15-Jul-2020

1) Japanese Yen Little Changed After BOJ Rate Decision
2) EUR/USD: Bulls Pause Near June Swing Highs, Upside Potential Intact
3) OPEC Compliance And A Guarantee On The Principle Of Compensation Was Music To The Market Ears Overnight
4) AUD Trades Sideways As Broader Ranges Narrow

1) Japanese Yen Little Changed After BOJ Rate Decision

The Japanese yen was little changed as traders reacted to the interest rate decision by the Bank of Japan. As was expected, the bank left interest rates unchanged at -0.10% and left other policies intact. By this, it is continuing to guide the 10-year government bond yields at around zero. The members now expect that the economy will shrink by 4.7% this year and that consumer inflation will fall to 0.7%. In its previous statement, the bank was expecting the economy to shrink by between 3% and 5%. Recent numbers have shown that the Japanese economy is having a slower recovery than other countries.

The Canadian dollar is little changed against the US dollar ahead of the Bank of Canada interest rate decision. Like the Bank of Japan, most analysts expect that the bank will leave interest rates unchanged at 0.25%. However, this being the first decision by Tiff Macklem, analysts will be watching his language during the press conference. They also expect him to recommit to large-scale asset purchases in order to keep up with a jump in government spending. Before the decision, the statistics office will release the country’s June inflation data.

The British pound rose slightly against the US dollar as traders waited for inflation numbers from the UK. Analysts expect that the headline consumer price index declined from the previous 0.5% to 0.4% in June. They also expect that core CPI remained unchanged at 1.2%. These numbers will come a day after the ONS released mixed GDP numbers. The data showed that the economy started the slow recovery in May this year. Meanwhile, from the United States, we will receive the industrial and manufacturing production data and oil inventory numbers.

The USD/JPY pair is little changed today even after the BOJ interest rate decision. It is trading at 107.28, which is slightly higher than yesterday’s low of 107.15. On the four-hour chart, the price is stuck at the 50-day and 100-day EMAs and slightly below the 38.2% Fibonacci retracement level. Also, the pair has formed a bullish pennant pattern, which means that the price is likely to continue rising.

2) EUR/USD: Bulls Pause Near June Swing Highs, Upside Potential Intact

The EUR/USD pair built on its recent positive momentum and moved back above the 1.1400 round-figure mark for the first time since June 11. The shared currency was supported by hopes that European Union leaders may agree on stimulus and deepening fiscal integration to shield the economy from the pandemic. Bulls largely shrugged off weaker-than-expected ZEW economic survey, which showed that German Economic Sentiment fell to 59.3 in July as compared to consensus estimates pointing to a drop to 60 from 63.4 previous. The German ZEW Current Situation Index also fell short of market expectations and rose to -80.9 from -83.1 June. Meanwhile, the broader Eurozone ZEW Economic Sentiment improved from 58.6 to 59.6, but again missed market expectations of 78.1. Separately, the German CPI print matched preliminary estimates and was finalized at 0.6% MoM,  0.9% YoY for June.

On the other hand, the US dollar failed to attract any meaningful buying interest despite concerns about a surge in coronavirus cases, which pushed California back into lockdown. The greenback remained on the defensive following the release of hotter-than-expected US consumer inflation figures. In fact, the headline CPI increased by 0.6% in June, the most in nearly eight years and snapped three straight months of declines. The yearly rate matched expectations and came in at 0.6% in June, marking the smallest YoY rise since September 2015. The data eased worries about deflationary pressures from the economic downturn, albeit did little to provide any impetus to the USD. Adding to this, optimism about a coronavirus vaccine led to a strong rally in the US equity markets, which further undermined the greenback’s safe-haven status and provided an additional boost to the major.

The pair ended near the top end of its daily trading range and shot to four-month tops, around the 1.1425 region during the Asian session on Wednesday. The pair, however, struggled to capitalize on the move, instead witnessed a modest pullback amid nervousness over rising Sino-US tensions. The US President Donald Trump signed a bill sanctioning Chinese officials in response to Beijing’s national security law for Hong Kong and an executive order ending preferential treatment for Hong Kong. China was quick to respond and threatened to impose retaliatory sanctions against US individuals and entities. Meanwhile, the downside is likely to remain cushioned as investors might refrain from placing any aggressive bids ahead of the ECB monetary policy decision. In the meantime, the pair remains at the mercy of the USD price dynamics in the absence of any relevant market-moving releases from the Eurozone. Later during the early North American session, the US economic docket – highlighting the release of Empire State Manufacturing Index and Industrial Production – will be looked upon for some meaningful trading opportunities.

From a technical perspective, bulls might now wait for some follow-through buying above the 1.1420-25 resistance zone before positioning for any further appreciating move. A convincing breakthrough should pave the way for a move back towards retesting YTD tops, just ahead of the key 1.1500 psychological mark. Some follow-through buying has the potential to lift the pair further towards 2019 yearly swing highs resistance near the 1.1570 region.

On the flip side, the 1.1350 region now seemed to protect the immediate downside, below which the pair is likely to slide back towards the 1.1300 mark. Failure to defend the mentioned support levels might prompt some technical selling and accelerate the slide further towards the 1.1260 horizontal zone before the pair eventually slides to test sub-1.1200 level.

3) OPEC Compliance And A Guarantee On The Principle Of Compensation Was Music To The Market Ears Overnight

Risk assets closed on a more favorable note Tuesday after news broke that Moderna Inc’s Covid-19 vaccine produced antibodies to the coronavirus in all patients in the initial therapeutic trial.

Oil doesn’t benefit specifically from the forward-looking conjecture oomph to the extent that equities do around the vaccine, since oil price action is relegated more towards what is happening today. Although, if and when a vaccine is in hand oil prices will moonshot as it will affect virtually every commodity on the planet.

OPEC’s Joint Technical Committee says June OPEC compliance with the cut agreement was 112%, and 99% for participating non-OPEC nations for an overall 107% compliance.

The key at Wednesday’s OPEC+ meeting will be whether the group decides to taper to 7.7mb/d, as planned from August, or extend 9.7mb/d cuts by another month. Comments so far suggest the group is more inclined to taper.

However, positive for oil prices is that Saudi Arabia is laying the foundations for a relatively smooth OPEC+ meeting on Wednesday, with a joint statement released from the Saudi Arabian and Iraqi Energy Ministries complementing Iraq for progress implementing production cuts.

At the same time, Saudi Arabia’s energy minister has also had a discussion with his Nigerian counterpart, following which Nigeria said it would compensate through September for producing over its agreed quota in May and June.

The guarantee of the principle of compensation was music to the market’s ears, as was OPEC compliance which continues to demonstrate unwavering unity within the group. Indeed, presenting a unified OPEC front is the most crucial deliverable at this stage of the oil market recovery. Production policy can be tweaked to fit macro circumstances as needed, but the group must avoid any hint of dissent.

Unnamed OPEC+ delegates suggesting the group will not extend the first phase of production cuts into August provide an excuse for profit-taking. In contrast, the principle of compensation provides an offset to the return of around 2mb/d of OPEC+ production and caused short term oil market shorts to cover.

The return of around 2mb/d of OPEC+ production is anticipated, but risks to demand due to a resurgence in coronavirus infections in some regions had prompted speculation that the initial 9.7mb/d cut would again be extended.

We’ve been stuck in a very tight trading range for some time, and despite the numerous short factors that may drive intraday momentum – whether it’s reimposing short-term soft lockdowns or a US inventory data miss – invariably Brent continues to gravitate back to the midpoint of the market’s perceived current bookends ($40-45).

While near-term headwinds remain, the overwhelming evidence suggesting oil is past the trough and that supply and demand are rebalancing – at a gradual pace, mind you.

We see price action continuously revert to the short term “mean”, indicating the markets are finding some semblance of equilibrium that could even extend throughout the summer until the soft lockdowns flatten the US EPI curve or the ultimate recession-stopper is in hand, which is of course a vaccine.

4) AUD Trades Sideways As Broader Ranges Narrow

The Australian dollar crept higher through trade on Tuesday, supported by underlying USD weakness and a small uptick across risk assets. Trade was choppy and moves relatively modest as ranges across currency markets narrowed. The AUD has struggled to break outside a 70 point range bouncing between 0.6930 and 0.70 US cents through the last 2 weeks as the ebb and flow of risk demand controls broader moves. Markets largely ignored the uptick in new Coronavirus infections in Victoria and New South Wales, confident strict proactive measures will contain the spread through the short term.

Direction continues to derive from markets demand for risk, fluctuations in risk aversion are creating sustained volatility across financial markets, albeit in narrowing ranges. The AUD continues to find support in a positive risk correlation, propped up by unprecedented levels of fiscal and monetary policy stimulus. We expect the AU will remain range bound through much of Q3, bouncing between 0.68 and 0.70 with a shift in the current risk profile the biggest threat to that position. Setting aside COVID-19 headlines, attentions this week turn to the EU summit as leaders meet to flesh out the specifics of the EU’s recovery fund. IF a compromise can be agreed this week and the final plan mirrors the proposal put forth by the EU commission we can expect a renewed EURO upturn and subsequent USD sell off, with AUD/EUR crosses perhaps testing a break back below 0.6050 and 0.60.

The US dollar drifted lower through trade on Tuesday as inflation expectations increased. US CPI data showed prices in June jumped over half a percent (largely driven by a near 13% increase in petrol prices) raising concerns the record levels of fiscal stimulus are going to drive living costs higher at a time the Federal Reserve cannot increase interest rates, potentially derailing any consumer led recovery.

The Euro upturn continued Tuesday pushing through 1.14 as investors eye this week’s EU summit and potential rescue package. The promise of a 750 billion euro recovery fund has helped drive the combined unit higher as markets begin pricing in a swift EU recovery. As the US continues to battle the COVID-19 outbreak expectations euro zone will be better placed to bounce out of the pandemic are increasing opening the door to extended Euro gains through the medium term.