17-Jul-2020

1) Dollar Pares Initial Losses On Risk-Aversion
2) ECB Signals A Lot Done, A Lot More To Do
3) Asian Markets Attempt Stall Recovery
4) GBP/USD: 1.2500 Mark Holds The Key For Bulls

 

 

1) Dollar Pares Initial Losses On Risk-Aversion

Although the greenback weakened in European session as the release of record U.S. retail sales data improved risk sentiment, dollar pared its losses and rebounded across the board in New York as concerns about the rising number of coronavirus infections triggered risk-off trade.

Reuters reported the Commerce Department said on Thursday retail sales rose 7.5% last month. That was on top of the 18.2% jump in May, which was the biggest gain since the government started tracking the series in 1992. Economists polled by Reuters had forecast retail sales advancing 5% in June.    A separate report from the Labor Department on Thursday showed 1.30 million people filed for state unemployment benefits during the week ending July 11, slightly down from 1.31 million in the prior period. Economists had forecast 1.250 million applications last week.

Versus the Japanese yen, dollar found renewed buying at 106.84 in Asian morning and rose to 107.03. Despite retreating to 106.87 on weakness in U.S. Treasury yield, price then rallied to session highs at 107.39 New York afternoon on safe-haven usd buying due to U.S.-China tensions as well as rise in global coronavirus infections before stabilising.

The single currency met renewed selling at 1.1420 in Australia at fell to 1.1394 at European open on cross-selling in euro before rebounding to 1.1415 but only to retreat to 1.1379 on usd’s broad-based strength. However, the pair erased intra-day losses and later rallied to an intra-day high at 1.1442 in New York after European Central Bank left interest rates unchanged before falling to session lows at 1.1371 in late New York on risk-aversion.

Reuters reported the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.50% respectively.     The Governing Council will continue its purchases under the pandemic emergency purchase programme (PEPP) with a total envelope of 1,350 billion euros.     Net purchases under the asset purchase programme (APP) will continue at a monthly pace of 20 billion euros, together with the purchases under the additional 120 billion euros temporary envelope until the end of the year.

The British pound also fell in tandem with euro from 1.2593 in Australia to 1.2538 at European open, then to session lows of 1.2520 on safe-haven usd buying. However, renewed buying interest emerged and cable rallied to 1.2625 in New York morning due partly to cross-selling of sterling especially vs euro before retreating sharply to 1.2638 on profit-taking and traded at 1.2553 near the close.

Reuters reported early indicators suggested that the number of employees on companies’ payrolls was down by 649,000 between March and June with the largest falls at the start of the pandemic, the Office for National Statistics said.     Britain’s unemployment rate unexpectedly held at 3.9% in the three months to May. A Reuters poll of economists pointed to a rise in the unemployment rate to 4.2%.

In other news, Reuters reported, a deal on the EU’s proposed stimulus scheme to start economic recovery from the coronavirus pandemic is not certain at the bloc’s summit this Friday and Saturday as major differences persist between member states, a senior official in Brussels said on Thursday.

 

2) ECB Signals A Lot Done, A Lot More To Do

As the European Central Bank (ECB) had substantially increased both the scale and duration of its easing measures at its previous policy meeting in early June, there was little expectation of any dramatic developments at yesterday’s ECB policy meeting. The key task now for the ECB in common with other Central Banks is to avoid over‐promising or , more importantly, under‐delivering. In that respect, the muted response of interest rate and FX markets testifies to the job being well done but ensuring easier monetary conditions continue for all could prove a tricky task.

While not likely to be market moving, there were three important messages from the ECB president Christine Lagarde at a relatively low key press conference. In terms of ECB policy support, the message was a lot done but a lot more to do. So, monetary policy is set to remain exceptionally accommodative for the foreseeable future. Equally important is a continuing call for fiscal policy to shoulder more of the burden in supporting an economic turnaround. Mirroring recent comments by senior Federal Reserve officials in the US, the ECB continues to argue for ‘further strong and timely efforts’ through fiscal policy actions ‘to prepare and support the recovery’. While the immediate focus is to urge agreement on the part of EU leaders to the €750 billion European Recovery and Resilience Facility, the broader message is one of ensuring fiscal policy across the Euro area remains sufficiently accommodative.

A third message linking the other two was a strong emphasis on the ECB’s capacity to ‘effectively stave off risks to the smooth transmission of monetary policy’ to ensure the accommodative stance is fully felt. This message was forcefully signalled by Mme Lagarde’s indication that the ECB envisages using the full €1.35 trillion envelope of its Pandemic Emergency Purchase Programme (PEPP) effectively contradicting remarks by other officials that suggested it might not all be needed.

A further important element in this third message was Mme Lagarde’s emphasis on the flexibility of the PEPP underlined by indicating ‘we will never let capital key convergence ..impair the efficiency of the monetary policy that we have adopted’. With market sentiment still fragile, repeated reassurances emphasising the fulsome support of ECB actions are likely to be required for some significant time to come.

ECB president, Christine Lagarde, took several opportunities to list off the range of exceptional actions the ECB has taken in recent months, indicating that an evaluation of ‘comprehensive’ recent policy measures at yesterday’s policy meeting suggested they ‘are effective, are adequate and are working.’ Mme Lagarde suggested signs of effectiveness were seen in the flow of credit to firms and households in recent months.

Possibly even more striking is the contrast in the ECB’s depiction of the current economic environment compared to that of a month ago. In June, the opening assessment of the ECB’s press statement was that ‘Incoming information confirms that the euro area economy is experiencing an unprecedented contraction.’ The tone of yesterday’s opening statement is markedly different, noting that ‘Incoming information since our last monetary policy meeting in early June signals a resumption of euro area economic activity…. Both highfrequency and survey indicators bottomed out in April and showed a significant, though uneven and partial, recovery in May and June.’

Notwithstanding the ECB’S acknowledgement of recent signs of improvement, it continues to see activity well short of pre‐pandemic levels and recognises that the rebound is uneven.Critically, ‘the Governing Council assesses the balance of risks to the euro area growth outlook to remain on the downside.’ Moreover, whereas the June statement spoke of ‘the current rapidly evolving economic environment’, the new statement speaks of a ‘current environment of elevated uncertainty and significant economic slack’, implying a more stable but weak picture has emerged.

These circumstances also translate into conditions in which inflation is expected to remain well below the ECB’s target as it remains the case that ‘Over the medium term, weaker demand will put downward pressure on inflation, which will be only partially offset by upward pressures related to supply constraints.’

Given circumstances of modest improvement and with major difficulties, the ECB continues to signal a protracted period of very accommodative monetary policy. While some recent pronouncements from senior Federal Reserve officials pointed towards the possibility of further easing by that Central Bank, there is little expectation of any further policy action by the ECB anytime soon. That said we should mention a slight tweak in the forward guidance with a linguistic strengthening in the shape of a shift to the use of the future tense (e.g ‘We will keep the key ECB interest rates unchanged’ which compared to June; ‘we decided to keep the key ECB interest rates unchanged’.

The still gloomy economic outlook means further ECB easing can’t entirely be ruled out particularly if a resurgence of the virus or disappointing economic data threaten through summer months. That said, ECB president, Christine Lagarde stated that the mood suggested policy was ‘in a good place’. So, the barriers to early action appear quite high. In this context, Mme Lagarde indicated that the ECB hadn’t discussed the possibility of a technical change to increase the multiplier determining the level of excess commercial bank reserves that are not subject to negative rates.

While the ECB has achieved a lot in enacting major policy measures, ensuring they operate as intended means there is still a lot to do in ‘maintaining favourable financing conditions for all sectors and jurisdictions’. At present, the main market focus in this regard is on the ECB’s ability and willingness to limiting any widening in spreads between sovereign bond yields. However, the issue for the ECB is broader than that.

Mme Lagarde noted today that ‘sovereign yields are the basis of the pricing of other financial products and loans to businesses and households’ but the pressing issue is to ensure countries retain adequate fiscal capacity to undertake public policy actions in response to the pandemic. In essence, the ECB is trying to ensure that the large scale fiscal actions it sees as necessary in current circumstances are not jeopardised by ‘crowding out’ effects that in many but not all instances could fall most heavily on countries most affected by the pandemic.

While different in form to the ‘doom loop’ of the financial crisis, the ECB is clearly conscious of the risk that inadequate fiscal capacity in a country could weigh on the financial sustainability of firms and households leading to a tightening in credit standards and an associated circle of worsening financial conditions.

The message of the latest ECB bank lending survey of an expected material tightening in credit standards in the coming quarter sits uneasily with repeated questions at the press conference on possible ‘cliff effects’ if or when Government guarantees/supports run out. The ECB may face further challenges to ensure the delivery of its intended monetary stance.

 

3) Asian Markets Attempt Stall Recovery

In aviation, a stall is basically a condition where the pilot allows the aircraft’s speed to drop so low that the wings stop generating lift, never an optimal condition. The recovery is usually quite simple; push the nose down to regain speed, apply more power and pull out of the ensuing dive. In fact, as a pilot, stall recovery is pretty much the first thing you learn, after being able to get off the runway in a straight line.

Off course there are stalls, and there are stalls. Training aircraft are designed to have benign, easily recoverable stalls, unsurprisingly. They will even kindly buffet and shake to warn you it’s about to happen. Other higher performance aircraft I have flown, are altogether different animals in the stall. On my first trip in a high-performance glider, as opposed to the training glider, I got too slow in a turn. The highly-strung beast snapped left and went straight into a spin. (my instructor behind me knew it was coming, they have an odd sense of humour) The key is having enough altitude to recover, which is why you try not to stall after take-off, or on approach to land.

In mid-March, equity markets crossed controls in the stall, pulled the nose up and went into an aggressive spin. Their record highs gave more than enough altitude to recovery, albeit leaving investors in a cold sweat afterwards. The perils of stalling to close to the ground, though, were laid bare by the negative price shock of the May WTI futures settlement. That resulted in a smoking hole in the field for many investors.

Investors hoping for a continuation of v-shaped peak-virus price action overnight were somewhat disappointed. Chinese equities endured a torrid day with both the Shanghai Composite and CSI falling over 4.0% as momentum aggressively stalled. Luckily, after a huge run higher, the retail investor dominated markets had plenty of altitude to recover. Across Europe and North America, the stall across asset classes was rather more benign. A gentle buffet and push the stick down as momentum stalled on equities, currency markets and energy.

Much has been made of the mixed signals from Netflix and the US data overnight. Netflix added lots of subscribers but said further growth level at that rate would be challenging. The 10% drop in its share price was limited to just Netflix though. The US retail sales data rose, but future improvement is threatened by the fallout from the exploding number of Covid-19 cases across America. Initial Jobless and Continuing Claims both improved slightly, but the rate of improvement is stalling. They are stuck stubbornly around 1.4 million and 17 million respectively.

Equity markets had already fallen before all the data came out, so we should avoid fitting facts to explain the price action. The price action overnight looks like nothing more than a loss of momentum, and a benign stall. Asset markets have plenty of central banks induced altitude to recover from the mild stall and modest dive. That is what Asia looks like it is doing today. Some days, a gentle recovery to straight and level is just what it says on the tin, no conspiracies necessary.

The data calendar in Asia today is very quiet, as it is across Europe and the United States. Earnings season has passed without incident this week and looks set for much of the same this evening. Most attention will be on the European Union Leader’s Summit, which is meeting to continue negotiations about the nature of the EUR 750 billion pandemic recovery fund. It is unlikely a final deal will emerge today with the Frugal Four and Club-Med nations still far apart. However, signals of forward progress should be enough to keep the Euro firm versus the US Dollar and Sterling. That said, a breakdown in progress could set the single currency up for a negative finish, with so much forward momentum already priced into it.

Financial markets, whilst vulnerable to headline induced clear air turbulence, seem content on finishing the week in straight and level flight. Perhaps with a little stalling practise along the way.

Asian equity markets are painting a mixed picture today following a modestly negative New York session. For the most part, the major indices are trading each side of unchanged. Most of the attention has been on Mainland China, where the Shanghai Composite and CSI both fell by over 4.0% yesterday afternoon. With Mainland markets dominated by retail investor flows, they are by their nature, vulnerable to the direction of the stampeding FOMO-retail herd. Yesterday looked like a capitulation of the long positioning piled into after the State media organisations urged investors to get long the week before. The joys of a command and control economy.

Today, however, things appear much more orderly on the Mainland. The Shanghai Composite and CSI 300 0.30% higher in quiet trading. Over in Japan the Nikkei 225 has edged lower by 0.25%, while Seoul’s Kospi is up 0.50%. The Hang Seng is also 0.50% with the Straits Times 0.20% higher after the rebound in non-oil exports. Malaysia has risen 0.60% with Australian markets unchanged on the day.

Overall, short-term flows appear to be dominating Asian markets with no overriding theme apparent. Investors seem to have one eye on the door for the weekend. We would expect much the same to be evident in European markets ahead of the EU leaders’ summit later today.

With markets generally in consolidation mode, the US Dollar clawed back some of its recent losses overnight, the dollar index rising 0.30% to 96.34. The trend was most noticeable in recent outperformers, with the UAD/USD and NZD/USD both falling 0.50%. Elsewhere amongst the majors though, the effect of the stall in momentum was much more benign, with EUR/USD edging back below 1.1400 to 1.1390.

I note now that NZD/USD has formed quite strong technical resistance at 0.6600, having failed ahead of it three times over the past week. The 0.7000 region has become somewhat of an intra-day pivot point for AUD/USD, which seems content to range between 0.6970 and 0.7030 for now.

The Bank of Indonesia has been officially intervening to sell USD/IDR this morning. The BI has been a vocal interventionist in recent months, with the central bank making clear it felt to Rupiah was undervalued. The USD/IDR is unchanged at 14,630.00 today, suggesting that the BI action this morning are more smoothing than drawing a line in the sand.

Across Asia, the US Dollar has edged gently lower versus the majors as Asian stock markets hold their own. Asian regional currencies are virtually comatose today, being unchanged versus the greenback.

With the EU Summit convening today on the pandemic recovery package, most eyes will be on EUR/USD. A positive outcome should see the single currency retest the week’s highs at 1.1450. An unfavourable outcome will see the 1.1370 support tested and a potentially deeper correction, possibly as far as 1.1300.

In line with price action elsewhere, profit-taking seemed to be the order of the day in energy markets. Both Brent crude and WTI beat a gentle retreat as short-term momentum stalled. Brent crude edged 0.60% lower to $43.40 a barrel, and WTI fell a modest 0.70% to $40.70 a barrel. Both contracts are unchanged in Asia in a moribund session.

Although oil prices have stalled, the buffet is gentle and not a prelude to an incipient spin lower. Both contracts are comfortably ranging at the upper end of their recent price levels. Brent crude has critical resistance at $44.00 a barrel, and $42.00 a barrel for WTI.

Markets have assimilated the impending increase in OPEC+ production without incident. As long as the price action across financial markets remains corrective, and not structural, oil’s consolidation should continue.

Gold fell 0.70% to $1497.00 an ounce overnight, as investors looked at the price action elsewhere and decided to book profits ahead of the weekend. In line with the flat-line volatility elsewhere in Asia’s session, gold is almost unchanged at $1498.00 an ounce this morning.

Support in gold remains between $1480.00 and $1490.00 an ounce, and as long as this region holds, gold’s price action at these levels remains consolidative, if somewhat directionless. A move through $1680.00 an ounce implies a deeper correction, possibly as far as $1750.00 an ounce.

Resistance at $1819.00 an ounce remains the main barrier to further gold gains. It is unlikely to be tested in the upcoming New York session though, with price action implying another range-trading day is ahead.

 

4) GBP/USD: 1.2500 Mark Holds The Key For Bulls

The GBP/USD pair had some good two-way price moves on Thursday and finally settled in the red, erasing the previous day’s modest gains. The British pound initially struggled to gain any meaningful traction despite better-than-expected UK jobs report, which showed that the unemployment rate remained unchanged at 3.9% during the three months to May. Adding to this, the number of people claiming jobless benefits unexpectedly fell by 28.1K in June as against expectations of a 250K increase, albeit did little to impress bulls.

Weaker global risk sentiment drove some haven flows towards the US dollar. This, in turn, was seen as one of the key factors exerting some pressure on the major. Investors remain concerned about the ever-increasing number of COVID-19 cases globally, which overshadowed the recent optimism over a potential vaccine for the highly contagious disease. This coupled with worsening US-China relations further dented investors’ appetite for perceived riskier assets and led to a fresh leg down in the global equity markets.

The anti-risk flow was evident from a weaker tone surrounding the US Treasury bond yields, which kept a led on the early USD uptick and assisted the pair to attract some dip-buying ahead of the key 1.2500 psychological mark. Meanwhile, data released from the US showed that monthly Retail Sales rose by 7.5% in June (5% expected) and Philly Fed Manufacturing Index edged lower to 24.1 for July (20 anticipated) from 27.5 previous. Separately, the US Initial Weekly Jobless Claims fell less than expected to 1.30 million (1.25 million estimated).

The pair rallied over 100 pips from daily swing lows and touched an intraday high level of 1.2625, albeit the momentum fizzled out rather quickly amid resurgent USD demand. The pair now seems to have stabilized and was seen oscillating in a range around mid-1.2500s through the Asian session on Friday. Market participants now look forward to a scheduled speech by the Bank of England Governor Andrew Bailey for some impetus. The US economic docket features the release of housing market data (Building Permits and Housing Starts) and Prelim Michigan Consumer Sentiment Index. The data might influence the USD price dynamics and assist traders to grab some meaningful opportunities on the last day of the week.

From a technical perspective, the pair might continue to find some support near the 1.2500 mark. Any subsequent weakness below weekly lows, around the 1.2480 region, now seems to accelerate the fall further towards 100-day SMA support, currently near the 1.2425 region.

On the flip side, the 1.2600 mark now seems to act as an immediate resistance, above which bulls are likely to make a fresh attempt towards testing the 1.2665-75 strong horizontal resistance. A sustained move beyond should set the stage for a further near-term appreciating move towards reclaiming the 1.2700 mark en-route June daily closing highs resistance near the 1.2745 zone.