Corrective Forces Still Dominate

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

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

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

Dollar Index

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


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

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

Japanese Yen

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

Britsh Pound

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

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

Canadian Dollar

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

Australian Dollar

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

Mexican Peso

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

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

Chinese Yuan

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


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


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

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

US Rates

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

S&P 500

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

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

This article was written by Marc Chandler, MarctoMarket.

Markets Finding it Difficult to Rebuild Bullish Momentum

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

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

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

Asia Pacific

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

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

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

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

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

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


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

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

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

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

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


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

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

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

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

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

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

This article was written by Marc Chandler, MarctoMarket.

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

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

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

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

Asia Pacific

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

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

Chinese yuan

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

Japanese Yen

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


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

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

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


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

British Pound

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


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

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

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

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

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

Mexican Peso and Canadian Dollar

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

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

Playing the FX Cross in the Wake of the FOMC

The Fed aren’t going anywhere

There is little doubt the Fed was dovish, and the gravy train is going nowhere with future asset purchases continuing at the current pace of $80b p/m and MBS $60b p/m, which should underpin risk for some time. Judging by the bank’s economic projections (and dot plot) interest rates are not going up well past 2023, and the conversation on yield curve control (YCC) was certainly explored a few times, something Powell said was still “an open question”.

One suspects if they are going to announce YCC it will take place in the September meeting, and that meeting will be a biggy as it will give them a decent stretch to see how their many programs, not to mention economics, are evolving and the impact they are having on getting them towards its mandate.

When we consider YCC, I would expect the Fed to focus on the 3-5-year Treasury curve, more akin to what the RBA is doing than the BoJ, although there are a ton of questions around its commitment and of course what level (of yield) would they target.

Real Treasury yields promoting a bid in gold

For now, though we see a solid move lower in nominal yields, with the Fed importantly managing to generate a positive move higher in inflation expectations, with 5-yr Breakeven rates moving +3bp and above 1% for the first time since 9 March. This has resulted in US 5-year real Treasury yields collapsing 11bp to -70bp. For gold traders, this is all that matters and for gold bulls, it is the perfect storm, especially when married with such as the bearish trend in the USD.

Gold has been happy to track the 1750 to 1650 range since mid-April, and I have argued many times, the answer lies in the bond market and it appears to be playing out – Is this the time we finally see a solid break of the range?

Daily gold chart

The move in bond yields has propelled the NAS100, which will feed off lower yields every day, with the Fed keeping the punchbowl in the mix for as long as it takes. On the other hand, the dour economic projections have really made it clear that the Fed sees the prospect of a V-shaped recovery as incredibly low, so we’ve seen the Russell 2000 lower by 2.6%, while the S&P500 fell 0.5%, held back by financials (thanks to the flatter yield curve), and energy (crude fell 2.2%). Asia is feeding off these leads and risk is under pressure, with traders taking a bit off the top.

The USD is heading lower longer-term

If we consider the Russell 2000 is more reflective of inward factors and the US economy, it perhaps tells us why the USD is also being further shunned. The US is no longer the standout and almost isolated destination for global savings that it has been in recent years, and investors now have a choice and have redistributed capital accordingly. Lower yields are certainly incentivising an offer in the USD too, especially with raised prospects of YCC the months ahead. Why? Because if the Fed is going to add an extra measure to further increase its balance sheet through unlimited bond purchases, to fix a specific parts of the Treasury curve at a given yield, then it just increases the prospect of deeper negative real yields and an ever bigger balance sheet.

After a big move in the USD – Trading FX from a tactical standpoint

From a tactical perspective, the USD may still in the doghouse, but if the S&P500 is looking at the Fed’s dour economic projections, the index could find a few headwinds in the near-term. Despite liquidity, if the S&P500 tracks lower then global growth proxies such as AUD, CAD and MXN may also struggle near-term. It makes the currency crosses become a more attractive trading vehicle.

I am watching EURCAD. After some messy price action, the buyers are starting to get a better say here and should crude come off further and we start to see a few more sellers in the S&P500 then the funding currencies (EUR, JPY, CHF) will outperform. Whether this starts to trend is questionable, but the battle lines are drawn.

If playing the USD, AUDUSD is looking more vulnerable, but EURUSD is still strong and would be a preference if keeping the USD in play.

We see price still holding the 5-day EMA and there are few reasons to be short with any genuine conviction on current price action – happy to stay bullish here, where a close above 1.1383 would open up 1.1500. Will turn more neutral on a break of 1.1321.

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Chris Weston, Head of Global Research at Pepperstone.

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Corrective Forces Still Seem in Control Ahead of the FOMC Outcome

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

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

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

Asia Pacific

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

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

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

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

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


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

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

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

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

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


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

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

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

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

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

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

This article was written by Marc Chandler, MarctoMarket.

Monday Blues: Consolidation Threatened

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

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

Asia Pacific

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

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

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

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

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

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


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

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

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

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

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


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

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

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

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

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

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

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

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

This article was written by Marc Chandler, MarctoMarket.

Risk Taking Pauses Ahead of the ECB

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

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

Asia Pacific

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

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

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

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

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


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

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

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

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

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

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

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


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

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

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

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

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

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

This article was written by Marc Chandler, MarctoMarket.

Dollar is Sold and ROW is Bought

Europe’s Dow Jones Stoxx 600 is up more than 1% for the third consecutive session. US shares are trading higher and are poised to extend their recent run. Bond yields are backing up. Australia, New Zealand, and South Korea saw 5-6 bp increases, while European bonds are 2-3 bp higher. The US 10-year benchmark is straddling the 70 bp area.

The dollar is soft against most European currencies, led by the Scandi bloc, and the euro is trying to establish a foothold above $1.12. The greenback is consolidating its recent gains against the dollar-bloc currencies. The Swiss franc and yen remain on the defensive. Outside of China, Turkey, India, and most emerging market currencies also are firmer against the dollar. Gold was turned back after approaching $1750 yesterday, and July WTI is above $38, while August Brent poked above $40.

Asia Pacific

A pattern that is emerging with the service sector PMI reports is that the final reading is mostly above the preliminary or flash reports. This began in Japan and Australia. Japan’s service PMI rose to 26.5 from 25.3, and 21.5 in April. The composite rose to 27.8 from 27.4, and 25.8 in April. Australia’s service PMI rose to 26.9 from 25.5. It was below 20 in April. The composite PMI rose to 28.1 form 21.7 in April. The preliminary estimate was 26.4. Separately, Australia reported that Q1 GDP contracted by 0.3%, a little less than anticipated. The BOJ is considering doubling its assistance to small businesses as early as the policy meeting later this month.

China’s Caixin PMI surprised to the upside. The non-manufacturing component rose to 55. from 44.4 in April. The composite rose to 54.5 from 47.6. Nevertheless, China is expected to provide more monetary and fiscal stimulus. Meanwhile, Hong Kong forward points eased with the 3-month nearly back at pre-crisis levels, thought the 12-month points remain elevated.

The yen was sold off hard yesterday, finally capitulating to the unwind of “safe haven” strategies that had already pressured the US dollar, and was also becoming evident in the Swiss franc. The US dollar broke out of its narrow range yesterday, surging above the 200-day moving average (~JPY108.35), for the first time since mid-April to nearly JPY108.80. Follow-through buying today in Tokyo saw only a marginal new high before consolidating. As long as the JPY108.00-JPY108.20 area holds, the breakout will be confirmed.

The Australian dollar‘s gains accelerated to almost $0.7000 (~$0.6985) before profit-taking kicked in and sent the Aussie to about $0.6880 before buying returned. Still, a stronger recovery in North America is needed to avoid leaving a bearish shoot star candlestick in its wake. The PBOC set the dollar’s reference rate a bit stronger than the bank models suggested (CNY7.1074 vs. CNY7.1053). The dollar is ending its four-day downtrend against the yuan, and the CNY7.10, which was the upper end of the previous range, now could be the lower end of the new range.

The dollar has sold off hard against the Indonesian rupiah (-2.2%) after a 1.3% slide on Monday. Strong portfolio flows into its bond market, where the 10-year local currency bond yield has fallen near 35 bp over the past week.


The main macro development today is the final service and composite PMI readings. They were better than expected. Germany’s May service PMI was twice April at 32.6 (vs. 16.2) and a little higher than the preliminary reading. The composite, held back by the manufacturing PMI, rose to 32.3 form 31.4 (flash) and 17.4 in April. France’s story was the same but more. The service PMI rose to 31.1 from the initial estimate of 29.4 and 10.2 in April. The composite stands at 32.1 after 11.1 in April. Spain and Italy, which do not see preliminary estimates, rose more than expected. In Spain, the service PMI rose to 27.9 from 7.1, and the composite is at 29.2 after 9.2 reading in April. Italy service PMI jumped to 28.9 from 10.8, and the composite surged to 33.9 from 10.9.

The same general pattern was evident in the UK. Between the time of the preliminary estimate and the final reading, the situation, while remaining dire, improved. The service PMI rose to 29.0 from the 27.8 flash report and 13.4 in April. The composite rose to 30.0 from 28.9 initially and 13.8 in April. Separately, we note that Bank of England Governor Bailey encouraged banks to prepare for the UK and EU to fail to secure a trade agreement by the end of the year.

The euro is trading higher for the seventh consecutive session and pushed above $1.12 for the first time since mid-March. There are 1.4 bln euros in options struck between $1.1210 and $1.1220 that will expire today. The high in late Asia was just shy of $1.1230. Sterling’s advancing streak has extended into the fifth consecutive session today, and it traded above $1.26 for the first time since May 1. The 200-day moving average is near $1.2675, and it has not traded above it since March 12, and the April highs were set a little lower (~$1.2640-$1.2650). Turkey’s CPI was stronger than expected (almost 11.4% in May from just below 11% in April) and mostly reflected an increase in the core rate. This takes real rates in Turkey deeper into negative territory and weakened the lira after it rose to near two-month highs.


The Bank of Canada meets today amid little fanfare. The Bank of Canada has responded aggressively to the crisis. It slashed the overnight target rate to 25 bp from 150 bp, a record low. It launched its first quantitative easing (large-scale asset purchases) by buying federal, provincial, and corporate debt. The balance sheet has quadrupled to around C$465 bln or about 20% of GDP. Poloz was not an advocate of negative rates, and we suspect Macklem concurs. Current policies can be scaled if needed.

Thursday’s economic update (to be delivered by a deputy governor) and Friday’s jobs report lay ahead. The Canadian dollar often moves alongside the other Australian and New Zealand dollar, and it has been the laggard in the advance that has accelerated since mid-May. The Canadian dollar has risen about 4.3% compared with around 7.8% for the Antipodeans. Lastly, while the Reserve Bank of Australia has targeted the 3-year yield at 25 bp, the same as its cash rate target, the Bank of Canada has not introduced yield curve control. However, its two-year yield has been stable, hovering around 30 bp since the end of April.

The ADP releases its estimate of the change in last month’s private sector employment. A loss of 9 mln jobs is expected after a 20.2 mln loss in April. The median forecast in the Bloomberg survey for Friday’s non-farm payroll is for a decline of 8 mln. Markit reports its final service and composite PMI and the ISM issues its non-manufacturing index.

The takeaway is that construction continues but at a slower rate, which is still seen setting the stage for a recovery beginning in Q3. The labor market, and the current end of the extended benefits next month, could set the stage for the second wave of layoffs, and this risk is beginning to be discussed. April factory and durable goods orders are too dated to have much impact. Separately, the US has begun reviewing the digital tax that several countries in Europe and India are threatening, and this could be a source of friction (tariffs?) in the coming months.

The US dollar had fallen from CAD1.40 on May 25 to about CAD1.3480 yesterday. It is holding near the today, which is a little above the 200-day moving average (~CAD1.3460). There is also an old gap from March (~CAD1.3440-CAD1.3460) that may have some technical significance. Resistance is seen in the CAD1.3585-CAD1.3615 area.

The impressive recovery of the peso continues. The dollar traded toward MXN21.50, and the next technical target is near MXN21.30. Its recovery despite weak fundamentals can be attributed to its high real and nominal interest rates. We are concerned that the level of the peso needed to clear the capital markets is much stronger than the level of the peso needed to clear the market for goods and services.

This article was written by Marc Chandler, MarctoMarket.

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

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

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

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

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

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

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

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

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

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

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

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


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

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


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

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

(end of March indicative prices, previous in parentheses)

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


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

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


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

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

Canadian Dollar

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

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

Australian Dollar

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

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

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

Mexican Peso

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

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

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

Chinese Yuan

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

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

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

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

Breakouts Need Confirmation

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

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

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

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

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


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

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

Japanese Yen

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

British Pound

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

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

Canadian Dollar

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

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

Australian Dollar

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

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

Mexican Peso

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

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

Chinese Yuan

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

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


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


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

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

US Rates

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

S&P 500

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

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

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

China and Hong Kong Pressures are Having Limited Knock-on Effects

The spill-over into today’s activity has been minor. The heightened tensions weighed on China and Hong Kong markets, but Japan, South Korea, Taiwan, and Indian equity markets rose.

Europe’s Dow Jones Stoxx 600 is higher for the third consecutive session, the longest streak this month. US shares are also trading higher, and the S&P 500 looks poised to rechallenge yesterday’s high, leaving yesterday’s opening gap unfilled. Benchmark bond yields are a little lower, and the US 10-year is hovering around 68 bp.

The greenback is bid against most of the major and emerging market currencies. Among the majors, the yen, the Canadian dollar, and New Zealand dollar are steady to higher, while the European complex, led by the Swiss franc, is nursing small losses. Turkey, Hungary, and South Africa led the losers among emerging market currencies.

The Chinese yuan (onshore and offshore) fell to its lowest level of the year. Gold drifted to two-week lows a little above $1700, while July WTI is consolidating in $33.50-$34.30 range as Russia seems to be balking at extending the maximum output cuts beyond next month.

Asia Pacific

President Trump is threatening “very interesting” action against China by the end of the week. Apparently, under consideration are a new set of sanctions against officials, businesses, and financial firms over the effort to crack down on dissent in Hong Kong.

There are actions the US could take, including limiting transactions and freezing assets. The US could suspend Hong Kong’s special trade privileges, but this seems potentially too disruptive for US companies and would punish Hong Kong more than China. Meanwhile, demonstrations and conflict with police have escalated in Hong Kong.

Pressure on the Hong Kong dollar is evident in the forward market. The 12-month forward points increased by almost 60 to 670. A week ago, they stood at 256. The 3-month forward points increased by almost 20 today to about 167. A week ago, they stood at 75.

Separately, the PBOC set the dollar’s reference rate at CNY7.1092, while the bank models implied CNY7.1144. However, the dollar rose to almost CNY7.1630 to approach the CNY7.1850 peak last September. The dollar rose to almost CNH7.1770 against the offshore yuan. It peaked last September near CNH7.1965. Chinese officials do not appear to cause the yuan’s weakness but are not resisting it forcefully.

Separately, China reported a 4.3% decline in April industrial profits, almost a third of the decline that the median forecasts in the Bloomberg survey anticipated and what seems like an improvement after the nearly 35% decline in Q1. However, the performance of the state-owned enterprises suggests a more complicated picture. Profits in this sector fell 46% in the January to April period, a little worse than the 45.5% decline reported in Q1.

Nevertheless, with the latest reserve requirement cuts for large banks, and additional efforts for small and medium businesses, and signs of more fiscal support coming from the National People’s Congress, China is stepping up economic and financial efforts. At the same time, Japan’s cabinet has approved a JPY117 trillion supplemental budget with JPY72.7 trillion of fiscal outlays. South Korea is expected to deliver another 25 bp rate cut tomorrow (bringing the seven-day repo rate to 50 bp).

For the sixth consecutive session, the dollar stuck on the JPY107-handle. It has not traded below JPY107.30 since May 18. It neared JPY108 yesterday but backed off. Today there are $1.7 bln in options in the JPY107.80-JPY107.90 area that expire. If that is not a sufficient cap, there is another billion-dollar option at JPY108.15 that will also be cut. The Australian dollar is in a narrow range below yesterday’s high near $0.6675. There is an option for nearly A$635 mln at $0.6650 that expires today.


The European Commission appears to be combining the German-French proposal with the other proposal by Austria, Sweden, Denmark, and the Netherlands to advance a 750 bln euro fiscal support effort. It would include 500 bln euro in grants and 250 bln euros in loans.

It seems a popular meme to see an EU bond as a step toward the mutualization of debt and a fiscal union. This seems exaggerated. There are already common obligations, such as bonds issued by the European Stabilization Mechanism and the European Investment Bank. The EU itself has issued bonds in the past.

ECB President Lagarde is laying the foundation for an increase in the central bank’s Pandemic Emergency Purchase Program next week. She cautioned today that the more mild scenario that had been considered was out of date and that the more likely scenario is the one that anticipates an 8-12% contraction this year.

The internal debate seems to be over relaxing more of the self-imposed limits. The capital key has already been diluted for PEPP, and the issue limit of 1/3 has also been waved. There does not seem to be much interest in taking rates deeper into negative territory.

There has been much discussion of the Bank of England adopting negative rates. We have understood officials to be keeping that option on the table, which may help lower UK rates, such as last week’s 3-year Gilt auction that resulted in a negative yield.

However, it does not seem to be imminent. More likely, the Bank of England will increase its bond purchases when it meets on June 18. The BOE’s chief economist, Haldane’s comments, were consistent with the idea that other policy options will be explored before negative rates.

The euro initially slipped to almost $1.0930 after stalling in front of $1.10 yesterday. However, with a running start in the European morning, the euro punched above $1.10 and above last week’s high to poke above the 200-day moving average (~$1.1015) for the first time since the end of March.

The $1.1050 area may hold some offers, but there is little chart-based resistance ahead of $1.1160-$1.1200. Sterling, on the other hand, is firm but through late in the London morning, has been unable to surpass yesterday’s high near $1.2365. The next target above there is around $1.2425.


The US reports the May Richmond Fed survey and the Fed’s Beige Book for ahead of next month’s FOMC meeting. Nearly every survey (diffusion indices and sentiment surveys) have shown some moderation in the weakness since in April. The improvement has also mostly been better than expected. And yesterday’s it was reported that April new home sales, which were forecast to have imploded by nearly a quarter, eked out a small (0.6%) gain.

Yes, there is little doubt that the world’s biggest economy has suffered a large hit in this quarter, but the data suggests ideas of a Q3 recovered may not be misplaced. Other data, including traffic patterns, are also pointing to a slight pick up in activity as the lockdowns ease. Canada and Mexico’s calendars are light today. Banxico issues its inflation report today, and coupled with the strength of the peso may spur speculation of another 50 bp rate cut at its next meeting.

Although Fed officials have played down the likelihood of negative rate policy in the US and the fed funds futures curve is not implying negative rates, the central bank may not be done. There is more virtual ink being devoted to the possibility of yield curve control, where the Fed would not target a certain amount of Treasuries to be bought, as it is now ($5 bln a day down from $75 bln a day at the peak) but to target another rate.

The Bank of Japan targets the 10-year yield, and the Reserve Bank of Australia targets the three-year yield. If the Fed adopts such a tool, it would more likely target a short or intermediate coupon such as something between a two- and five-year maturity. It would help steepen the curve and send a signal that rates will remain low for some time.

The Canadian dollar joined the Australian dollar in breaking out of its recent range. The US dollar fell below the lower end of its two-month range against the Canadian dollar near CAD1.3850 yesterday. The losses are being extended today. The break of CAD1.38 is important from a technical perspective as it coincided with the halfway mark of this year’s range.

The next retracement objective is near CAD1.3600. More immediately, a bid in the European morning was found near CAD1.3730. The old support near CAD1.38 now offers resistance. The greenback is also pushing below the halfway mark of this year’s range against the Mexican peso (~MXN22.15). A break of MXN22 would set the sights on the MXN21.00-MXN21.10 area. Mexico is reporting a record increase in virus cases and related fatalities. The peso’s strength largely reflects the broader risk-on mood.

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

Fear is Still on Holiday

Equity markets have rebounded strongly. Nearly all the equity markets in the Asia Pacific region rose (India was a laggard) led by an almost 3% rally in Australia, which was seen as particularly vulnerable to the Sino-American fissure.

The Nikkei is approaching its 200-day moving average as it reached the best level since March 5. Europe’s Dow Jones Stoxx 600 is up around 1% after a 1.5% gain yesterday. It is at its best level since March 10.

The S&P 500 is set to gap sharply higher, above 3000, and its 200-day moving average for the first time since March 5. Benchmark 10-year bond yields are mostly firmer (US ~70 bp), but peripheral yields in Europe are softer, which is also consistent with the risk-on mood. Germany sold a two-year bond today with a yield of minus 66 bp and saw the strongest bid-cover in 13 years.

The dollar is heavy. Among the majors, the Antipodean and Norwegian krone lead the way. The yen is least favored and is struggling to gain in the softer dollar environment. Emerging market currencies are higher, led by more than 1% gains by the Mexican peso, South African rand, and Polish zloty. Gold is consolidating at softer levels (~$1725-$1735), while oil prices continue to recover. July WTI is probing the recent highs around $34 a barrel.

Asia Pacific

The risk-on mood has not been sparked by any sign of a thaw in the US-Chinese tensions. Indeed, the PBOC set the dollar’s reference rate against the yuan a little higher than the bank models suggested (CNY7.1293 vs. CNY7.1277). It was the second successive fix that was the highest since 2008. Still, the yuan snapped a three-day decline and rose less than 0.1%.

Legislation that makes it easier to crack down on dissent pressured Hong Kong, where the stock market fell more than 5.5% before the weekend, and forward points for the Hong Kong dollar exploded. The Hang Seng stabilized yesterday and gained more than 1.8% today. The 3-month and 12-month forward points are more than double what they were a week ago, but have eased from the extreme readings before the weekend. The situation is far from resolved despite the market moves.

The focus in Japan is on the government’s second supplementary budget for nearly JPY1 trillion. It could be approved by the Cabinet as early as tomorrow and would nearly double the government’s efforts. Japan is lifting the national state of emergency.

The dollar is firm against the yen but held just short of JPY108.00 (last week’s high was ~JPY108.10). There is an option for a little more than $400 mln struck at JPY107.90 that expires today. The market looks poised to challenge the highs in North America today. Note that the 200-day moving average is found near JPY108.35, and the greenback has not traded above it since mid-April.

The Australian dollar is punching above $0.6600 and is at its best level since March 9. Its 200-day moving average is found near $0.6660. The dollar peaked against the Chinese yuan at the end of last week near CNY7.1437. It rose against the offshore yuan on the same day near CNH7.1646, just below the high set on March 19.


The EU responded to Germany’s proposal to take at least a 20% equity stake (~9 bln euros) in Lufthansa by requiring it to give up some slots at airports in Frankfurt and Munich. Meanwhile, the larger focus is on the EC’s proposal for a recovery plan now that the German-French proposal has been countered by Austria, Denmark, Sweden, and the Netherlands.

However, the basis for a compromise does appear to exist in the form of some combination of grants, loans, and guarantees and in terms of access. With the European Stabilization Mechanism and the European Investment Bank issuing bonds for which there is a collective responsibility, we are not convinced that an EU bond is a step toward mutualization of existing debt or a fiscal union. In fact, such claims do little more than antagonize the opposition.

The ECB’s Pandemic Emergency Purchase Program (PEPP) has spent a little more than a quarter of its 750 bln euro facility in the first two months. Hints from some officials suggest that this could be expanded as early as next week when the ECB meets. At the current pace, PEPP will be out of funds toward the end of Q3 or early Q4. Talk in the market is that a 250-500 bln euro expansion is possible.

The political controversy of UK’s Cummings violation of the lockdown seems to have little impact for investors. Sterling, the worst performing of the major currencies this month, is bouncing back smartly today, and while the UK stock market was closed yesterday, it is playing a little catch-up today. The benchmark 10-year Gilt yield is a few basis points higher, but faring better than German Bunds and French bonds (where the 10-year yield is now back into positive territory, albeit slightly).

The euro has bounced a full cent from yesterday’s low near $1.0875. The market has its sights on last week’s high just shy of $1.1010 and the 200-day moving average a little above there. The euro has not traded above its 200-day moving average since the end of March. Above there, the $1.1065 area corresponds to about the middle of this year’s range. Sterling is near its best level in a couple of weeks.

After finding support near $1.2160 in the past two sessions, it bounced to about $1.2325 today to toy with the 20-day moving average (~$1.2315). The short-covering rally has stretched the intraday technical readings, and it may be difficult for the North American session to extend the gains very much before some consolidation.


The US reports some April data (Chicago Fed’s National Economic Activity Index) and new home sales. The reports typically are not market-movers even in the best of times. Moreover, it is fully taken on board that the economy was still imploding. May data is more interesting. The Dallas Fed’s manufacturing survey and the Conference Board’s consumer confidence surveys will attract more attention and are expected to be consistent with other survey data suggesting the pace of decline is moderating. This is thought to be setting the stage for a recovery in H2.

Canada’s economic diary is light today, and Mexico is expected to confirm that Q1 GDP contracted by 1.6%. Yesterday Mexico surprised by with a nearly $3.1 bln trade April deficit. The median forecast in the Bloomberg survey was for a $2 bln trade surplus. Apparently, none of the economists surveyed expected a deficit. Exports fell by nearly 41%, and imports tumbled by 30.5%. Many economists are revising forecast for Mexico’s GDP lower toward a double-digit contraction this year.

Nevertheless, the peso is flying. It is the strongest currency here in May. The 1.75% gain today brings the month’s advance to a dramatic 9%+ gain. The US dollar is near MXN22.10, giving back about half of this year’s appreciation. A break of the MXN22.00 area would target the MXN21.30 area.

The intraday momentum indicators are stretched. The US dollar is heavy against the Canadian dollar as well. It is approaching the lower end of its two-month trading range near CAD1.3850. The next important chart point is around CAD1.3800. Here too, the greenback’s slide in Asia and Europe is leaving intraday technicals indicators stretched as North American dealers resume their posts.

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

Markets Pull Back after Flirting with Breakouts

Perhaps it is a bit of “buy the rumor sell the fact” type of activity on the back of upticks in the preliminary PMI reading and hesitancy about pushing for what appeared to be breakouts. The MSCI Asia Pacific Index snapped a four-day advance, although India and Taiwanese shares were bought. Europe has been chopping back and forth since surging 4%+ on Monday. It is off almost 0.65% in late morning turnover in Europe.

US shares are heavy, and the early call sees the S&P 500 giving back a little more than half of yesterday’s nearly 1.7% gain. Benchmark yields are mixed, and the US 10-year is in its well-worn range around 66 bp. The dollar is higher against all the majors, while the emerging market currencies are mixed. South Africa and Turkey, which are expected to deliver 50 bp rate cuts, are seeing their currencies trade with a heavier bias.

Gold is weaker amid some profit-taking after unable to close above $1750 for the past four sessions. Support is seen near $1725. Meanwhile, July WTI is extending its rally for the sixth consecutive session as it pushes above $34 a barrel. It finished last week near $29.50.

Asia Pacific

The Japanese and Australian preliminary PMIs showed a nascent recovery in services while manufacturing remained under pressure. And this seemed to also be picked up by weakness in the latest Japanese and South Korean export figures.

First, the PMIs. In Japan, manufacturing slipped to 38.4 from 41.9, while services rose to 25.3 form 21.5. This translated into a 27.4 composite from 25.8. In Australia, the manufacturing PMI eased to 42.8 from 44.1. Services rose to 25.5 from 19.5. The composite rose to 26.4 from 21.7.

Let’s look at the trade figures next. April exports from Japan fell 21.9% year-over-year. This was in line with expectations after an 11.7% decline in March. Imports fell 7%, which was shallower than expected after a 5% decline in March. Japan recorded a JPY930 bln deficit. It is the fifth deficit in the past six months.

South Korea’s trade figures have begun improving. In the first 20 days of May, exports fell 20.3%, moderating from a 24.3% decline in April. Exports of semiconductor chips from 13.4%, while autos were off 58.6%, mobile devices fell 11.2%, and oil products were down almost 69%. In terms of destinations, exports to the US were off 27.9% and 18.4% to the EU and down 22.4% to Japan. Exports to China were off only 1.7% from a year ago.

This month’s up trendline for the dollar is seen near JPY107.35 today. It has not been below JPY107.50 today. On the upside, although frayed earlier this week, the JPY108 area still offers resistance and the 200-day moving average is near JPY108.30. The dollar has not been above JPY107.85 today, and there is a roughly $465 mln option at JPY107.69 that expires today.

The Australian dollar began the week near $0.6400 and was probing $0.6600 yesterday, the highest since early March. It found initial support today around $0.6550, and there is additional chart support by $0.6525. The PBOC set the dollar’s reference rate a little lower than the bank models suggested, but the greenback edged higher. It continues to trade in a narrow range around CNY7.10, which is the upper end of the broader two-month trading range.


A similar pattern to Australia and Japan was seen in the preliminary European PMI: namely a better showing a stronger pick up in services than manufacturing. German manufacturing PMI rose to 36.8 from 34.5, while the service PMI rose to 31.4 from 16.2. The composite was lifted to 31.4 from 17.4. In France, manufacturing rose to 40.3 from 32.5, while the service PMI rose to 29.4 from 10.2. These translate into a 30.5 composite reading compared with 11.1 in April. For the eurozone as a whole, Markit estimates the manufacturing component rose to 39.5 from 33.4, and the services PMI rose to 28.7 from 12.0. The composite sits at 30, up from 13.6.

The UK’s preliminary figures were also consistent with this broad pattern. Manufacturing PMI rose to 40.6 from 32.6, while the services PMI increased to 27.8 from 13.4. The composite is at 28.9 after a 13.8 reading in April.

The reports lend credence to the idea that worst for the regional economy is likely passed. To be clear, a sub-50 reading on the PMI shows contractions continue, but the turning of the “second derivative” is the first sign of the bottom. Moreover, many areas remained shut down in whole or part when the surveys were conducted between May 12 and May 20. This seems to set the stage for stronger readings in June.

After a couple of Bank of England members explicitly said that negative interest rates were among the policies being considered, the new Governor seemed to soften his stance. Bailey acknowledged his position had modified and that there was no need to rule out anything. Shortly before that, the UK auctioned its first note that had a negative yield.

It sold GBP3.75 bln of a three-year Gilt with an implied yield of -0.003%. The auction was oversubscribed (2.15x) but by the lowest amount in two months. The Bank of England meets again on June 18. The odds still favor an increase in asset purchases before negative rates come into play. Neither the short-sterling futures strip or the rest of the yield curve (outside the 2-3 year Gilt) are implying negative rates. Sterling has stabilized after falling by about 4.5% against the dollar in the month through the start of the week.

Banks took about 850 mln euros from the ECB’s first Pandemic Emergency Long-Term Refinance Operation. These loans were for minus 25 bp. It was disappointingly light and will likely fan speculation of easier terms perhaps as early as the June 4 ECB meeting. In terms of these long-term loans, the one to watch is the June 18 offering, which will be the first that could be at a minus 100 bp yield if specific lending criteria are met. Moreover, other such loans will be rolled into this more attractive option. It could be a trillion euro.

The euro was stopped 1/100 of a penny shy of the $1.10 level yesterday and is consolidating lower today. It spent little time above $1.0980 in Asia and eased to about $1.0950. Support is seen in the $1.0920-$1.0940 band. A break below $1.09 would disappoint the bulls.

Sterling tested a three-day low near $1.2185 today, which is about the middle of this week’s range. The high for the week was set on Tuesday, 4/100 of a cent below $1.23. The price action of both the euro and sterling is a timely reminder of the psychological significance of round numbers, and stops should be placed accordingly. Sterling rebounded toward $1.2240 in the European morning but appears set to run out of steam near there.


The US has stepped up its pressure on China. The rhetoric over the virus, Taiwan, the kidnapping of Panchen Lama (1995), and China’s military and economic policies has escalated in recent days. But it is not all about rhetoric. The US Senate passed a bipartisan bill yesterday that requires Chinese companies listed in the US to affirm that they are not under the control of the government.

This could impact large Chinese companies, like Alibaba and Baidu, both of whom sold off late yesterday in response to the bill. A separate bill that authorizes the President to levy sanctions on individuals for the mistreat of minorities in China is also progressing through the legislative process. Soon, the US Treasury report on the currency market is expected, and more importantly, the US State Department has to affirm that Hong Kong remains autonomous, or the SAR will lose its special trade privileges with the US.

The US reports the weekly jobless claims, which are expected to have remained elevated at over 2 mln. The Philadelphia Fed survey for May (expected rise to around -40 from -56.6) and the preliminary PMI (both manufacturing and services are expected to increase and lift the composite from the 27.0 reading in April) are the highlights. The April index of Leading Economic Indicators and existing home sales are overshadowed by May data. Canada and Mexico have light calendars today, but both report March retail sales tomorrow.

The US sold 20-year bonds for the first time since 1986 yesterday. It paid 1.22% to borrow $20 bln. The bid-cover was 2.53, and indirect bidders, which include foreign central banks and some asset managers, took almost 61%. There is not much available in that duration area, and what there is the Federal Reserve appears to have bought nearly to their 70% individual issue cap.

Separately, the FOMC minutes from last month’s meeting were published, and little new ground was unearthed. There seemed to be an agreement that if things got worse, apparently from their base case for a recovery in H2, more fiscal stimulus was needed, and there was more than the Fed could do. Yield curve control remains a possibility. No official discussion of negative interest rates was recorded. The possibility of tweaking interest on reserves, which some, including myself, played up, seems less likely now. The Fed reported that there was little concern that the fed funds rate would fall below target.

The US dollar is trading within yesterday’s range against the Canadian dollar, which was inside Tuesday’s range. The CAD1.3900-CAD1.3950 range so far today is likely to be extended, and the intraday technical readings suggest higher. The recent price action reinforced the lower end of the six-week range near CAD1.3850. A move above CAD1.4000-CAD1.4020 is needed to lift the greenback’s tone. The US dollar finished last week a little above CAD1.4100.

The greenback fell 1.8% against the Mexican peso yesterday, the third consecutive decline, and the most in roughly three weeks. It found support just above MXN23.00, the dollar’s lowest level since late March. A push above MXN23.30 now would suggest a near-term low is in place with the next resistance near MXN23.50.

This article was written by Marc Chandler, MarctoMarket.

Optimism Burns Eternal

There was strong follow-through in the Asia Pacific region, where most markets advanced by more than 1% today. However, the bloom came off the rose, so to speak, in Europe. After a higher opening, markets reversed lower, and the Dow Jones Stoxx 600 is off about 0.75% in late morning turnover. All the major sectors are lower, led by utilities and industrials.

The US 10-year yield closed yesterday at 72 bp, its highest in a month, and sent Asia Pacific yields higher. However, the German-French proposal and ideas that the ECB will likely increase its bond purchases saw peripheral yields fall more than core rates.

The US 10-year yield is also a little softer. The risk appetites were expressed as a weaker US dollar, yen, and Swiss franc, while high-beta dollar-bloc currencies and Scandis jumped, and this has continued today. The JP Morgan Emerging Market Currency Index rose by nearly 1% and is up another 0.2% today and is at new highs for the month.

Gold reached $1765.4 yesterday before stabilizing, and today it is consolidating around $1726-$1740. Oil is also consolidating after yesterday’s surge. The July WTI contract reached $33 yesterday. It bottomed in late April a little above $17. It is trading today between $31 and $33 a barrel.

Asia Pacific

China is adding pressure on Australia. Even though Beijing has not formally linked its actions against Australian barley and beef as retaliation for its calls for an investigation into Covid-19 and the wet markets, there is little doubt about the subtext.

China is threatening to widen the trade dispute, and reports suggest it could extend to other products, such as wine, seafood, and oatmeal. On the other hand, Australia is the largest producer of iron ore, and Chinese demand has lifted prices to eight-month highs. Brazil, the second-largest producer, is being hobbled by a surge in virus cases and is now the world’s third-largest hotspot. Still, China’s apparent willingness to disrupt trade, as it has with Canada over Huawei, is unsettling.

The Bank of Japan’s next scheduled meeting is on June 18, but officials signaled an emergency meeting at the end of this week. The ostensible purpose is not to adjust monetary policy itself. Instead, it is expected to unveil a new program to support small businesses. The central bank left its bond-program unchanged today and stepping into the market to buy JPY1.2 bln of ETFs and REITs.

The dollar has been confined to about a 30-pip range against the yen below JPY107.60. For the sixth session, it has been limited to the range set on May 11 (~JPY106.40-JPY107.75). There are options for $1.5 bln that expire today between JPY107.65 and JPY107.75 and a $640 mln option at JPY107.35 that will also be cut today.

Just when the Australian dollar looked to be (finally) rolling over, with its first close below the 20-day moving average in a month before the weekend, it jumped up yesterday, and the follow-through buying today is testing recent highs. The late April high was set near $0.6570, and today’s high is just below. The intraday technicals suggest consolidation is likely. The PBOC set the dollar’s reference rate a little higher than the bank models suggested.

The dollar remained above CNY7.10 for the second session, which had been seen as the upper end of the acceptable range. We had thought that ahead of the National’s People Congress later this week, officials would have wanted a more stable yuan exchange rate. Meanwhile, tomorrow, the Loan Prime Rate is set, and more than 75% in a Reuters poll expect the one and five-year rate to be unchanged at 3.85% and 4.65%, respectively.


It has been up to the individual European countries to respond to the virus. The federal or joint effort has been limited largely to the ECB. However, that will change in the coming weeks as the EU prepares to respond. Yet, that is a point in itself, the level is not the monetary union but the larger group of 27. The vehicle is the EU’s budget seven-year financial framework that has been a bone of contention even before the pandemic.

Germany and France jointly proposed a 500 bln joint borrowing as part of the EU budget that will be used to help spur economic recovery. Germany and France envisioned grants, while several countries want loans. The funds would be raised by the EU and available based on need, while the repayment will be according to the share of the EU budget (tied to the size of an economy).

The ultimate EU effort will likely be larger than these funds, which still require agreement among the members. Last month the EC suggested a 2 trillion-euro packaged that included 320 bln euro borrowing. Its proposal included grants, loans, and guarantees. Investors liked what they saw, and Italian bonds rallied strongly.

The 10-year yield fell 19 bp, the most since late March, and the premium over German narrowed to below 215 bp for the first time in a month. The French 10-year yield rose a couple of basis points, less than the (~six basis-point) increase in the German Bund yield, despite Fitch’s cut in the outlook to negative before the weekend.

The UK reported jobless claims surged by 856.5k in April, while the claimant count rate rose to 5.8% from 3.5% in March and 3.4% at the end of 2019. Those working but experiencing an income loss qualify. The average weekly earnings (2.4% vs. 2.8%) and unemployment rate (3.9% vs. 4.0%) are March readings. Separately, while in trade talks with the EU, the US, and Japan, the UK unveiled a new post-Brexit tariff schedule. Some items like dishwashers and freezers will enter the UK duty-free next year. A 10% tariff will remain on cars, and duties will still be levied on agriculture goods.

The German ZEW survey was mixed. The current assessment deteriorated to a new low of -93.5 (from -91.5). However, the expectations component soared to 51.0 from 28.2. This is its highest level in five years. The IFO survey and the PMI, both due later this week, are seen as more important soft economic reports.

The euro is extending yesterday’s rally, which was the largest in a month, and the first push above $1.09 since May 4. The high from May 1, when Europe was on holiday, was near $1.1020, and that area is the next target, and the 200-day moving average is found there as well. The euro has not traded above it since late March. The intraday technical readings, however, are stretched, and initial support is seen near $1.0920. Sterling recovered smartly yesterday.

After falling to almost $1.2075, its lowest level since late March, sterling rebounded to nearly $1.2230 yesterday and reached almost $1.2270 today. The gain is notable too because another MPC member (Tenreyro) weighed on on the negative interest rate debate and claimed it was a powerful transmission mechanism with a positive impact on some EU countries. An option for nearly GBP430 mln is set at $1.23 rolls off today. As is the case with the euro, sterling’s gains through the European morning have stretched the intraday technical readings, cautioning against chasing it immediately higher.


An experimental vaccine by Moderno, the US biotech firm, showed some promise in a small first study to spur an immune system response to the novel coronavirus. The innovation here appears to be stimulating one’s own body to generate the spike protein that, like Covid-19, which ideally triggers the creation of antibodies. This helped lift sentiment. On the other hand, President Trump has given the World Health Organization 30-day for “major substantive improvements,” or America’s temporary funding freeze will become permanent.

NASDAQ reportedly will tighten its rules for IPOs that will make it more difficult for small Chinese companies to list. The listing of many Chinese companies on US exchanges has come under greater scrutiny recently. While the need for reform is clear, in the current setting, it is seen as part of the larger US campaign against China.

The US reports April housing starts and permits. At issue is the magnitude of the decline, and expectations are for a drop of 20-25%. It is the May survey data that, like the Empire State survey and University of Michigan consumer sentiment, that may show the first signs that a bottom was reached. Still ahead this week are the Philly Fed survey and preliminary PMI.

Separately, Treasury Secretary Mnuchin and Fed Chairman Powell will testify remotely before the Senate Banking Committee, and their prepared remarks have already been released. The takeaway is that although more steps may be taken, the economic recovery is expected to begin in Q3.

Canada and Mexico’s economic calendars are light today. The US dollar tested this month’s low near CAD1.3900 earlier day to extend yesterday’s loss that began from a little above CAD1.4100. The downside momentum appears to be stalling, and initial resistance is seen in the CAD1.3970-CAD1.4000 area. The greenback is also consolidating yesterday’s losses against the Mexican peso. Yesterday, it had fallen to its lowest level since mid-April near MXN23.45. The next support area is seen in the MXN23.25-MXN23.35 band.

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

This article was written by Marc Chandler, MarctoMarket.

Yuan Slumps as US-Chinese Tensions Rise

India was an outlier, suffering a 2.4% loss, and Taiwan’s semiconductor sector was hit, and the Taiex fell 0.6%. European markets are off to a strong start with a 2% gain in the Dow Jones Stoxx 600 to cut last week’s loss in half. The benchmark is approaching a two-week downtrend line near 399. US shares are higher, and this could lift the S&P 500 to test the key 2945-2955 area.

The US 10-year yield is little changed near 64 bp, but European bonds are lit with peripheral yields off 4-8 basis points. The dollar is mixed. The dollar-bloc currencies and Scandis are firm, while the European complex and yen are heavier. Risk appetites are also evident among emerging market currencies, where the South African rand, Mexican peso, Turkish lira, and Hungarian forint are higher.

The JP Morgan Emerging Market Currency Index is in a sawtooth pattern of alternating gains and losses for more than a week. It fell before the weekend and is higher now. The Russian rouble has been helped by the continued recovery in oil prices, where the July WTI traded above $31. Gold racing higher after pushing to new multi-year highs at the end of last week. The yellow metal is extending is advance for a fifth session and tested the $1765 area in Europe.

Asia Pacific

Japan reported its GDP contracted by 0.9% in Q1 or 3.4% at an annualized rate. It was a little better than expected though the Q4 19 loss was revised slightly to show a 1.9% quarterly contraction (earthquake and sales tax increase). This quarter understood to be considerably worse with expectations of a quarterly decrease of around 5.0-5.5%. Separately, even if not totally unrelated, the latest Asahi poll shows support for Prime Minister Abe is off about eight percentage points to 33%, the lowest in two years. The two big knocks include the handling of the virus and efforts to secure the power to appoint senior prosecutors.

At the same time that the US was announced a tighter ban on the sales of chips to Huawei, China took steps to dramatically increase its output of 14-nanometer wafers. Taiwan Semiconductor Manufacturing Corporation (TSMC) plans to build a wafer fabrication plant in Arizona needs to also be understood in this context too. The US prohibited without a license the sales of chips to Huawei if designed or made by US-produced technology and hardware. That would apply to TSMC, whose biggest customer is Huawei.

The US export controls were circumvented by servicing Huawei out of foreign fabrication facilities. The new actions seek to close the loophole, and it seems that China had been preparing for this be stockpiling in semiconductor chips.

The dollar is confined to less than a third of a yen range above JPY107.00 and is within the pre-weekend range. So far, it is the first session in four that the dollar held above JPY107.00, though this could be challenged in the North American session today. On the top side, a $2.2 bln option at JPY107.50 expires today. After settling on its lows before the weekend, the Australian dollar bounced back to test the $0.6455 area. Resistance is around the pre-weekend high near $0.6475.

The option for roughly A$635 mln at $0.6495 that expires today looks safe. A closed blow $0.6440 would likely signal that the corrective forces remain in control. Given the heightened tension between the US and China and the greenback’s strength seen late last week, today’s PBOC fix was closely watched. The dollar’s reference rate was set at CNY7.1030, which was a bit stronger than the bank models suggested. The dollar reached its highest level since it peaked on April 2 near CNY7.1280. The highest close was on March 25 near CNY7.1150 and is under threat today.


Bank of England Governor Bailey reportedly denied that zero interest rates were under consideration last week. And the BOE’s chief economist Haldane seemed to suggest that negative interest rates were among the unconventional measures that were being considered. We suspect that the contradictory signals are more apparent than real.

With the base rate at 10 bp, unconventional policy options are being discussed. Haldane was making this more academic point. Bailey was signaling the policy thrust, which is to say that expanding its asset purchase program holds more promise. The UK 2-year yield, which fell below zero last week, is now near minus five basis points.

The economic data highlight of the week is the preliminary PMI reports. The aggregate composite is expected to rise from the record low of 13.6 in April to 27.0 in May, according to the median forecast in the Bloomberg survey, as both the manufacturing and service sectors are forecast to improve. Ahead of the report, the European Commission is slated to announce its policy recommendations for a recovery package for next month’s meetings.

The euro is trading heavily but within the pre-weekend range. It has found a bid at $1.08, where a nearly 530 mln option will expire today. On the topside, the pre-weekend high was near $1.0850, and the 20-day moving average is just below there, likely keeping the $1.0875, expiring option for about 565 mln euros out of play. Sterling gapped lower (below $1.21) on the back of the talk of negative rates, but recovered to $1.2125 in the European morning.

It is struggling to maintain the downside momentum that has seen it fall for five consecutive sessions coming into today. Note that the lower Bollinger Band is found near $1.2115 today. The Turkish lira‘s short-squeeze is extending for its eighth consecutive session. News that Clearstream and Euroclear will not settle lira trades appears to have encouraged further buying back of previously sold lira positions. The US dollar found support near TRY6.81, as domestic demand (for debt servicing?) emerged.


The US calendar is light today. The highlight of the week includes the Philadelphia Fed survey (the Empire State manufacturing survey rose to -48.5 from -78.2) and the preliminary PMI (which is also expected to improve). April housing starts, and existing home sales will also be reported, and no fewer than eight Fed officials speak, including Powell (and Treasury Secretary Mnuchin) before the Senate Banking Committee tomorrow. Canada reports April CPI and retail sales figures this week. Mexico’s data highlight is the April retail sales report.

Conventional wisdom sees the negative yields in the US fed funds futures and concludes that investors are betting that the Fed cuts the target rate again. Some suggest that investors may be trying to push the Fed hand, deliver it a fait accompli, force it to cut, perhaps against its wishes. It is hard to argue against this. It seems to intuitively true.

Yet, the markets are not only about betting and taking on risk, but they are also for hedgers and people trying to layoff risk. The negative yields can be explained, even if no one thought the Fed would adopt negative rates. Imagine businesses that need to protect themselves against the chance.

They buy “insurance” from the seller, who then goes to the market to layoff the risk. Financial intermediaries may also choose to hedge the risk of sub-zero rates. Negative rates in the US appear to be more about swapping from floating to fixed rates and the related hedging then actually reflecting expectations of negative Fed policy rates.

Brazil is being punished. The currency and equity market are among the hardest hit, losing a third of their value. It is not simply a function of macroeconomics. Policy matters. The self-inflicted political crisis adds to the challenge posed by the crippling pandemic. President Bolsonaro has lost the confidence of investors who had been prepared to like him after several tumultuous years. The loss of the second health minister in a month during a pandemic that appears to give Brazil the fourth most cases in the world.

The US dollar is consolidating within the pre-weekend range against the Canadian dollar (~CAD1.4020-CAD1.4120). A six-week downtrend line is found today near CAD1.4160. With stronger risk appetites today, initial support near CAD1.4060 would be pressured in North America. The greenback is also consolidating against the Mexican peso with a heavier bias. Lows from the end of last week around found near MXN23.75. Below there, support is seen around MXN23.50, which also corresponds to the lower Bollinger Band. The dollar posted a key downside reversal on May 14 against the Brazilian real. Still, the follow-through dollar selling ahead of the weekend was reversed in late turnover, and the greenback finished on session highs (~BRL5.8560). The dollar’s record high was set near BRL5.9715.

This article was written by Marc Chandler, MarctoMarket.

Speculators cut Dollar Shorts again

Saxo Bank publishes two (1,2)weekly Commitment of Traders reports (COT) covering leveraged fund positions in bonds and stock index futures. For IMM currency futures and the VIX, we use the broader measure called non-commercial.

Hedge funds and other large speculators were net buyers of dollars for a third consecutive week to May 12. The net dollar short against ten IMM currency futures and the Dollar Index was reduced by 4% to $6.4 billion, the lowest since March.  Overall as per the table below there were no major changes apart from the renewed selling of Mexican peso with a net short emerging for the first time since December 2018.

Leveraged fund positions in bonds, stocks and VIX

What is the Commitments of Traders report?

The Commitments of Traders (COT) report is issued by the US Commodity Futures Trading Commission (CFTC) every Friday at 15:30 EST with data from the week ending the previous Tuesday. The report breaks down the open interest across major futures markets from bonds, stock index, currencies and commodities. The ICE Futures Europe Exchange issues a similar report, also on Fridays, covering Brent crude oil and gas oil.

In commodities, the open interest is broken into the following categories: Producer/Merchant/Processor/User; Swap Dealers; Managed Money and other.

In financials, the categories are Dealer/Intermediary; Asset Manager/Institutional; Managed Money and other.

Our focus is primarily on the behavior of Managed Money traders such as commodity trading advisors (CTA), commodity pool operators (CPO), and unregistered funds.

They are likely to have tight stops and no underlying exposure that is being hedged. This makes them most reactive to changes in fundamental or technical price developments. It provides views about major trends but also helps to decipher when a reversal is looming.

Ole Hansen, Head of Commodity Strategy at Saxo Bank.

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This article is provided by Saxo Capital Markets (Australia) Pty. Ltd, part of Saxo Bank Group through RSS feeds on FX Empire

What do the Charts say about Risk Appetites?

Decreased appetites for risk, illustrated by losses in the major equity benchmarks, seemed to have played a role. Sterling fell every day last week to reach its lowest level since late March ahead of the weekend.

While there was discussion of the possibility of negative rates in the US, the UK two-year yield has remained below zero for the past three sessions. New Zealand, which explicitly played up the possibility of negative policy rates, while doubling its bond-buying, saw its currency slump the most of the majors, losing about 2.7%. At the same time, UK talks with the EU are not going well, and without an extension, which Prime Minister Johnson rejects, it is difficult to see how significant disruptions will be avoided.

On the one hand, interest rates will remain low for a long time, and, for many investors, there is not much of an alternative to equities, and there appears to be plenty of cash on the sidelines.

On the other hand, the extreme left-hand tail risk that was palpable in March has been reduced by aggressive central bank and government action. Still, a meaningful recovery appears to some time off and more economic pain, in terms of business failures and supply chain disruptions. At the same time, the tensions between the US and China are ratcheting higher, and it has tended to curb risk-appetites in the past.

Dollar Index

A 99.00-101.00 range has contained the Dollar Index since the end of March with a few downside breaks that proved false. It pushed toward the upper end of the range last week, reaching its best level since April 24, roughly 100.55. With the pullback ahead of the weekend, it finished about 0.4% higher on the week. The sideways movement has rendered the momentum indicators moot, and if one assumes the range remains intact until proven otherwise, the risk-reward and the rule of alternation would seem to discourage new longs.


A range of about 1.2-cents prevailed last week (~$1.0775-$1.0895), and the euro finished virtually unchanged. Demand around $1.08 seems to be gradually being absorbed. The euro traded below there five times in April and has matched that in the first half of May. A move and probably a close above $1.09 is needed to take pressure off the downside. Three-month implied volatility had its lowest weekly close (~6.7%) since the end of February. Volatility may increase as the EU and ECB move back into fore next month.

Japanese Yen

The range for the entire week was set on Monday (~JPY106.40-JPY107.75). The rest of the week was consolidation. The price action reinforces the month-old trading range of JPY106.00-JPY108.00. Three-month implied volatility is approaching the 200-day moving average near 7.10%. It peaked around 19% and was trading below 5% in mid-February.

British Pound

Sterling’s five-day slide shaved 2.3% of its value against the dollar and sent it to almost $1.21. It saw its lowest level since March 26 ahead of the weekend. The MACD is rolling over, but the Slow Stochastic is getting stretched. The convincing break of the late April low near $1.2240 and the (38.2%) retracement objective (~$1.2175) are bearish technical developments. Although initial support may be encountered in the $1.2000-$1.2030 area (psychological support and the 50% retracement objective), the risk extends to $1.1850-$1.1880 (61.8% retracement and the measuring objective of the double top at $1.2650, with a neckline at $1.2250). A move back above $1.2250-$1.2300 would help stabilize the tone.

Canadian Dollar

The US dollar rose four of last week’s five sessions. It gained about 1.2%, the largest weekly rise in six weeks. An outside up day on Monday set the stage. The greenback rose from CAD1.3900 to roughly CAD1.4140. Since the explosive moves in March, the exchange rate has found a base around CAD1.3850. On the topside, the greenback has been making lower highs. The downwardly sloping trendline is found near CAD1.4160 to start the new week. The Canadian dollar remains sensitive to the general risk appetite, more so than the Australian dollar (60-day correlation of the percent change of the S&P 500 and the exchange rate 0.51 vs. 0.47, respectively). More inclined to see an eventual upside break for the greenback.

Australian Dollar

We have been looking for the Australian dollar to top out. It tested the late April high near $-0.6560 and reversed to post an outside down day on Monday. It approached $0.6400 in the second of the week and settled on the week’s low. For the first time since April 3, it closed below its 20-day moving average (~$0.6435), and the five-day moving average can move below the 20-day in the coming days. The MACD is rolling over from over-extended territory while the Slow Stochastic is tuned down from a secondary bounce. The next support area is around $0.6370, and a break could confirm a top is in place and warn of losses toward $0.6170, a measuring objective of a double top, and the (38..2%) retracement of the big rally off the March spike low to almost $0.5500.

Mexican Peso

The dollar rose 1.6% against the peso last week to snap a two-week 5.4% slide. After peaking around MXN25.78 in early April, the greenback has been consolidating. It has held below MXN25.00 this month and found support in the MXN23.50-MXN23.75 band. Initial resistance is now seen in the MXN24.50 area, and a three-week downtrend line begins the new week just below there. The MACD continues to drift lower, while the Slow Stochastics are just turning higher. The peso initially strengthened after Banxico delivered the 50 bp rate cut that was widely expected (overnight target is now 5.5%), but the pullback in equities proved too much, allowing the dollar to finish the week above MXN24.00.

Chinese Yuan

The yuan fell by about 0.4% against the dollar last week. Only a handful of currencies rose against the greenback, and the JP Morgan Emerging Market Currency Index fell by nearly 0.7%. It is not so much the magnitude of the dollar-yuan exchange rate movement, but the level that is notable. The dollar traded at a six-week high (~CNY7.11) before the weekend. It is the second close this month above CNY7.10 after not doing it at all last month. Some may link the yuan’s weakness to the escalating US rhetoric. We suspect that ahead of the National People’s Congress, Chinese officials likely prefer a stable yuan.


A four-day rally lifted the yellow metal above $1750 ahead of the weekend, its best level since late 2012. The advance began with an outside up day on May 7 from a low near $1677, as gold fell by about 1% over the next two sessions. However, the recovery and push higher was steady, and closes were near session highs, but only marginal new highs were seen as stops were triggered above the mid-April high near $1747 and more at $1750. Both the MACD and Slow Stochastics are pointing higher. The next big target is $1800. Initial support is likely near $1720.


Light sweet crude oil for July delivery extended its rally for a third successive week. The 13% rally lifted it to almost $30 a barrel ahead of the weekend. A small increase in demand, coupled with cuts in output, has helped prices recover. The US recorded its first decline in oil inventories since January, and there is a push for OPEC+ not to boost output in the next phase of the agreement output restraint agreement. The key technical level is $35, roughly last month’s high and the (38.2%) retracement of this year’s decline. It is also a level that reportedly will bring back some production. The MACD and Slow Stochastic are stretched but have not begun rolling over. This would seem to be consistent with a push closer to $35, but profit-taking is likely ahead of it.

US Rates

After absorbing a record-sized refunding, US coupon yields were lower on the week. In fact, ahead of the weekend, the 10-year yield touched its lowest level here in May, just below 59 bp. The yield bounced back as investors seem comfortable with the 0.60%-0.70% range. The two-year yield, which fell to record lows the week prior to near 10 bp, stabilized and finished the week little changed.

While the Fed continues to taper its Treasury purchases, some of its other facilities are just becoming operational. Purchases of corporate bond ETFs, which may include some high-yielding bonds, are formally launched last week. The Fed’s balance sheet rose by about $213 bln (~3.2%) last week, the most in nearly a month. The March and April 2021 fed funds futures contracts hover around zero, but the May contract has not implied positive rates for seven sessions and counting.

Foreign central banks continue to replenish their Treasury custody account at the Fed that was drawn down in March and the first half of April. Official holdings rose by $21.2 bln in the fifth consecutive week of accumulation.

S&P 500

The 1.5% rally in the last two sessions was not sufficient to offset the earlier losses, and the S&P 500 fell by about 2.25% last week. It reversed higher from three-week lows recorded on May 14 (~2766.6) and saw follow-through gains ahead of the weekend, with a close above the May 14 high (~2852.8) and back above the 20-day moving average (~2856.3). The momentum indicators are mixed with the MACD continuing to flatline near the highs and the Slow Stochastic turning back lower from the middle of the range. Resistance seems clearer than support presently.

The double top from late April and early May is in the 2945-2955 area, and then there is the 200-day moving average and psychological resistance around 3000. A close below 2800, which has not occurred in three weeks, might signal a new phase. The April equity recovery, which lifted the NASDAQ into positive territory for the year, arguably, was fueled by the removal of the far left-hand tail risk by officials that moved to replace part of the income lost during the shutdown. Now, it seems as we anticipate the survey data to begin showing some improvement as economies start opening up, risk appetites may wane as focus shifts toward the long slough back to a new normalcy.

This article was written by Marc Chandler, MarctoMarket.

Risk Appetites Wane

Europe’s Dow Jones Stoxx 600 is off a little more to double this week’s decline and leaves it in a position to be the biggest drop since panicked days in mid-March. US shares are narrowly mixed, but coming into today, the S&P 500 is off 3.7% for the week, which, if sustained, would also be the largest decline in nearly two months.

Bond markets are better bid, and the US 10-year benchmark is off four basis points to 61 bp, the lowest in three and half weeks, despite the deluge of supply. European yields are off 1-3 bp. The dollar is firm against nearly all the world’s currencies. The yen, among the majors, and the Turkish lira and Russian rouble in the emerging market space, are the notable exceptions. Oil and gold are near five-day highs (~$1720 and $27 basis July WTI)

Asia Pacific

Australia reported a massive 594k job loss in April. While it was slightly more than most economists expected, given the magnitude, the median forecast of the Bloomberg survey for a loss of 575k proved fairly accurate. About 220k were full-time positions.

The unemployment rate rose from 5.2% to 6.2%. Economists had projected a jump to 8.2%. Australia’s 10-year yield is dipping below 90 bp for the first time this week. Wednesday saw record demand at the 10-year sale while the central bank has stepped back from its purchase program.

The Bank of Japan has also reduced its buying of equity ETFs and REITs. Its JGB buying had been tapered under its yield curve control initiative. Back in the particularly dark days in March, the BOJ bought a little more than JPY200 bln of the ETFs on four different occasions.

In the first five sessions of May, it purchased a total of JPY126.5 bln. Separately, a BOJ lending initiative in April that pays banks 10 bp on reserves associated with lending under the program is off to a successful start, and BOJ Kuroda hinted at an emergency meeting before the next formal meeting (June 16) to unveil a new facility to lend to small businesses.

Following the Reserve Bank of New Zealand’s move to put negative rates on the table, the government approved an NZD$50 bln (~$30 bln) stimulus package. It projects that the country’s debt will rise over 53% of GDP from less than 20% last year.

The 10-year benchmark bond rose six basis points today from the record low hit yesterday below 60 bp. Year-to-date, the Kiwi is the second worse performing major currency, off a little more than 11% (behind the Norwegian krone that has depreciated by nearly 13.7%).

The dollar rallied from JPY106.40 to almost JPY107.80 on Monday, and that has marked the range, for now, the third session. Narrower still, the greenback is within yesterday’s range (~JPY106.75-JPY107.30). There are two sets of expiring options to note today. There is about $1 bln at JPY106.75-JPY106.82 and another $1.1 bln in options struck at JPY107.00-JPY107.05 This is the fourth consecutive session that the Australian dollar is falling.

It is the longest streak since late March and early April. Watch the 20-day moving average. It is found near $0.6430 today, and although it has been flirted with on an intraday basis, it has not closed below it since April 3. A break of the $0.6375 area may be needed to confirm the top we have been anticipating. The dollar is little changed against the Chinese yuan and is hovering around the CNY7.09-CNY7.10 area, the upper end of its recent trading range.


Bank of England Governor Bailey hinted that the GBP200 bln bond purchase program will likely be extended as early as next month (next MPC meeting is June 18). Recall that at last month’s meeting, the majority wanted to wait while two members dissented in favor of an immediate increase of GBP100 bln in Gilt purchases.

While much attention has been focused on the fact that some derivatives in the US imply negative rates, the UK 2-year Gilt has a negative for the third consecutive session (about minus 3 bp). Since our experience with negative rates is so limited, we relied on induction to derive a hypothesis that countries with negative rates had central banks that led the move and have current account surpluses. That hypothesis is being tested. We suspect that the currency would have to bear more of the burden if this turns out to be the case.

The euro reached a seven-day high yesterday and approached $1.09 before reversing lower and recording new session lows late in the session near $1.0810. It is in about a 15-tick range on either side of that level, with little enthusiasm in either direction. There is a 1.2 bln euro option at $1.08 that expires today. Below there is an option for 1.8 bln euros at $1.0750.

The euro settled last week near $1.0840. Sterling fell to $1.2180 today, its lowest level since April 7, when it recorded the month’s low near $1.2165. It is lower for the fourth consecutive session, which is also its longest losing streak since March. Initial resistance is now seen near previous support in the $1.2250 area.


Powell had no more luck than his colleagues in removing the risk that the Federal Reserve will adopt a negative interest rate target. The implied yield of April 2021 through March 2022 fed funds futures contracts remains negative. The OIS forward curve is slightly negative two and three-years out. The impact on the dollar seems minimal at best.

It is higher against all the major currencies this month, but the Norwegian krone (~0.60%) and yen (~0.30%). Overall, Powell’s economic assessment was very somber. He indicated that a report out today will show that 40% of the households under $40k a year income, who had a job in February, lost it. Powell advised not placing much stock in estimates of full employment. The Chair tends not to put weight on economist’s intangible concepts like r-star (natural interest rate) or full-employment.

Powell called for more fiscal support, a day after the House of Representatives prepared an additional $3 trillion spending bill. When coupled with Dr. Fauci’s comments the previous day, calling for more testing and tracking, and slowing the re-opening process, the message appears squeezed risk appetites.

There are two highlights of the North American session today. First is the release of the US weekly initial jobless claims. Economists expected a decline to 2.5 mln, which is still around ten-times larger than what was prevailing before the crisis. It has been gradually declining since reaching above 6.8 mln in late March. Separately, the continuing claims are likely to push above 25 mln.

Note that the survey for the next monthly jobs report is being conducted this week. Second, the central bank of Mexico meets today, and the consensus forecast is for a 50 bp cut to 5.50%. A week ago, Mexico reported that April CPI fell to 2.15%. Given this and the broad stability of the peso, we suspect that if Banxico is to surprise, it is more likely to deliver a larger rather than a smaller cut.

For the fourth consecutive session, the US dollar has edged above the previous session’s high against the Canadian dollar. However, it is better offered in the European morning. The CAD1.4040-CAD1.4060 may provide support today, but it seems particularly sensitive to the broader risk appetites.

Tuesday’s range in the greenback against the Mexican peso is to be watched (~MXN23.75-MXN24.40). After rallying strongly in March and into early April, the US dollar has been consolidating for over a month and has largely been confined to a MXN23-MXN25 range. Lastly, note the EIA reported the first decline in US oil inventories (-745k barrels) since the middle of January.

Holdings in Cushing fell by 3 mln barrels. This, coupled with the IEA assessment of a marginal improvement in supply (reined in) and demand (a little stronger) dynamics, are helping to underpin prices today.

This article was written by Marc Chandler, Marcto Market.

Will Powell have any more Luck Pushing against Negative Rate Expectations in the US?

India led the way (~2%) after a fiscal stimulus program was announced. European shares, though, are heavier, led by consumer discretionary and financial sectors. US shares are steady to firmer. After a slow start, European bonds have rallied and yields are 2-3 bp lower, with Italy’s benchmark off about 6 bp to 1.82%.

Bond markets are mostly quiet, but the Reserve Bank of New Zealand’s increase in bond purchases and indication that negative rates are possible saw the benchmark yield fall around 12 bp and took the currency about 1% lower. The 10-year US Treasury is a little softer at 66 bp.

Outside of the Kiwi, most of the major currencies are mostly firmer, led by the Norwegian krone and Canadian dollar. Emerging market currencies are mixed, with eastern and central European currencies a little heavier. Gold continues to hover are $1700 and July crude continues its broadly sideways drift.

Asia Pacific

India announced a package of INR20 trillion or 10% of GDP. The details are not yet clear, but it does appear that officials have combined several previous commitments and central bank measures. The fresh initiatives, though, still appear substantial and are estimated around INR8-INR12 trillion (~4%-6% of GDP).

The Reserve Bank of New Zealand doubled its bond-buying efforts to NZD60 bln. It left its cash rate target at 25 bp but suggested that negative rates are possible. Thus far, no country with a current account deficit has adopted negative interest rates. New Zealand’s current account deficit was about 3.3% of GDP in 2019.

The US dollar jumped to a little more than JPY107.75 to start the week after testing the JPY106 area while Japanese markets were closed in the first half of last week for the Golden Week holidays. Yesterday and today, the dollar has pared Monday’s gains and now is testing JPY107.00 where a nearly $900 mln option is set to expire.

The dollar is third of a yen range today, and the upside looks to be blocked with the help of a $1.1 bln expiring option at JPY107.40. The Australian dollar fell nearly 1% over the past two sessions, but it found support near the 20-day moving average (~$0.6425), which it has not closed below in over a month. There is an option for A$1 bln at $0.6500 that expires today. The greenback is firm against the Chinese yuan as it holds in the upper end of the CNY7.05-CNY7.10 range that has largely contained it in recent weeks.


The two main economic reports from Europe were not as dismal as expected. The eurozone reported industrial output in March fell 11.3%. The median forecast in the Bloomberg survey was more than a 12% slump. The UK economy contracted 2% in Q1 with the median estimates looking for a 2.6% decline in output. The monthly GDP estimate showed a 5.8% decline in March alone.

The Bank of England is expected to increase its bond purchases as early as next month. The ECB is also likely to increase is Pandemic Emergency Purchase Program (PEPP) as well, but the timing is less clear.

On the fiscal front, the UK has extended its furlough program until the end of October and will not taper it until at least July. Italy’s cabinet approved the 55 bln euro stimulus package. Nearly 30% is for its employee furlough program. More than 10% is earmarked for what appears to be grants to small businesses. And nearly another 10% is for self-employed and seasonal workers.

The euro traded in a cent-range yesterday (~$1.0785-$1.0885) and today is in a little more than a quarter-cent range above $1.0830. The consolidation looks set to continue. Sterling fell to around $1.2255 yesterday, its lowest level in over a month. A marginal new low was made in Asia, before sterling was bid in Europe to toy with the $1.2300 area. There is potential toward back toward $$1.2340-$1.2350.


There are three events in the US today to note. First, the US reports April producer prices. The deflationary shock is well recognized, and the collapse of oil price will send the headline PPI into negative territory. However, the core rate, which excludes food and energy, is likely to fare considerable better. The median forecast in the Bloomberg survey is for a 0.1% decline on the month for a 0.8% year-over-year gain.

In yesterday’s April CPI, gasoline prices fell by over 20% while food prices rose 1.5%. Second, the EIA will make its weekly energy inventory report. API estimated that oil stocks increased by about 7.6 mln barrels, but at Cushing, they might have fallen by more than two million barrels. This would be the first decline in 10 weeks.

Third, Federal Reserve Chairman Powell speaks at the Peterson Institute (9:00 am ET). He is expected to push back against ideas a negative funds rate. Despite the efforts of several regional presidents to play down this scenario, the fed funds futures strip starting next March imply slightly negative rates. Another common theme of Fed speakers have been that more support may be needed for the economy. This is seen as a balance sheet issue and fiscal policy.

After raising $100 bln in cash management bill sales, the Treasury sold $32 bln 10-year notes at a lower yield than the previous auction (70 bp vs 78 bp), with a higher bid-to-cover (2.69 vs 2.63), and more taken up by indirect bidders that include asset managers, hedge funds, and foreign central banks (66.1% vs 59.2%). More is coming. It is not just today’s $20 bln 30-year bond sale to round out the quarterly refunding and another $75 bln of cash management bills, but another large spending bill has begun its circuitous route to become law.

The initial estimate of the House bill is about $3 trillion and that is on the day that the US reported a record $737.9 bln deficit for the month of April. Around a third of the bill is for states and local governments. There are also funds for another $1200 payment adults, which is means-tested, and money for elections and the postal service.

The deduction for state and local taxes is also brought back. Of course, as the Senate Majority Leader noted it is aspirational. It must be negotiated with the Senate, and especially Trump Administration. However, the House took first-mover advantage and forces the GOP to be less “Rooseveltian” with the election now less than six months away.

The US dollar settled last week near CAD1.3925. It recovered 0.5% on Monday and again on Tuesday but has run out of steam near CAD1.4085. Support is seen in the CAD1.3980-CAD1.4000 area today. Similarly, the greenback finished last week around MXN23.65 and gained 1% on Monday and 2% yesterday to reach MXN24.40.

It is trading softer now around MXN24.10. Dollar losses may be limited in North America today ahead of the Banxico rate decision tomorrow. Although a 50 bp cut is widely expected, there is scope for 75 bp move. More political problems for Brazil’s President Bolsonaro weigh on the real, which fell to new record lows yesterday (the US dollar rose above BRL5.89). Today, Brazil reports March retail sales and its economic activity index. The only question is how fast of a contraction is being experienced.

This article was written by Marc Chandler, MarctoMarket.

Quiet Start to a New Week

Benchmarks off all three regions rallied by 3.4%-3.5% over the past two weeks. Bond markets are also little changed, with the US 10-year benchmark just below 70 bp ahead of this week’s record refunding. Core European yields are slightly higher, while the peripheral premiums have edged in. The dollar begins the new week firmer across the board, with the New Zealand dollar and Japanese yen the weakest, off around 0.5%.

Except for a handful of mostly currencies from smaller Asian countries, most emerging market currencies are also beginning the week with a heavier tone. Gold is a little lower as it tests $1700, and July WTI is heavy near $25.50 after stalling near $28 last week.

Asia Pacific

China’s aggregate financing rose by nearly CNY3.1 trillion last month, a little stronger than most economists expected after a CNY5.1 trillion increase in March. The annual growth rate accelerated to 12% from 11.5% and is the highest in two years.

The main catalyst was bonds issued by and lending to local governments, which is the vehicle of China’s stimulus, not the central government. Separately, the PBOC’s quarterly monetary policy statement promised more powerful policies to promote growth and job.

What it did not say was also important: it did not repeat pledges about avoiding excess liquidity. Many expect new initiatives after the National People’s Congress in about ten days.

South Korea’s reported exports in the first ten days of May slumped 46.3% from a year ago. That followed a 24.3% decline last month. Average daily exports fell by a little more than 30%. Exports to the US were off almost 55%, while shipments to the EU were off 50.6%. Exports to China fell by 29.4%.

In terms of products, the exports of semiconductor chips and wireless devices fell by 17.8% and 35.9%, respectively. Imports were off 37.2%, but the imports of chip fabrication equipment rose by almost 70%.

Since Japanese markets re-opened from the Golden Week holiday on May 7, the dollar has risen in all three sessions. The greenback bottomed last week just below JPY106.00. It climbed steadily in Asia and reached almost JPY107.30 in the European morning, its highest level since May 1.

Initial resistance is seen near JPY107.50 then JPY108.00. Intraday technicals are stretched. A close below JPY107 would be disappointing. The Australian dollar’s gains were extended to $0.6560, just shy of the rebound high (~$0.6570 on April 30) but have reversed lower to test the $0.6500 area in Europe.

A break, and ideally a close below, the pre-weekend low of about $0.6490, would be another opportunity to try picking a top. At the least, it may signal a test of $0.6400. The dollar rose by about 0.2% against the Chinese yuan to about CNY7.09 and remains within the range seen in recent weeks.

Credit Ratings

Moody’s did not change its credit assessment of Italy or Greece’s sovereign ratings at the end of last week. Moody’s gives Italy the lowest investment-grade rating. Recall that the ECB has indicated that it would ignore rating downgrades until September 2021. Moreover, the ECB accepts the highest rating of the top four agencies. DBRS gives Italy a high BBB rating. However, before the weekend, it cut the trend (outlook) to negative from stable, citing the deterioration of the government’s balance sheet.

The fallout from the German Constitutional Court ruling last week continues. Over the weekend, EU President von der Layen threatened to sue Germany over the verdict. The ECB is undeterred. The German court did not rule on the Pandemic Emergency Purchase Program, a 750 bln euro effort that is not bound by the capital key. However, press reports indicate that lawsuits are being prepared. Separately, ECB President Lagarde estimates that EMU members will be issuing 1-1.5 trillion of new bonds. Most seem to expect the ECB to expand its PEPP buying in the upcoming meetings by 250-500 bln euros.

The euro remains pinned near $1.08, where a nearly 900 mln option is set to expire today. There is also an option at $1.0850 for one billion euros that also will be cut today. Between the two, it likely marks the range. Sterling is finding support around $1.2350 in the European morning, and the intraday technicals are stretched, suggesting potential for a bounce in early North American activity. Initial resistance is seen near $1.2400. The dollar is slipping against the Turkish lira following the reversal of last week’s decision to ban three banks (Citi, UBS, and BNP).


The implied yield of the December 2020 Fed funds futures rose by 2.5 bp ahead of the weekend to pop back above zero, despite the simply dreadful jobs data. The yields through May 2021 also moved out of negative territory. Federal Reserve officials have repeatedly rejected such a course. Fed Chairman Powell will discuss “current economic issues” on the internet on Wednesday and is expected to push back against such speculation. Some hedgers may seek protection from the low probability but high impact possibility.

Others might look at it as on a risk-reward basis, without attaching any special value attached to the zero bound. It is just “betting” on the chances of another rate cut. At the same time, the Federal Reserve signals that it recognizes that financial conditions are continuing to improve as it reduces the amount of Treasuries it will purchase this week will be $7 bln a day, down from a peak of $75 bln a day. Meanwhile, after the employment data, the Atlanta and NY Fed GDP trackers were revised sharply lower for Q2 to -34.9% and -31.2%, respectively.

The data highlight this week include the US April CPI retail sales (tomorrow) and retail sales and industrial production figures (Friday). The week, the US Treasury sells more than $90 bln in coupons for its quarterly refunding, which includes a 20-year bond. Canada has a light calendar, while the highlight of Mexico’s is the central bank meeting on May 14. The overnight rate is at 6.0% now, and at least a 50 bp cut is likely to be delivered. Ahead of the meeting, Mexico reports March industrial output (expect around a 4% decline on the month) and April job creation (after a loss of 130.6k jobs in March).

Before the weekend and again today, the US dollar found good bids near CAD1.3900. Initial resistance is seen near CAD1.40, which is about the middle of the recent range. The Canadian dollar is more sensitive to the risk environment (equities) than the price of commodities (oil proxy). Near MXN23.55, the US dollar was at the lower end of its recent range against the peso. After falling for the last two sessions, the greenback is firm. Initial resistance is seen near MXN24.00 and then MXN24.15.

This article was written by Marc Chandler, Marcto Market.