23-Jun-2020

1) Dollar Falls Broadly Due To Return of Risk-On Trade
2) Aussie Snaps Losing Streak as Wall Street Posts Modest Gains
3) Markit UK PMI Surveys Preview: Consumers to business-can you hear me?

1) Dollar Falls Broadly Due To Return of Risk-On Trade

The greenback snapped its recent winning streak and ended lower across the board on Monday due to liquidation in long USD positions as well as return of risk sentiment as businesses globally start to reopen after the coronovirus pandemic lockdown restrictions. Gain in U.S. stocks and rebound in U.S. yields also boosted risk appetite.

Versus the Japanese yen, dollar swung broadly sideways in lackluster Monday’s session as focus was on euro and sterling. Price rebounded from 106.75 in New Zealand to 107.00 in European morning on cross-selling in JPY before retreating to 106.80 in New York on USD’s weakness and fall in U.S. Treasury yields and then moved narrowly.

The single currency found renewed buying after re-test of last Friday’s 2-week low at 1.1169 in New Zealand and rose to 1.1226 in Europe on USD’s weakness before retreating to 1.1204 on profit-taking. The pair then rallied to session highs at 1.1269 in New York and then moved sideways.

Reuters reported the euro zone economy may be in for more pain if measures aimed at containing the coronavirus outbreak are eased too soon, European Central Bank Vice President Luis de Guindos said on Monday.

On the data front, Reuters reported the European Commission said a flash estimate showed euro zone consumer morale improved to -14.7 this month from -18.8 in May. Economists polled by Reuters had expected a rise to -15.0.

Although the British pound extended its recent losing streak and fell to a 20-day low at 1.2336 shortly after Asian open, renewed buying interest emerged and cable rose to 1.2434 in European morning on USD’s weakness before retreating to 1.2381 on profit-taking. However, the pair then rallied in tandem with euro to session highs of 1.2477 in New York and traded at 1.2460 near the close.

Reuters reported the Confederation of British Industry’s headline industrial orders measure inched up to -58 in June from May’s 38-year low of -62, but remained far below its pre-COVID level, while export orders fell by the most since records began in 1977 at -79.

2) Aussie Snaps Losing Streak as Wall Street Posts Modest Gains

The Australian dollar benefited from broad based USD weakness overnight, with the US dollar index falling 0.6%, the AUD was able to raise over 60 pips from 0.6860 to 0.6920. The tight correlation between the AUD and global equity markets was once again evident as the S&P500 rose 0.7% on the day, whilst the NASDAQ100 also rose 1.2%, posting a record close in the process. AUD/NZD initially fell to 1.0630 as the Kiwi performed strongly however it did recover back to levels nearer to 1.0664.

On the domestic docket today, we have second tier data in the form of preliminary merchandise trade data for the month of May. Market participants don’t take much notice of the release as the data is not seasonally adjusted; it is therefore not expected to move markets. On the global front, we have a raft of PMI’s out of Japan, Germany, America and the Eurozone as well as industrial production numbers out of Taiwan. Further contractions are universally predicted across these releases.

Having bounced off lows of 0.6811 on Monday to now trade above 0.6900, traders will want to see a consolidation above this handle before moves to 0.7000 will be considered. On the downside, initial support is now seen at previous resistance level 0.6890 with a break below this opening up moves to 0.6840 (21 day moving average).

As we touched on above, we witnessed a reversal in risk sentiment throughout Monday trade which saw the USD sold off and risk assets such as equities and risky currencies rally. The reversal in risk sentiment also extended to commodity markets as oil, copper and gold all posted strong gains. These moves were seen as a sign of confidence from investors that the global recovery has begun and demand for these commodities will rebound.

Consistent with the shift in risk sentiment, the safe haven Japanese Yen underperformed, particularly in the crosses however the USD weakness saw USD/JPY trade sideways around the 107 handle. EUR/USD posted strong gains to trade around 1.1250 whilst a similar story was seen for GBP/USD, which closed the session near its daily high of 1.2460.

Global markets will now turn to the raft of PMI releases due out today which we outlined above. To finish out the week, investors will be looking to the RBNZ’s monetary policy decision on Wednesday before US GDP and employment figures on Thursday for direction.

3) Markit UK PMI Surveys Preview: Consumers to business-can you hear me?

The sterling has languished for the past two weeks from an unforgiving combination of Brexit and the stubborn coronavirus. It may get a lift on Tuesday if the economy can post a strong recovery signal from April’s pandemic economic low.

Purchasing managers’ indexes (PMI) from IHS Markit of London are expected to continue their rebound into June from the April scores that set record lows in the manufacturing and services surveys.

Manufacturing PMI is forecast to climb to 45 from 40.7 in May and 32.6 in April.  The index has been below the 50 demarcation between expansion and contraction for 11 of the 13 months since April 2019.

The index for services is expected to rise to 39.5 in June from 29 in May and 13.4 in April. Before the current plunge the low reading had been 40.1 in November 2008.

Though neither index is projected to move into expansion the farther the distance from the April lows the more secure markets will be that the pandemic collapse was a vicious but temporary contraction unlikely to bring on an extended recession.

The pound has been trending lower for almost two weeks after reaching a post-pandemic high of 1.2813 on June 10. During the March viral panic it had first climbed to a high of 1.3200 on March 9 and then fell precipitously over the next two weeks as the world’s financial markets desperately bought dollars and dollar assets, touching bottom on March 20 at 1.1412.

The recovery from that panic was as swift and in a week, March 27 the pound entered the 1.2200 to 1.2400 range that would last until early June.

April figures for manufacturing and industrial production were the worst on record as was the index of services which measures the addition of gross value in the sector.  Gross domestic product fell 20.4% in April another all-time low along with the claimant count for unemployment at 1.0327 million.

Retail sales, one of the few released statistics covering May, showed a promising recovery rising 12% after tumbling 18% in April, each the directional record.

Markets are waiting to be convinced the economic catastrophe that overtook the UK economy in March and April reversed in May and that the climb from the pit is proceeding apace.

Consumers have played their part, these PMI numbers will tell if businesses have received the message.   The sterling and FTSE are waiting for the answer.