16-Jun-2020

1) EUR/USD: Challenging the Highs? After Trump and Powell’s Pumping Up, Retail Sales Are Key
2) Fed Put Weighs On The Dollar
3) Japanese Yen Falls As BOJ Leaves Rates Unchanged

1) EUR/USD: Challenging the Highs? After Trump and Powell’s Pumping Up, Retail Sales Are Key

The “Powell Put” is alive and kicking – the Federal Reserve seems to have made good on its promise to act aggressively and proactively – announcing corporate bond-buying and sending stocks higher. The announcement changed the market mood and downed the dollar, allowing EUR/USD to recapture 1.13 and more.

The Fed is not deploying new funds – the Secondary Market Corporate Credit Facility (SMCCF). is worth $750 billion and was already announced in March. Nevertheless, the world’s most powerful central bank will buy debt in markets – and even directly from companies – rather than via Exchange Traded Funds (ETF).

Moreover, the Fed includes companies that were highly rated before the crisis, even if they were downgraded to junk status. Jerome Powell, Chairman of the Federal Reserve, will testify later in the day and may provide more details. The long session may see a repetition of the messages conveyed by Powell less than a week ago – a slow recovery but willingness to act. However, it could contain surprises as well.

The generosity of the bank has wiped out concerns about coronavirus cases and hospitalizations rising in around 20 states, including Texas and Florida.

The increase in coronavirus cases is due to the quick reopening of the economy. Has it also led to increased sales? Economists expect a bounce in May’s Retail Sales after they plunged by double-digits in April. Consumption is central to the world’s largest economy and the publication is set to rock markets.

Markets have also shrugged off concerns about the COVID-19 outbreak in Beijing, which has affected around 100 people and triggered the closure of markets in the Chinese capital. The world’s second-largest economy – which seemed to have the disease under control – is now tested.

President Donald Trump added to market optimism. The White House is reportedly considering a $1 trillion infrastructure plan. The move makes sense ahead of the presidential elections, yet previous pledges to rebuild roads ended without action. Markets remain optimistic for now.

Investors may also find encouragement in signs of a rapprochement between China and the US. Washington will allow US firms to use some of Huwaei’s equipment. More importantly, Secretary of State Mike Pompeo may meet his Chinese counterpart Yang Jiechi in Hawaii. Reporting on the potential encounter are scant, amid the sensitivity of relations.

In the old continent, the German ZEW Economic Sentiment figures are forecast to reflect growing optimism. Berlin recently announced a large stimulus package worth €130 billion, the European Central Bank increased its bond-buying scheme – and coronavirus seems under control.

Efforts to save the tourism season are underway in the EU and in several capitals as spring makes way to summer. Any outbreak may dampen the mood, but so far, the hardest-hit countries seem to keep the numbers low.

Overall, optimism is prevailing and may send euro/dollar to new highs, but last week’s events showed that sentiment can change rapidly.

2) Fed Put Weighs On The Dollar

Markets started the week in outright risk of modus. Investors feared that a second wave of corona infections could complicate the recovery. However, the risk-off was mainly visible in equity markets. Gains in the dollar were modest. EUR/USD already turned north early in US dealings. Equities rebounded further and the USD decline accelerated as the Fed announced it will start buying corporate bonds under its SMCCF. The Fed put was again firmly in place. EUR/USD closed at 1.1323. USD/JPY held a rather tight sideways trading pattern as the risk rebound weighed on the yen too, counterbalancing the broader USD declined. The pair closed at 107. 33.

This morning, Asian markets join the risk rebound on WS. The BoJ left its policy rate and the target for 10-y government bond yield unchanged but expects the amount of lending under crisis program to rise to 110 trillion from 75 trillion. Sentiment was also supported by a Bloomberg article that US president Trump is preparing infrastructure package of about $1 trillion to support the recovery. The TW dollar (DXY) declines further 96.50 area. EUR/USD is holding strong in the 1.1340 area.

Today, ZEW investor confidence in Germany is expected to rebound further to 60 from 51 (expectations). In the US, May retail sales are expected to rise 8.4% M/M after a 16.4 decline in April. Constructive data might support global sentiment and weigh on the dollar. However, future path/pace of the recovery remains highly uncertain. Powell will hold its semi-annual testimony before the Senate. He will probably reiterate the Fed’s commitment to support the economy as necessary .

Last week, the three week-long EUR/USD rally fell prey to profit taking. However USD rebound stayed modest even as sentiment turned risk off. Yesterday’s EUR/USD price action should be considered as constructive. Some further drift north in the 1.12/1.1425 range might be on the cards.

EUR/GBP spiked temporarily north of 0.90 given the global risk-off move. However, as was the case for most other small currencies, GBP selling eased soon. Headlines from the call between UK PM Johnson and EU leaders were positive and suggest that both sides are prepared to work on a practical compromise. This better tone on the UK-EU talks and a better global sentiment might help to put a floor for sterling, at least short-term. Some consolidation in the 0.9050/0.8865 range is possible.

3) Japanese Yen Falls As BOJ Leaves Rates Unchanged

The Japanese yen declined slightly after the Bank of Japan delivered its interest rate decision. As was widely expected, the bank left interest rates unchanged at -0.10%. The bank also left its yield curve control program intact and continued with its aggressive quantitative easing program. On the QE, the bank is acquiring government bonds, corporate bonds, and real estate investment trusts. The goal of corporate purchases is to prevent bankruptcies and boost asset prices at a time when the economy is going through its worst recession in years. Later this week, we will receive interest rates decision from the Swiss National Bank, Norges Bank, and Bank of England.

The Australian dollar rose after the RBA released the minutes of the meeting held earlier this month. In the minutes, the bank’s officials said that it would leave the current monetary policy in place until progress is made on employment and inflation. The two are in a dire state, with the unemployment rate rising and inflation falling. The bank also warned that even with the reopening, the outlook remained highly uncertain and that the pandemic would have long-lasting effects on the economy. In addition, the bank will be ready to make additional purchases as needed.

The economic calendar will be heavy today with important economic data from around the world. In Switzerland, the State Secretariat for Economic Affairs (SECO) will release its economic forecasts. These forecasts come two days before the SNB’s rates decision. In the UK, the ONS will release the April employment numbers while in Germany, the statistics office will release the inflation data. In the United States, the bureau of statistics will release the May retail sales numbers while the Fed chair will have a speech. Finally, the American Petroleum Institute will deliver its weekly inventory update.

The USD/JPY pair rose to an intraday high of 107.62 after the BOJ decision. On the four-hour chart, the price is slightly below the 61.8% Fibonacci retracement level. It is also slightly below the 50-day and 100-day exponential moving averages. Most importantly, the price has moved slightly above the previous resistance at 107.56. Therefore, there is a likelihood that the pair will continue rising as bulls attempt to test 108.