21-Apr-2020

1) EUR/JPY Nearing Key Support
2) GBP/USD Remained Depressed Amid Sustained Buying Around the USD
3) WTI Crude Oil Prices Turns Negative

1) EUR/JPY Nearing Key Support

Yesterday, the trade-weighted dollar (DXY) several times tested the 100 mark, but a sustained break didn’t occur (at that time). Dollar bulls maybe should be a bit disappointed as the global mood was far less optimistic than last week, with the unprecedented decline of the (US) oil price an illustration of how the pandemic is unraveling parts the economic (and financial) infrastructure via several channels. Of late, bad news, even as it came from the US, mostly supported the dollar, but yesterday USD gains stayed modest. We don’t see it a real change in the FX reaction function yet, but keep an eye on it. EUR/USD closed slightly lower at 1.0862. USD/JPY also closed marginally higher at 107.62.

This morning, the risk-off correction is further spreading into Asian markets. Uncertainty on the health of North Korean leader Kim Kong UN is an additional source of (regional) uncertainty. The trade-weighted dollar finally regained the 100 mark (currently 110.10 area).The Korean won underperforms. The Yuan is also losing ground, but only modestly (USD/CNY 7.0850). Interesting, the yen gains against the US dollar and EUR/JPY is nearing the key 116 support area.

Today’s eco is modestly interesting. Investors will keep an eye on the ZEW investor confidence, but the PMIs and the German IFO business climate to be published later this week are more important. Global factors, including the developments in the oil market, will continue to drive global FX trading.

EUR/USD remains vulnerable as investors await a potential compromise on an EU support package to be decided at a summit later this week. At the same time, we keep a close eye at the yen cross rates. EUR/JPY breaking below 116 could trigger further stop-loss selling both in EUR/JPY and USD/JPY. EUR/USD 1.0770 remains our first technical reference for EUR/USD.

Yesterday, sterling underperformed the dollar and the euro. Last week, the EUR/GBP cross rate already showed tentative signs of bottoming in the 0.8700/0.8680 area. For now, it looks that the UK probably won’t be a frontrunner in the easing of the lockdown measures. This was illustrated by comments of BoE’s Broadbent indicated that the assumption of a 3-month lockdown was reasonable. With sentiment on risk further deteriorating this morning, EUR/GBP might continue drifting north in a daily perspective.

2) GBP/USD Remained Depressed Amid Sustained Buying Around the USD

The GBP/USD pair failed to capitalize on Friday’s positive move and met with some fresh supply on the first day of a new trading week. The US dollar resumed its climb amid persistent worries over the economic fallout from the coronavirus pandemic and turned out to be one of the key factors exerting pressure on the major. The already weaker sentiment deteriorated further in the wake of a historic collapse in crude oil prices, which provided an additional boost to the greenback’s perceived safe-haven status against its British counterpart.

The pair ended near the lower end of its daily trading range and remained depressed through the Asian session on Tuesday, hitting near two-week lows. The downtick lacked any strong follow-through selling and showed some resilience below the 1.2400 round-figure mark. Meanwhile, Tuesday’s UK employment details showed that the official jobless rate rose to 4.0% from 3.9% previous and the number of people claiming jobless benefits came in at 12.2K for March, beating market expectations by a big margin.

The mixed data did little to provide any meaningful impetus and passed largely unnoticed as the key focus remains on developments surrounding the coronavirus saga. Investors also seemed reluctant to place any aggressive bets, rather preferred to wait on the sidelines ahead of the resumption of Brexit negotiations this week. Hence, it will be prudent to wait for a sustained move in either direction before traders start positioning for the pair’s near-term trajectory.

From a technical perspective, immediate support is pegged near the 1.2370-65 region, which if broken will reinforce the near-term negative outlook. The pair might then accelerate the slide further towards the 1.2300 round-figure mark before eventually dropping to the next major support near mid-1.2200s.

On the flip side, the 1.2460-65 regions now seems to act as an immediate resistance, above which the pair is likely to aim towards reclaiming the key 1.2500 psychological mark. Some follow-through buying beyond the 1.2525-35 area might trigger a short-covering move and lift the pair back towards the 1.2600 mark. The momentum could get extended further towards the very important 200-day SMA, around mid-1.2600s.

3) WTI Crude Oil Prices Turns Negative

Core bond trading was confined to well-known boundaries for most of yesterday’s European and US trading hours. A late plummet in oil prices sent WTI crude prices for delivery next month into negative territory. Traded volumes were light, but the current oil oversupply and lack of demand creates a problem of storage capacity. Risk sentiment took a hit (US equity indices -2%) and provided safe haven flows into core bonds. US Treasuries outperformed German Bunds. The US yield curve bull flattened with yields declining by 0.1 bp (2-yr) to 4.5 bps (30-yr). German yields added 2.1 bps (2-yr) to 2.9 bps (30-yr) across the curve. 10-yr yield spread changes vs. Germany widened by 3 bps to 6 bps with Greece (+10 bps) and Italy (+12 bps) underperforming in the run-up to Thursday’s EU Summit. Italian PM Conte warned for the risk of market contagion (and the existence of the euro zone) if EU leaders would fail to come up with a debt mutualization proposal.

Asian stock markets lose up to 2.5% this morning. Core bonds have an upward bias. The WTI crude oil contract (first delivery) for May has its final trading day. The June 2020 contract stabilizes around $21/barrel. The oil sector nevertheless remains something to follow up with the US (shale) business facing huge (debt) problems and talk about a bailout intensifying.

Today’s eco calendar contains German April ZEW investor confidence. Its close correlation with the Dax suggests that we might see some rebound. We fear that markets won’t be impressed though. Q1 earnings continue with amongst others Coca-Cola and Netflix. It could influence risk sentiment, though most companies will probably delay full year guidance because of the current high level of uncertainty. Other highlights this week are EMU PMIs and the European Council, both on Thursday. Europe remains hugely divided on the topic of debt mutualization to provide (fiscal) aid to tackle the current crisis. The European Commission’s EU budget could serve as flair to divert attention, but will have much less of an impact. We advise against joining the Easter risk momentum as we haven’t turned the corner in the coronacrisis yet. Stress on a corporate level could be the next domino.

From a technical point of view, the German 10-yr yield is trying to find a fresh equilibrium. For US yields, the Fed’s unlimited QE announcement is the de facto start of curve control probably reducing volatility. A trading range between 0.5% and 1% could open up.