21-Jul-2020

1) GBP/USD: Stage Seems Set For A Possible Move Towards 1.2800 Mark
2) EUR/USD: Profit-Taking Kicks In After EU Recovery Fund Agreement, Bullish Bias Remains
3) Battle Between The Safe Havens: USD Vs JPY
4) AUD/USD Fails To Significantly Extend Upturn As Risk Sentiment Begins To Moderate

1) GBP/USD: Stage Seems Set For A Possible Move Towards 1.2800 Mark

The GBP/USD pair caught some aggressive bids on the first day of a new trading week and rallied around 150 pips from the Asian session swing lows, around the 1.2520-15. In the absence of any negative Brexit-related headlines, the emergence of some fresh selling around the US dollar was seen as one of the key factors driving the pair higher. The continuous surge in coronavirus infections in the US fueled concerns that the economic recovery will take much longer than initially expected kept the USD bulls on the defensive.

This comes amid the latest optimism over a potential COVID-19 vaccine, which remained supportive of the goodish bounce in the equity markets and further undermined the greenback’s relative safe-haven status. Oxford University said on Monday that early-stage human trials for its vaccine for the highly contagious disease – co-development with AstraZeneca – showed positive results. The pair jumped back above the very important 200-day SMA and the subsequent momentum took along some short-term trading stops placed near the 1.2625 region.

The strong intraday positive momentum seemed rather unaffected by dovish language from the Bank of England’s chief economist Andy Haldane, saying that we would need to think about further lowering of the cost of borrowing if there was a further negative shock to the economy. Haldane further added that the UK’s economic recovery is still looking V-shaped, which inspired bullish traders and provided an additional boost to the British pound.

The pair finally settled near the top end of its daily trading range and broke through the 1.2665-70 supply zone during the Asian session on Tuesday. The pair shot to near six-week tops, with bulls now eyeing a sustained move beyond the 1.2700 round-figure mark. There isn’t any major market-moving economic data due for release on Tuesday. Hence, the broader risk sentiment will continue to influence the USD price dynamics and produce some meaningful trading opportunities.

From a technical perspective, the overnight upsurge confirmed a near-term bullish breakthrough a symmetrical triangle. Adding to this, the pair has now found acceptance above the 23.6% Fibonacci level of the 1.2076-1.2813 positive move and hence, seems poised to appreciate further. Bulls might now aim to surpass the 1.2700 mark and test June daily closing highs resistance near the 1.2745 region. Some follow-through buying has the potential to lift the pair further towards June monthly swing highs – levels just above the 1.2800 mark.

On the flip side, the 1.2670-65 resistance breakpoint now seems to protect the immediate downside. Any dip below the said resistance-turned support might still be seen as a buying opportunity and help limit the downside near the 1.2600 area. This is closely followed by the 1.2580 region (200-DMA) and the triangle support, around the 1.2545-40 region. Only a sustained breakthrough the latter will negate the bullish outlook, rather prompt some aggressive technical selling and pave the way for a further downside.

2) EUR/USD: Profit-Taking Kicks In After EU Recovery Fund Agreement, Bullish Bias Remains

The shared currency started the week on a positive note and remained well supported by expectations of an agreement on the massive EU pandemic recovery fund. This comes amid fresh hopes of a potential COVID-19 vaccine, which drove flows away from the safe-haven US dollar. Oxford University said on Monday that early-stage human trials for its vaccine for the highly contagious disease – co-development with AstraZeneca – showed positive results. This, in turn, assisted the EUR/USD pair to gain some follow-through traction on Monday, marking its sixth day of a positive move in the previous seven.

The pair finally settled near the top end of its daily trading range and popped to the highest level since March 9 during the Asian session on Tuesday. The uptick was sponsored by reports that the European Union has reached a highly-anticipated deal on the €750 billion coronavirus recovery fund – aimed at aiding the region’s worst-hit economies. Given that the optimism has been flowing into the single currency over the past few weeks, the market reaction was pretty much a ‘buy the rumour, sell the fact’ play.

The pair failed to capitalize on the early uptick, rather witnessed a modest pullback and was last seen trading below mid-1.1400s. As investors digest the latest developments, the USD price dynamics might not turn out to be an exclusive driver of the pair’s momentum amid absent relevant market-moving economic releases, either from the Eurozone or the US.

From a technical perspective, the near-term bias still seems tilted in favour of bulls and any subsequent slide might still be seen as a buying opportunity near the 1.1400 mark. That said, a convincing breakthrough could drag the pair further towards the 1.1330 horizontal support en-route the 1.1300 mark.  Some follow-through selling now seems to pave the way for further weakness towards the 1.1260 horizontal zone before the pair eventually drops to sub-1.1200 levels.

On the flip side, sustained move back above mid-1.1400s will set the stage for a move towards challenging YTD tops, just ahead of the key 1.1500 psychological mark. Above the mentioned level, bulls are likely to lift the pair further towards 2019 yearly swing highs, around the 1.1570 region.

3) Battle Between The Safe Havens: USD Vs JPY

The Dollar Index at the peak of the Coronavirus lockdown rallied, almost touching 103 – the highest level since 2017. The Dollar index shows the relative strength of the USD to a basket of other currencies. However, a couple of currencies strengthened as everyone was hoarding the USD – The JPY.

The strength in the US dollar was primarily due to market participants selling risky US-based assets such as US equities due to the market turmoil. As investors and traders sold their assets, they were getting paid in US dollars, pushing the US dollar demand.

With the appreciation of the US Dollar relative to other countries but the Japanese Yen, there was a net increase in demand for the Yen relative to the US Dollar. There are many factors as to why the Japanese Yen appreciates during times of uncertainty, with one factor explaining that net demand increase – Japanese citizens’ net foreign assets peaked to 726 Billion in 2019. However, once risk-off events occur, there is a repatriation of those foreign assets (often denoted in US Dollars) bank into their home currency, the Yen. Although Government Debt to GDP is around 230%, Japanese citizens do not share this trait of excess debt. As the New York Times stated, “The Japanese Government is in deep debt, but the rest of Japan has ample money to share.”

Another reason may be due to traders winding down their “positive carry” trade. In short, by buying a currency with a positive yielding interest rate and shorting a currency with an interest rate less than the currency you purchased, the overnight swap fee is positive. This is because the interest you gain by holding the former currency is less than the interest you pay shorting the latter currency. With the Bank of Japan having negative interest rates since 2016, it has been a popular short for the carry trade with currency with a relatively higher interest rate like Australia. However, in risk off events such as the Coronavirus, positive yielding currencies tend to get their respective central banks cutting rates, making the carry trade less profitable. Therefore, traders cut their positions, which requires them to cut their positions, buying back the Yen they shorted, increasing demand.

However, one of the main reasons the JPY appreciated against the USD during peak lockdown was because people believe that it is a safe haven. It does not necessarily matter why it is, only that people believe it is. If you know the relationship between risk-off and the Yen’s appreciation, then you assume it to be true.

Since the market has generally been risk on/off due to the Coronavirus, it would be interesting to see whether the Yen has played out as a safe haven. If we take 20th March as the start date (peak of the Dollar index this year) and compare the prices of the SP500 and the USD/JPY pair, we find a correlation of -0.498 (~-0.5). This means on average, a 1% increase in the market, there is a 0.5% decrease in the JPY (vice versa). This shows a relatively strong relationship between risk-on and risk-off assets as off late. In comparison, the average correlation between the SP500 and the USD/JPY pair has been around -0.28.

4) AUD/USD Fails To Significantly Extend Upturn As Risk Sentiment Begins To Moderate

The Australian dollar crept back above 0.70 US cents through trade on Monday, buoyed by an uptick in risk appetite. Investors chased risk assets higher following reports further COVID-19 vaccine trials showed promising results. AstraZenica, in partnership with Oxford University, released results of trials that covered over 1,000 patients all of whom generated antibodies to the virus as well as T-cells which seek out and kill already infected cells. With no serious side-effects reported researchers will move to the next stage of clinical trials, upsizing the number of participants in the hope of having a finished product ready for delivery to key healthcare workers and those most vulnerable to the disease by years end. Having pushed back through 0.70 the AUD touched intraday highs at 0.7020 before leveling out and trading sideways into this morning’s open.

Attentions remain with the race for a COVID-19 vaccine as risk demand continues to steer direction. With investors largely ignoring the slew of negative data points and dire headlines any sign a vaccine will be ready sooner than first expected will help drive the risk on tone and support a higher AUD. That said, while the dollar has edged higher through the last 2 weeks the AUD has struggled to extend gains beyond 0.7020 with investors reluctant to extend gains amid heightened uncertainty. Current rallies are not supported by the same level of conviction as the rally of April and May and as risk sentiment moderates the threat of a slower economic recovery amid renewed restrictions across Victoria and NSW could prompt a correction leading through Q3 ad Q4.

The USD edged lower through trade on Monday amid a backdrop of optimism driven by positive COVID-19 vaccine trials and a resurgent Euro. The Euro touched four-month highs, jumping above 1.1450 after EU leaders agreed on distributing 390 billion of the 750 billion proposed recovery fund as grants to the worst hit member states while the remaining 360 billion will be parceled into low interest rate loans. The proposed agreement is a huge step forward in a united Europe and bolstered markets hopes the EU will continue to be proactive in tackling the problems raised by the COVID-19 crisis. Having touched intraday highs at 1.1467 the single currency opens marginally lower at 1.1444.

With little of note on the macroeconomic docket this week, attentions remain with fiscal support plans and COVID-19 headlines. Discussions between democrats and republicans regarding a proposed 1 trillion dollar economic relief bill continue through the week with delays possibly adding to safe-haven bids on the dollar.