20-May-2020

1) Dollar Pares Losses on Doubts over Moderna’s Vaccine
2) GBP/USD: Resuming the Rally? Not So Fast, Three Reasons To Expect A Downside Correction
3) EUR/USD: Sustained Break through 1.0975 Supply Zone Needed To Confirm Bullish Bias
4) Crude Prices Up, Supported By the Reopening Of Developed Economies
5) Equity Markets Unsure About Their Direction, Gold Continues Its Upward Journey

 

 

1) Dollar Pares Losses on Doubts over Moderna’s Vaccine

Although the greenback remained on the back foot in Asia and Europe, except versus the Japanese yen, dollar pared its losses in New York on safe-haven usd buying after STAT News reported that vaccine experts said Moderna did not produce data critical to assessing COVID-19 vaccine.

Reuters reported in a sometimes testy hearing before the Senate Banking Committee, U.S. Treasury Secretary Steven Mnuchin and Federal Reserve Chair Jerome Powell said the nearly $3 trillion in federal rescue programs rolled out over the past two months were working to support an economy devasted by the novel coronavirus.    Mnuchin warned prolonged lockdowns would pose a “risk of permanent damage” to the economy.

Versus the Japanese yen, dollar traded with a firm bias in Asia due to a rally in Japanese stocks on improved risk appetite due to encouraging results from a COVID-19 vaccine trial. The pair continued to ratchet higher in Europe after Bank of Japan announced emergency policy meeting and rose to a 1-month peak at 108.08 in New York morning before retreating to 107.69 on fall in U.S. Treasury yields and stocks following STAT News report.

Reuters reported the Bank of Japan said it will hold an emergency policy meeting on Friday to sign off on a new lending programme to help firms combat the fallout from the coronavirus crisis. The emergency policy meeting will be held from 9 a.m. (0000 GMT) on Friday, the central bank said in a statement on Tuesday.

Although the single currency dropped to session lows at 1.0903 in Asian morning, price erased its losses and resumed Monday’s winning streak and rallied to an intra-day high at 1.0976 in European morning on continued optimism over Franco-German proposal for a recovery fund together with upbeat German and EU ZEW sentiment data. The pair then retreated to 1.0919 near New York close on renewed usd’s strength.

Reuters reported the ZEW research institute said its German monthly survey showed economic sentiment among investors rose to 51.0 from 28.2 in April. Economists had expected a reading of 32.0.

The British pound also dropped in tandem with euro to session lows at 1.2185 in Asian morning before rising to 1.2268 at European open due partly to cross-buying of sterling especially vs euro. Cable then retreated to 1.2220 in European morning on profit-taking before ratcheting higher to 1.2296 in New York but only to weaken to 1.2235 near the close on buying in USD.

In other news, Reuters reported the Franco-German idea that the European Union should borrow to issue grants for its economic recovery is a historic step as it would be the first time that budget spending is financed through EU debt, French Finance Minister Bruno Le Maire said. France and Germany proposed on Monday a 500 billion euro fund, financed through European Commission borrowing on the market, to issue grants to EU regions and sectors worst hit by the coronavirus pandemic to help them recover.

On the data front, Reuters reported a measure of the number of people claiming unemployment benefits in Britain soared in April, the first full month of the government’s coronavirus lockdown, data published on Tuesday showed.    The claimant count rose by 856,500 to 2.097 million, the Office for National Statistics said.    A Reuters poll of economists had produced a median forecast for a leap of 676,500 in the claimant count with forecasts ranging widely from just over 56,000 to as high as 1.5 million. The ONS also said Britain’s unemployment rate fell to 3.9% in the January-March period, covering only one week of the lockdown, from 4.0% in the three months to February.

 

2) GBP/USD: Resuming the Rally? Not So Fast, Three Reasons To Expect A Downside Correction

A breather before next move up? Not so fast, especially with Brexit breathing down the pound’s neck.GBP/USD has been edging lower as the safe-haven US dollar regained some ground. While the greenback may be ready to retreat once again, the pound’s position may limit any gains and perhaps suggest falls.

Markets rallied on Monday – diminishing demand for the dollar – amid hopes for a coronavirus vaccine. Massachusets-based Moderna announced positive results among eight patients and inspired investors. However, as time passed by, the lack of any details that scientists could scrutinize – nor any acknowledgment from government bodies involved in the project – caused doubts, that sent the dollar back up and equities lower.

Daily COVID-19 deaths are on the rise once again, jumping to 545 in Tuesday’s report. The weekend effect – in which statistics are relatively rosy for Saturdays and Sundays, is pronounced in Britain and the setback on workdays is substantial. Total coronavirus mortalities have topped 35,000 with the focus on care homes.

The ongoing misery limits the government’s ability to lift the lockdown, weighing on the economy. Chancellor of the Exchequer Rishi Sunak painted a gloomy picture of the economy, saying the UK is facing a recession “the likes of which have never been seen.”

Brexit talks getting nasty: David Frost, London’s Chief Negotiator, said that the EU is treating the UK as an “unworthy partner” trying to bend it to EU norms, offering a low-quality deal. He described Brussels’ proposals as “egregious” when referring to having EU state rules as part of British law. His counterpart Michel Barnier blamed Britain for wanting to keep the benefits of a member state without the obligations.

The ongoing tensions raise the chance that the UK exits the transition period without a trade deal, reverting to World Trade Organization rules, worrying investors.

 Rising chances of negative rates: Britain’s Consumer Price Index fell to 0.8% yearly in April, worse than expected. The sharp fall in inflation raises the chances that interest rates fall below zero – in addition to more Quantitative Easing.

Andrew Bailey, Governor of the Bank of England, will speak to lawmakers later in the day and may refer to the topic. While he previously sounded skeptical about such a move, several of his colleagues have been open to the idea. That could weigh on the pound as well.

Money markets are raising their bets on the BOE taking that path.

Traders are also speculating on negative rates in the US. Jerome Powell, Chairman of the Federal Reserve, recently rejected setting sub-zero borrowing costs, The bank’s meeting minutes are eyed. Powell vowed to support the economy and nudged elected officials to add fiscal stimulus in a testimony on Tuesday.

 

3) EUR/USD: Sustained Break through 1.0975 Supply Zone Needed To Confirm Bullish Bias

The EUR/USD pair built on the previous day’s goodish positive move and gained some follow-through traction on Tuesday. The shared currency remained well supported by the Franco-German proposal for a €500 billion European recovery fund and got an additional boost from encouraging data from the Eurozone. In fact, the German Economic Sentiment bounced further to 51.0 in May from 28.2 previous. The gauge for the broader Euroland improved to 46 during the reported month as compared to -12.1 anticipated.

Meanwhile, the latest optimism over encouraging data on COVID-19 vaccine trial remained supportive of the upbeat market mood. The risk-on rally in the global equity markets prompted investors to continue dumping traditional safe-haven currencies, including the US dollar. Weaker US housing market data and the Fed Chair Jerome Powell’s testimony before the Senate Banking Committee did little to impress the USD bulls or hinder the pair’s intraday momentum to over two-week tops.

However, reports that the US drugmaker Moderna had provided insufficient data to determine the vaccine’s efficacy led to some weakness in the US equity markets. This, in turn, forced investors to take refuge in the safe-haven dollar and kept a lid on any further gains for the pair, instead prompted some selling at higher levels. The pair retreated over 50 pips from daily tops and finally settled with only modest gains. Despite the pullback, the pair managed to hold above the 1.0900 round-figure mark and regained some positive traction during the Asian session on Wednesday.

Moving ahead, market participants now look forward to the Eurozone economic docket – highlighting the final CPI print and the preliminary estimate for the Consumer Confidence for May – for some impetus. Later during the US trading session, the Minutes of the latest FOMC meeting will play a key role in influencing the USD price dynamics and produce some meaningful trading opportunities.

From a technical perspective, the pair on Tuesday was rejected near the top end of a near eight-week-old trading range. The mentioned barrier, around the 1.0975 region, should now act as a key pivotal point for short-term traders, which if cleared might be seen as a fresh trigger for bullish traders. Bulls might then make a fresh attempt to cleared the very important 200-day SMA barrier, currently near the 1.1015 region, before eventually aiming to reclaim the 1.1100 round-figure mark.

On the flip side, sustained weakness below the 1.0900 mark might accelerate the fall towards the 1.0845 horizontal support. Some follow-through selling has the potential to drag the pair back towards the 1.0800 mark ahead of the trading range support near the 1.0775 region. Failure to defend the mentioned support levels might now turn the pair vulnerable to break below the 1.0700 mark and slide further to retest YTD lows, around the 1.0635 region.

 

4) Crude Prices Up, Supported By the Reopening Of Developed Economies

Oil has been holding up in the extraordinarily choppy and thin trading conditions as investors mixed supply cuts and a demand rebound against a grim economic outlook from the Fed Chief Jerome Powell.

More broadly, oil prices appear to be attempting to trough out a range as unabashedly bullish sentiment over the short term might be giving way to the time mismatch between the market pricing versus the real economy demand.

Still, crude oil prices are up sharply across the last 48 hours, albeit off the highs as some understandable profit-taking kicked in. A clear trend to the re-opening of large developed economies is supportive, but crude prices could remain range-bound as investors scrutinize the re-opening news flow – particularly as they pertain to a resurgence of the virus, and especially in more populated areas where driving trends have picked up.

For today in Asia, bullish market ambition could give way to oil market investors combustible nature as they grow more skittish about a potential coronavirus vaccine that sparked a big risk rally yesterday. Indeed, there was a relatively muted reaction to the bullish draw reported in the API inventory report, likely weighted down by less favorable news on the vaccine front.

In general, oil prices continued to find support from a combination of positive macro data points in Asia. There’s been a notable increase in refined product demand in China and India so far in May and this suggests a more optimistic view on oil demand may be justified. This optimism also reflects the recent monthly updates from OPEC, the EIA and IEA, all of which acknowledge more rapid curtailment of non-OPEC production than was expected even a month ago.

There’s a growing chorus of Wall Street analysts suggesting the current oil surplus in Q2 will turn to a deficit in Q3. If the market deficit was triggered by demand alone, it would be very bullish and mean something special. However, given the massive waves of forced and agreed supply curtailment, as prices rise in anticipation of that breakeven, US shale and other global producers will either uncap the wellheads or ramp up production. So much of the heavy lifting will fall on consumer demand for all things oil to push prices higher.

But even at this stage of the price recovery it remains to be seen how much of the non-OPEC reduction will remain if oil prices continue to move higher and how good compliance within the OPEC+ group will be.

The near-term contango in pricing has compressed, likely providing good optics to OPEC+ producers as it offers a better price for their exports without allowing US producers an opportunity to hedge out longer-dated production at higher levels.

It appears that both supply and demand are rebalancing at a much quicker pace than expected, which is excellent news from the industry, the global economy and stock markets in general.

 

5) Equity Markets Unsure About Their Direction, Gold Continues Its Upward Journey

European markets and US futures are trading mixed today as the enthusiasm fades about a vaccine by Moderna. A health publication report showed that the vaccine is still very much in its early stages, and there are considerable hurdles ahead. Experts still need to see more data from the company before they draw any firm conclusion, and this took the wind out of the US equity session yesterday. The sell-off became intense during the final hour of trading and the SP500 closed with a loss of 1.05%, the Nasdaq dropped 0.36% while the Dow Jones declined 1.59%.

Market participants have once again made it clear that their appetite for risker assets is based on the development of a vaccine for Coronavirus. This is what we have learned during the past few weeks. Basically, the moment we get any positive news on vaccine or treatment of Covid-19 patients, traders cheer that news and load their portfolio with riskier assets.  In fact, it may not be a farfetched statement if we say that a vaccine is more important than monetary or fiscal support.

Over in the UK, traders are wary and angry at the UK government after the deal toll reached the highest level in Europe. Over 40,000 people passed away due to Coronavirus, and this is a colossal disaster. And yet, rather than taking the responsibility of this, ministers have started to play the blame game. According to them, the government received wrong advice from scientists.

Chancellor of the Exchequer, Rishi Sunak failed to assure the markets yesterday. He believes that there will be no immediate bounce back and that the recovery is likely to take much longer than previously anticipated. The latest data on the UK consumer prices index 12-month rate dropped to 0.8% against the previous reading of 1.5%. The UK’s fiscal position remains weakest among the G10 currency, and Brexit situation does provide any help. Hence, Sterling is trading lower against the dollar

As for the precious metal, investors are still mostly bullish, and they are finding every pullback as an opportunity to add more gold in their portfolios. One can hardly blame them for this strategy, and this is because we are still far from seeing daylight in terms of actual vaccine for Coronavirus. Speculators do blow things out of proportion the moment they get any news about a Coronavirus vaccine. But, when the optimism fades and reality becomes apparent, investors are left with no option but to hedge their bets. On top of this, Donald Trump is determined to fight China, and this only anchors geopolitical tensions. No one wants to see the US-China trade relation becoming sour as we are talking about the world’s two biggest economies. Anchored political concerns only make investors think that it is a good time for them to hang out in haven assets. Having said this, if the US economic recovery picks up steam and sentiment begins to improve, there will be no surprise to see some nasty correction for the gold price.