan last week. It has fallen in all but one week here in Q3. We had thought Chinese officials would have resisted more strongly the persistent demand for the yuan, which is at its strongest level since January. The dollar closed a gap left on the charts from the higher opening on January 21 near CNY6.8670.

The low for the year was set the previous day near CNY6.84. Technically, the CNY6.80-CNY6.82 would appear to offer support. It represents a retracement objective of the rally from the March 2018 low around CNY6.24 and the 200-day moving average.


The pre-weekend rally of about 1.3% prevented gold from falling for the third consecutive week. After testing $1900 in the middle of the week, gold rebounded initially in response to the Fed’s statement. It made it to almost $1977 before dramatically reversing back to $1910 before catching the bid ahead of the weekend that carried to nearly $1974. In the waning hours of activity, support was found ahead of $1960. Both the Slow Stochastic and MACD have corrected lower and now appear poised to turn higher. Initial resistance is in the $1995-$2000 range and then $2015.


The price of October WTI continues to trade broadly sideways in the $42-$43.50 range. It has progressed sufficiently for the contract to flirt with its 200-day moving average (~$43.15) without the kind of momentum that would usually signal a further advance. That said, October crude oil prices rose by about 1.5% to post the fourth consecutive weekly increase. A year ago, oil was a fifth higher.

US Rates

The US 10-year yields pulled back a couple of basis points ahead of the weekend to stop the four-day increase. Still, on the week, the 10-year yield rose 10 bp to around 73 bp, having traded a little above 78 bp. The 30-year yield edged up before the weekend to complete the fifth session higher. It reached 1.57%, the highest in a couple of months before settling back a little above 1.51%.

The September futures note tested the (50%) retracement of the rally from the June low around 138-22 at the end of last week and bounced off it. Are long-term interest rates on the rise? The technicals suggest otherwise. That said, the 10-year breakeven (spread between the conventional and inflation-linked bonds) rose to 1.77 bp, the most since April. Other market-based measures of inflation expectations are also elevated. The University of Michigan’s survey for 5-10-year inflation was confirmed at 2.7% in August, matching the high for the year.

S&P 500

The S&P 500 gapped higher to start the week and never looked back. The benchmark rose every day last week to bring its streak to seven sessions. The 3.1% rally was the biggest weekly rally of the month. As we have seen with some of the currencies, the S&P 500 has only fallen in one week over the past two months.

It began the week gapping above 3400 and finished the week poking above 3500 for the first time, which is just above the upper Bollinger Band. The trendline off the secondary low in March begins next week near 3400, which is also the bottom of the gap created by Monday’s higher opening.

This article was written by Marc Chandler, MarctoMarket.

Canada Shrugs Off Loss of Morneau and Gold Reclaims $2000 Threshold

Still, its 6.2% advance this month is the best among the G10. Chinese equities posted small gains, but amid rising infections and anticipating new lockdown measures, South Korea’s Kospi took it on the chin, falling nearly 2.5%. New US actions against Huawei took a toll on Taiwanese chip makers and weighed on the broader index. India’s 1% gain led the region.

European shares are flattish, and the Dow Jones Stoxx 600 remains within the range set before the weekend. US shares are also little changed. Benchmark 10-year yields are mostly 1-2 bp softer, which puts the US 10-year yield near 67 bp. The dollar is under modest pressure, falling against nearly all the currencies today. Among the majors, sterling, the yen, and the Canadian dollar are up just shy of 0.5% to lead.

Russia, Mexico, and South Africa lead the emerging market currencies higher. Turkey stands out as a notable exception. Gold has re-taken the $2000 level. The next technical target is near $2025. Oil is firm but flat within its recent ranges. The $43.50 capped the rally earlier this month in the September WTI contract.

Asia Pacific

The US tightened its attempt to isolate Huawei. It extended its sanctions to cover 38 more affiliates in 21 countries. The goal is to cut its access to semiconductor chips. This hit Taiwanese chip producers. Separately, and contrary to the assessment of many private economists, US trade adviser Navarro said in an interview yesterday that China is “absolutely” keeping its word on purchases of US goods. President Trump has also praised Chinese agriculture purchases. Separately, reports suggest some 14 mln barrels of oil in seven super-class tankers are on their way to China now.

The minutes from the recent meeting of the Reserve Bank of Australia confirmed it did not see the need for additional measures. However, there were two mitigating factors. First, officials were concerned that cheap funding was not leading to new credit expansion, though it was not clear on whether it was a supply or demand challenge. Second, the latest outbreak and lockdown in Victoria will push up unemployment and weigh on economic activity.

The dollar stalled just above JPY107 last week and is retracing the gains scored in the first half of August. It has traded at an eight-day low near JPY105.40 today, just above the (61.8%) retracement of the bounce off the JPY104 level seen on July 31. Resistance is seen around JPY105.80, and there is an option for about $480 mln at JPY106 that expires today. The Australian dollar is firm and approached the month’s high set on August 8, near $0.7245. A move above $0.7255 targets $0.7300.

Note that the Aussie continues to march higher against the New Zealand dollar. With today’s gains, the 11-day streak seems to match record moves of 1985 and 1991. The RBNZ seems more aggressive than the RBA, and this appears to be the main driver. The PBOC set the dollar’s reference rate at CNY6.9325, in line with bank model projections. The greenback traded down to almost CNY6.92, a fresh five-month low.


Rising new virus cases in Europe have begun to have an economic impact according to some high-frequency data. In the first two weeks of August, activity slowed in France, Italy, and Spain. Germany, which is reporting the most cases in four months, and Sweden and Norway are seeing more sluggish results. There is risk that these developments are picked up on the preliminary August PMI releases at the end of the week. If reflected, the service PMI appears more vulnerable than the manufacturing PMI.

The top UK and EU negotiators (Frost and Barnier) have dinner tonight to kick-off the week of staff negotiations. Frost and Barnier will meet again at the end of the week. To ensure that the treaty can be ratified, it is generally understood that it needs to be concluded by the end of September or early October at the latest. Often in such circumstances, officials bring in the goalposts, as it were, and reduce their ambitions and could settle for a smaller and narrower deal to secure an agreement.

In addition to UK trade talks, the EU is being challenged on two other fronts. The first is Belarus and the risk that Russia provides military/police support. The second is Turkey, which appears to be set to begin drilling for oil off the southwest coast of Cyprus and says it will continue to do so for the next month (September 15).

Nevertheless, euro has resurfaced the $1.1900 area and reached $1.1915 in early European turnover, just shy of the August 6 high, which is also a two-year high. Above there, the $1.20 area offers psychological resistance, and as we have pointed out previously, it is the euro’s average since its launch. Initial support is around $1.1880 and then $1.1860. Sterling is also firmer and knocking against this month’s high (~$1.3185). It has seen $1.3200 in March before collapsing, and the high for the year is closer to $1.3280. We have noted that 50 and 200-day moving averages (Golden Cross) for the major currencies have crossed. Sterling is the last, and it is happening today.


In and of itself, the Empire State manufacturing survey means little. However, the disappointment was palpable. Economists had expected a decline, but the deterioration of sentiment was notable and worrisome if it is representative. Roughly a third saw conditions improving, and almost a third saw deterioration. New orders contracted, and the six-month outlook eased. The Philadelphia Fed survey will be released on Thursday at the same time was weekly jobless claims. The results will be compared.

Ahead of it, though, the US reports July housing starts today (another month of solid gains are expected), and the FOMC minutes from the July meeting will be released (tomorrow). Those, like ourselves, who expect fresh policy move next month, would hope to seem some groundwork being laid in the minutes. There are also expectations that at the September FOMC meeting, a formal recognition that the inflation target is symmetrical, meaning that the undershoot will allow it to encourage an overshoot.

Canada’s Finance Minister Morneau resigned. There are a couple of flashpoints, including Prime Minister Trudeau’s fiscal response to the pandemic and desire to get more directly involved. Also, both Morneau and Trudeau have been caught up in a scandal involving a favoring a charity to which both had ties. Former Bank of Canada and Bank of England Governor Carney has been consulting with Trudeau, and some see him as a likely successor to Morneau. Deputy Prime Minister Freeland is also seen as a candidate.

The political developments in Canada have done no harm to the Canadian dollar, which has continued to march higher. The US dollar has slipped below CAD1.3160 in the European morning to trade at fresh seven-month lows. The intraday technicals are stretched. A bounce toward CAD1.3180-CAD1.3200 would likely be seen as a new opportunity to sell the greenback. The next chart support is seen a little above CAD1.3100. The US dollar low for the year was set in January near CAD1.2960.

The greenback is also offered against the Mexican peso as it yields yesterday’s gains. Support is seen in the MXN21.85-MXN21.95 area, as the broad dollar weakness and Mexico’s attractive rates blunt concerns about its domestic economy. The Brazilian real will be in focus today. It was the weakest currency in the world yesterday, and the dollar settled above BRL5.50 for the first time since the end of June. Concerns about fiscal policy plans with low real rates provided a weak backdrop for concerns over the futures of the market-friendly finance minister (Guedes).

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

This article was written by Marc Chandler, MarctoMarket.

About that Dollar Bounce

The price action lends credence to our view that a technical consolidative/corrective phase is at hand. Further near-term dollar recovery looks likely but does not change our longer-term bearish outlook.

Dollar Index

A bottom was carved and tested near 92.50. It is potentially a double bottom. A move above 94.00 is needed to confirm it, though others might not be convinced until 94.50 area (20-day moving average) is surpassed. The measuring objective of the double bottom is around 95.50, and the 95.80 is a retracement objective. The MACD appears poised to turn higher while the Slow Stochastic bottomed late last month, setting up a modest bullish divergence.


A potential double top is in the euro. It checked the air above $1.19 at the end of July and made a fractional new high in recent days. In between, it had fallen a little through $1.1700. That is the neckline of the double top and implies a measuring objective of near $1.15. We had offered a $1.1650 target last week. The 20-day moving average (~$1.1630) and the halfway mark of the rally off last month’s low ($1.1640) are near there as well. The next retracement (61.8%) is found closer to $1.1550. The MACD and Slow Stochastic are rolling over. Note too that implied vol rose along with the euro, and as the single currency corrects lower, vol will likely ease. The chart here since 2008 illustrates the importance of the area euro has approached. The fate of the 12-year downtrend is at stake.

Japanese Yen

The dollar posted its first leg up against the yen in dramatic fashion, with a key reversal from JPY104 on July 31. Follow-through buying lifted it to nearly JPY106.50 at the start of last week. There were a few days on consolidation, and the next leg up appears to have begun before the weekend. We suspect it can rise into the JPY107.00-JPY107.50. The 200-day moving average lies a little above the JPY108, around the upper end of its previous range. The Slow Stochastic turned higher at the end of July. The MACD is also edging higher.

British Pound

A double top also may be in place for sterling. The pound reached a high on the last day of July near $1.3170, and on August 6, a little above $1.3185. In between, it slipped to around $1.2980. The break confirms the pattern with a measuring objective of the $1.2780 area. The 20-day moving average and the 50% retracement of the last leg up of sterling that began near $1.1520 on July 20 also comes in near there. The next retracement (61.8%) comes in a little below the double top objective (~$1.2770). The momentum indicators are just begun rolling over.

Canadian Dollar

The US dollar fell to six-month lows against the Canadian dollar around CAD1.3230 in the middle of last week, but rebounded back to CAD1.3400 amid the wider greenback recovery ahead of the weekend. The 20-day moving average is found near CAD1.3435, and the high from late last month is a little higher (~CAD1.3460). A push there would signal a test on the CAD1.3500-CAD1.3530, and near the upper end of that range, the 200-day moving average is found. The momentum indicators are floundering in over-extended territory and have yet to convincingly curl up.

Australian Dollar

The potential topping pattern is not as aesthetically pleasing as the euro or sterling. It made a high at the end of July a little above $0.7225. It fell to about $0.7075 before rebounding and reached nearly $0.7245 before the pre-weekend cent sell-off. The greenback’s recovery saw the Aussie fall through and close below the previous day’s low, for a key reversal. A break of the $0.7075 area would confirm the topping pattern and project toward $0.6925. There are several areas of intermittent support. The $0.7040 area is the (50%) retracement of the rally that began in early July. The $0.7000 area is of modest psychological importance, and the next retracement (61.8%) objective is also there. The MACDs are not helpful now, and the Slow Stochastic has turned lower.

Mexican Peso

Emerging markets, for which the Mexican peso often serves as a proxy, seemed to turn lower against the dollar before the majors. Leaving aside the Turkish lira, where officials have finally appear to abandon their ill-conceived currency strategy, emerging market currencies remained under pressure, with the JP Morgan Emerging Market Currency Index falling for the second consecutive week.

Last week’s 1.5% decline is the largest decline in three and a half months. The dollar rose around 3.3% against the rand last week after gaining 2.4% in the prior week. Last week, the dollar’s nearly 4% gain against the Brazilian real was the most among emerging market currencies. The greenback looks poised may be range-bound between around MXN22.30 and MXN23.00. Our near-term bias is for a stronger dollar, but it closed softly ahead of the weekend.

Chinese Yuan

The yuan looks rich, given the dollar’s recovery ahead of the weekend and given the escalation and broadening tensions with the US. It traded at its best level since March (with the dollar at a low ~CNY6.9360). A trendline drawn off the late May high (~CNY7.1770) comes at the start of next week near CNY6.9860, but a move back to if not above CNY7.0 seems likely. Around 4.75% three-month implied vol is low compared with other currencies, but it is above its 200-day moving average (~4.4%). The skew in the options market (three-month risk-reversal) favoring dollar calls edged up slightly last week. While the skew is still low, it did increase more than the one-month tenor and could be picking up some risks around the US election.


New record highs were seen before the weekend near $2075.50, but then gold reversed lower and fell below the previous day’s low (~2034.55), though closed slightly above it. The bearish price action is intuitively consistent with the dollar’s bounce and the signal from the momentum indicators. The Slow Stochastic is poised to turn lower and did not confirm the new price high. The MACD is poised to cross down. Initial support is expected in the $1980-$2000 area. The rally has been so sharp that even a modest (38.2%) of the recent rally from early last month is closer to $1955.


The September WTI contract reached a five-month high (~$43.50) in the middle of last week, just shy of the 200-day moving average (~$43.80). This marked the end of a four-day net (close-to-close) rally of nearly 5.7%. Crude trade heavily in the second half of the week. It tested the upper end of a band of support that extends from around $39.80 to $41 before the weekend. The MACD has been trending lower since early/mid-June. The Slow Stochastic has actually turned up from mid-range. Still, our bias is lower.

US Rates

The US rates have found a near-term floor. The 2-year has held the 10 bp record low. Traders may have thought about pushing the 10-year yield below 50 bp, but have pulled back. The 30-year yield held 1.15% and recovered to almost 1.25%. There is some thought that with a weak dollar environment and near-record low-interest rates, some concessions may be needed to induce a robust reception to the US quarterly refunding. It is as if the inventory must be distributed to make room for new product.

The Treasury will raise $112 bln ($48 bln 3-year, $28 bln 10-year, and $26 bln 30-year) in coupon sales, which is about 16% more than the previous quarterly refunding. The Treasury has announced intentions to sell $132 more coupons in the August-October period than it did the last three months as it seeks to fund the huge gap between revenues and expenditures. One implication is that it would seem to boost the chances that the yield curve steepens. The 2-10 year curve briefly dipped below 40 bp last week, a low since late April. There is scope to claw back toward 50 bp in the coming weeks. The 2-30 year curve has been bouncing off 107 bp for two weeks. It can steepen toward 125 bp in the period ahead.

S&P 500

The benchmark gained almost 2.5% last week and filled the old breakaway gap from February (~3328.5). The S&P 500 gapped higher to start the week, and the gap takes on additional technical significance because it appears on the weekly and monthly charts as well. That gap, for reference, is roughly between 3272.20 and 3284.5. It then gapped higher on Wednesday, and that gap is unfilled as well (~3306.8-3317.4).

This area may offer initial support. The MACDs are not yielding any useful signal, while the Slow Stochastic turned up in the past week after barely correcting the over-extended reading. The S&P closed firmly, setting new highs were set for the week in the run-up to the close. There seem to be little in the way of a test on the record high set in February around 3393.5.

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

This article was written by Marc Chandler, MarctoMarket.

Dollar Bounces, Gold Slips, while Equities Hold Their Own

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

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

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

Asia Pacific

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

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

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

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


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

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

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

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

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


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

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

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

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

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

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

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

Dollar Slide Continues, while Gold Soars

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

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

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

Asia Pacific

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

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

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

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

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


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

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

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

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


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

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

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

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

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

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

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

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

Dollar Momentum

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

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

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

Dollar Index

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


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

Japanese Yen

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

British Pound

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

Canadian Dollar

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

Australian Dollar

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

Mexican Peso

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

Chinese Yuan

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

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


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


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

US Rates

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

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

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

False Breakout Will Show You the Direction

In today’s trading sniper video, I will show you the power of false breakout patterns. There has been quite a few of them on many instruments recently: indices, commodities or currencies. Today, the false breakout patterns come from the Forex market and this is what we’ll focus on today.

The EURAUD is currently moving significantly higher but it did not look so optimistic during the first half of the week. The price managed to bounce from the upper line of the triangle and used a great bearish momentum to break the lower line of this pattern. That gave us a sell signal, which turned out to be a fake one. Instead of going lower, the price created a double bottom formation and moved back inside of the triangle. That is a false bearish breakout and promote a strong upswing.

Another one is the USDMXN, where the price also went below the lower line of the triangle and in addition to this, below a crucial horizontal support. That breakout was also false and actually helped to create an inverse head and shoulders formation, which gave us a short-term buy signal.

We will finish with the most popular instrument on the market the EURUSD. The price here is obviously in a super strong up trend but it looks like the market is getting ready for a bearish correction. The price is still yet to test the broken 1.144 as a closest support. I think this movement would be more then welcome. Hard to imagine an attack on the 1.20 level without some kind of a correction in the meantime.

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

GBP/USD, USD/CAD and MXN/USD, All Respect the Triangle

The main topic of today’s analysis will be the symmetric triangle pattern, which can be spotted on few currency pairs. The symmetric triangle is a great formation, which can result with a strong directional movement. When the price is still inside of the triangle, it is usually hard to predict the direction. Traders have to remain patient and wait for the breakout. Once the price escapes from this pattern, the direction is set and the trade opportunity emerges.

The first instrument is the Cable – GBPUSD. The price was locked inside the triangle since May and the breakout happened on Monday. It was to the upside, so it gave a buy signal. Yesterday, the price was following that sentiment marching higher. The problem for the buyers was that the Cable had an ultimate resistance ahead, at 1.277. It is a crucial level for the GBPUSD since 2019 and was tested and respected many times. Sellers left no chance here and the price reversed almost instantly after the contact. Wednesday brings us an acceleration in momentum. Technically, it’s pretty normal, apart from the bounce, we see a simple movement of the price aiming at the broken line of the triangle to test it as a support. As long as the price stays above this dynamic support, sentiment is still positive.

The second triangle can be spotted on the USDCAD. Here, it resulted with a breakout to the downside. A weaker USD and higher commodities, helped the CAD gain strength. Along with the breakout of the lower line of the triangle, the price also broke the 1.35 support. As long as the price stays below those two levels, sentiment is negative.

The last instrument is a bit more exotic and, in this case, it did not have the breakout yet. I am talking about the USDMXN, where the price is still defending the lower line of the triangle together with the horizontal support at 22.26. As long as the price stays above the support level, there is no sell signal but the breakout will leave no hope for traders holding long positions.

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

Risk Appetites Firm, but the Greenback is Mixed

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

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

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

Asia Pacific

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

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

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

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

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


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

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

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

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

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

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


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

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

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

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

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

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

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

This article was written by Marc Chandler, MarctoMarket.

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

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

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

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

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

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

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

Dollar Index

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


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

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


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

British Pound

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

Canadian Dollar

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

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

Australian Dollar

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

Mexican Peso

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

Chinese Yuan

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

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


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


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

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

US Rates

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

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

S&P 500

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

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

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

This article was written by Marc Chandler, MarctoMarket.

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

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

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

Asia Pacific

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

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

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

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

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


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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

Asia Pacific

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

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

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

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

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


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

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

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


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

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

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

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

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

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

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

This article was written by Marc Chandler, MarctoMarket.

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

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

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

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

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

Dollar Index

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


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

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

Japanese Yen

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

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

British Pound

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

Canadian Dollar

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

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

Australian Dollar

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

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

Mexican Peso

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

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

Chinese Yuan

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


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


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

US Rates

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

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

S&P 500

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

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

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

This article was written by Marc Chandler, MarctoMarket.

Dollar Thumped Ahead of US Jobs Report

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

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

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

Asia Pacific

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

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

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

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


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

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

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

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


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

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

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

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

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

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

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

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

This article was written by Marc Chandler, MarctoMarket.

When Primary is Secondary

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

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

Asia Pacific

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

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

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

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

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

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


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

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

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

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

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


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

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

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

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

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

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

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

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

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

This article was written by Marc Chandler, MarctoMarket.

Contagion Growth and Calendar-Effect Saps Investor Enthusiasm

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

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

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

Asia Pacific

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

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

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


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

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

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

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

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


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

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

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

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

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

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

This article was written by Marc Chandler, MarctoMarket.