01-Jun-2020

1) EUR/USD Remained Well Supported By The Continuous Offered Tone Around The Buck
2) Trump Tenderness, China’s Caixin, Boost Asia
3) Oil Prices Could Stabilize At a Higher Range

1) EUR/USD Remained Well Supported By The Continuous Offered Tone Around The Buck

The EUR/USD pair extended its upside momentum and shot to fresh two-month tops on Friday amid a broad-based US dollar weakness. The optimism over re-opening of economies across the world and hopes of a sharp V-shaped recovery helped offset concerns about heightened tensions over China’s move to tighten control over Hong Kong. This, in turn, undermined the greenback’s relative safe-haven status and turned out to be one of the key factors driving the pair higher.

On the other hand, the shared currency remained well supported by the European Union Commission’s proposed €750 billion coronavirus recovery fund. The bullish momentum seemed rather unaffected by mixed Eurozone consumer inflation figures. According to Eurostat’s flash reading, the headline CPI came in at +0.1% YoY rate in May, hitting the lowest since June 2016 and falling short of market expectations of 0.2%. Meanwhile, the core figures held steady at +0.9% in the reported month as compared to +0.8% expected and +0.9% previous.

The pair rallied to late March swing highs resistance near the 1.1145-50 region, albeit witnessed a modest intraday pullback ahead of the US President Donald Trump’s response to China’s security law for Hong Kong. Nevertheless, the pair still ended in the greenback, around the 1.1100 round-figure mark and regained some positive traction on the first day of a new trading week. Trump announced a series of actions against China and as expected, began the process of ending Hong Kong’s special status. Investors breathed a sigh of relief as Trump did not withdraw from the US-China phase-one trade deal offered a sigh of relief.

This coupled with signs of recovery in the Chinese economy from the coronavirus pandemic remained supportive of the upbeat market mood and continue denting demand for the safe-haven USD. Data released on Sunday showed that China’s manufacturing sector activity slowed a bit in May, though remained in the expansion territory. Apart from this, the buck was further pressured by widespread riots in the US, led by George Floyd’s death at the hands of Minneapolis police. The pair has now moved back closer to Friday’s swing high and in the absence of any major market-moving economic releases from the Eurozone, remains at the mercy of the USD price dynamics.

Moving ahead, market participants will now look forward to a slew of important macro data, scheduled at the beginning of a new month. This, along with the latest ECB monetary policy update on Thursday will assist investors to determine the pair’s next leg of a directional move. A busy week kicks off with the release of the US ISM Manufacturing PMI, which will provide some short-term trading impetus later during the early North American session.

From a technical perspective, bulls on Friday took a breather ahead of a resistance marked by the 61.8% Fibonacci level of the 1.1497-1.0636 downfall. Meanwhile, short-term technical indicators are already flashing or have moved on the verge of breaking into overbought territory. The set-up warrants some caution before placing any aggressive bullish bets. Hence, any subsequent positive move might continue to confront a stiff resistance near mid-1.1100s, which should now act as a key pivotal point for short-term traders. That said, a convincing breakthrough the mentioned barrier now seems to set the stage for a move towards reclaiming the 1.1200 round-figure mark.

On the flip side, the 1.1100 mark now seems to act as immediate support and is closely followed by 50% Fibo. level, around the 1.1075 region. Failure to defend the mentioned support levels might prompt some long-unwinding trade and accelerate the corrective slide further towards the very important 200-day SMA resistance breakpoint, currently near the 1.1020-15 region.

2) Trump Tenderness, China’s Caixin, Boost Asia

Asia is off to a rollicking start to the week with equities performing strongly and currency markets rotating out of haven US Dollars. The turbocharging of bullish sentiment this morning has multiple drivers starting with President Donald Trump. Although scenes showing numerous riots across the USA dominated headlines this weekend, it is what President Trump announced on Hong Kong on Friday that really matters to financial markets: or more correctly, what he didn’t say.

As expected, the President withdrew Hong Kong’s special status over the new China imposed security law. What he did not do, however, was withdraw from the US-China phase one trade agreement signed in January. Nor did he impose sanctions on Chinese officials or persons connected to the regime. The collective sigh of relief in Asia is palpable this morning.

Being the first day of the month, we will receive the usual avalanche of PMI’s this today. This morning, the pan-Asia Manufacturing PMI’s have uniformly put-performed across the region except for Japan. That hints that the global recovery trade and a rebound in post-COVID-19 economic activity in the region remain intact.

Yesterday China released its official Manufacturing and Non-Manufacturing PMI’s. Manufacturing slightly underperformed at 50.6 but remained expansionary. Non-Manufacturing outperformed to print at 53.6, suggesting that domestic economic activity continues to increase after the COVID-19 shutdown. This morning, the broader China Caixin Manufacturing PMI has posted an impressive jump back into expansionary territory, at 50.7.

Having negotiated some potentially deep political potholes, and with a slew of data suggesting that, for now, the COVID-19 recovery is on track, momentum is clearly lying with the peak-virus trade as the week starts. The trade-centric Australian Dollar and the Hang Seng Index are notable outperformers this morning. Asia seems to content to ignore the US riots as a passing story, with Hong Kong protests seemingly muted over the weekend as well.

The Manufacturing PMI storm continues into Europe today, although Benelux, Scandinavia, France and German markets are all closed for Whit Monday. Given the low base they have previously achieved, prints to the upside by the PMI’s will be oil onto the fire of the global recovery trade.

3) Oil Prices Could Stabilize At a Higher Range

Oil prices could stabilize at a higher range if the current OPEC+ compliance commitment argument for price recovery holds water.

But the anarchy in the streets of major metropolitan areas across the US in the wake George Floyd’s death threatens to throw a wet blanket on the price recovery over the short term as investor optimism over economic reopenings in the US could wane. If American consumers were reluctant to come out of their Covid-19 lockdown cocoon fearing a secondary spreader, with police cars ablaze, freeways blocked and videos of mass looting shared through social media like wildfire, they’re not going to feel any safer.

Crude oil price rose to end the week on a positive tone despite confirmation of the crude build in the EIA data that the API flagged up in the session before. Nonetheless, US-China tensions weighed through the early part of Friday. At the same time, the crude build didn’t help, albeit its primary source was a significant rise in Saudi imports that one could validly claim was already in the price after trackers had flagged the oil Armada heading for the US weeks ago.

Reports ahead of the June OPEC meeting suggest that Saudi Arabia is considering proposing extending the 2Q cuts further into 2020, but traders remain wary of a Russian pledge.

A phone call last week between Saudi Crown Prince Mohamed bin Salman and Russian President Putin should put some of those pre-OPEC meeting jitters on the back burner; sources suggested the call resulted in a reiteration of a commitment to continue cooperation on supply cuts, reducing the risk of a split at the OPEC+ meeting on June 9.

Still, doubts remain that Russia might not go along with an OPEC decision to extend the duration of the initial two-month period of deepest production cuts within the OPEC+ agreement and that they’d begin phasing out cuts from July. While the fundamental impact of that would be limited, any sign of conflict between the two countries contributing the most to the OPEC+ agreement would provide poor optics and bring back memories of the March oil price war that started this oil market fiasco.

On Friday, Baker Hughes reported that the number of active US rigs declined by 15 to 222 this week. The oil rig count has now fallen for 11 weeks in a row, hinting of more CAPEX divestment in US oil production and a sharper downward adjustment in drilling activity than in 2015. All of which is indicating greater discipline and may moderate future supply growth, which is very bullish for oil.

The market will take note of the impressive recovery in Chinese refinery production, in addition to the tasty eye candy from both Google and Apple mobility tracking data. With the US only a third of the way up from the trough in US product demand, there’s no reason the US refineries can’t gradually fill that gap as more and more US states relax lockdown measures and more consumers hit the roads.

While only a vaccine will signal all systems go, there’s still plenty of room for refining run rates to rise when mapping to the comparable uptick on run rates to Chinese refinery demand.

With indications of strengthening and continued OPEC+ commitment amid signs that OPEC+ resolve will last at least through the end of the year, oil prices should continue to rise if the current OPEC+ compliance commitment argument for price recovery holds water.

But given the substantial rise in US oil inventories last week, it suggests we’re not out of the woods just yet.

Crude inventories are building outside of Cushing and product stocks are still rising. US crude stocks have now been broadly flat for the past four weeks – the glut has even shifted from Cushing, where NYMEX WTI futures settle, to other regions. Cushing stocks were down again last week and are down 12mb since the start of May, while Gulf Coast crude stocks have risen 12.5mb over the same period.

Meanwhile, stocks of oil products continue to build. The build-in distillates have been particularly quick and worrisome. Unless it reverses this week, it may act as a headwind to further near-term improvement in crude prices as the recovery in product demand hit the brakes last week, highlighting how the nascent demand recovery will be anything but smooth sailing

Fortunately we’re in the typical period of seasonally rising refining runs. Sadly, the past historical correlation could prove meaningless in a Covid-19 environment as past consumer consumption behavior is not necessarily transferable.