Summary: The British Pound took a hammering to its lowest since March 26, plummeting to 1.2080 in early Sydney. Sterling closed 1.25% lower at 1.2105 on Friday in New York from its opening of 1.2230. Brexit negotiations on a new partnership between the UK and the EU were “disappointing” according to Michel Barnier, chief negotiator for the European Union. The talks were already on their third week. The US Dollar was generally stronger with Sterling and risk currencies bearing the brunt. The Kiwi led the slide New Zealand’s April Business Manufacturing Index slumped to 26.1 from 38 in March and 53.7 in February. Last week the RBNZ doubled its QE which pressurised New Zealand’s Kiwi. The Aussie Dollar slumped 0.94% to 0.6415 (0.6465 Friday) as Australia faced its own trade challenges with China. Tensions between the US and China ratcheted higher with both protagonists threatening to expand their nuclear arsenals. Against the safe-haven Yen, the Dollar dipped to 107.15 (107.26 Friday). The Euro was little changed, closing at 1.0820 from 1.0810.
Wall Street stocks retreated at the close. The DOW finished down 0.08% to 23,660 while the S&P 500 was trading at 2,860 (2,856).
Other data released Friday saw China’s Retail Sales fall to -7.5%, underwhelming forecasts at -5.9%. China’s Unemployment Rate rose to 6.0% in April from 5.9% (March) and expectations of 5.8%. the Eurozone’s GDP contracting to -3.8%, matching forecasts at -3.8%. US Headline Retail Sales fell to -16.4% in April from -8.7% previously, worse than expectations of -12.0%. Core Retail Sales plunged to -12.2% from -4.5%, underwhelming forecasts at -8.6%.
US Industrial Production for April contracted to -11.2% slightly better than forecasts of -11.3%. US Empire State Manufacturing Index slipped to -48.5, bettering expectations of -65.0.
On the Lookout: Economic data reports from the US were mostly better-than-expected apart from the important Retail Sales numbers. On Friday US bond yields edged up with the benchmark 10-Year treasury rate at 0.64%. The week ahead sees another economic data deluge with UK Employment, UK Retail Sales as well as Global Flash Manufacturing and Services PMIs, as well as several central bank heads speaking. Federal Reserve Chair Powell, BOE Governor Bailey, RBA Governor Lowe, are all speaking at engagements in the week ahead. Canadian Inflation and Retail Sales are also released in the middle of the week.
Today sees Japanese Preliminary Q/Q GDP, GDP Price Index, and Tertiary Industry Activity Index. UK Rightmove House Price Index, and Conference Board Leading Indicators are also out today. Germany’s Bundesbank releases its Monthly economic report.
Trading Perspective: The Dollar Index (USD/DXY) a favoured gauge of the Greenback’s value against a basket of six foreign currency maintained its ascendancy, closing modestly higher at 100.361 from 100.283. While US Headline and Core Retail Sales were gloomy, the Empire State Manufacturing Index, Capacity Utilisation, and Industrial Production numbers all bettered forecasts. Last week the Fed confirmed that negative rates are not an option. The US Dollar has also gained an element of safe-haven status during the current coronavirus outbreak.
Expect FX trade in Asia today to consolidate their recent ranges with the Dollar retaining its bid.
AUD/USD – Topping Out, Risk Sentiment Sours, 0.6370 at Risk, 0.6480 Caps
The Australian Dollar grinded lower in true Battler fashion to finish at 0.6415 in late New York, down 0.94% from 0.6465 Friday morning. Overall US Dollar strength as well as a souring of risk appetite weighed on the Aussie, preventing it from 0.6480 overnight. AUD/USD saw a high at 0.64735 and a low at 0.64020.
Escalating tensions between the US and China are also keeping the Aussie at bay. Over the weekend, a war of words between US President Trump and China’s Global Times’ Hu Xijin intensified. Both have sugge sting expanding their nuclear weapons. Australia faces its own trade tensions with China over China’s rejection of Aussie beef and barley exports. Which follows Scott Morrison’s call for an international inquiry into the source of the Covid-19 pandemic.
Fears over a second wave of Covid19 after Australia eased restrictions are also weighing on the Battler. Weighing on the Aussie Dollar as well is the weakness of the Kiwi. The one supportive factor is the speculative Aussie short bets which at the last reading of the COT report were -AUD 33,455.
Immediate support for the Australian Dollar lies at 0.6400. The next support level is at 0.6370, which at risk of trading, possibly breaking today. The next support level lies at 0.6340 and 0.6310. Immediate resistance can be found at 0.6440 followed by 0.6470 and 0.6500. Look for an initial trading range of 0.6375-0.6455 with the preference to sell rallies.
EUR/USD – Trading Range Stays Intact for Now, Risk Still Lower
The shared currency traded within familiar ranges between 1.07888 and 1.08513, finishing at 1.0820 in New York. The shared currency continues to see good demand around the 1.0800 level which is gradually being supplied by net speculative Euro long bets. On Friday, Euro area economic data were mostly in line with some better than forecasts. The Brexit stalemate has weighed more on the Pound than the Euro, at least for now. Any failure on a Brexit agreement is bad for both the UK and the EU.
EUR/USD has immediate support at the 1.0800 level followed by 1.0770. The next support level is found at 1.0740. Immediate resistance can be found at 1.0850 followed by 1.0900. Last week the EUR/USD traded in a range between 1.0775-1.0900 roughly. It continues to trade around the 1.0800 area. It will need to pull above that, test and close above 1.0900 to see a bigger topside move. A clean break of 1.0770 will see 1.0730. Look for a likely range today of 1.0770-1.0850. Prefer to sell rallies.
GBP/USD – On the Backfoot, No-Deal Brexit Fears Grow, 1.20 in Reach
Sterling ratcheted lower after Brexit fears continued to escalate following comments from Chief EU negotiator Michel Barnier after negotiations were called off. After three weeks, Barnier said that results were “disappointing.” Bank of England officials were also seen examining unconventional monetary policy measures following their meeting earlier this month. GBP/USD closed at 1.2105 in New York on Friday from its 1.2230 opening. In early Sydney this morning, Sterling slid further to a low at 1.2070, not seen since March 26. The UK also faces some big Covid-19 challenges which add weight to the sliding Pound.
GBP/USD has immediate support at that 1.2070 level followed by 1.2040 and then the psychological 1.2000 support level. Immediate resistance can be found at 1.2150 and then 1.2200. We reported last week the net speculative GBP short bets were increased to -GBP 12,005 from the previous weeks -GBP 6,681. The net amount is not large and represents 12% of the yearly short highs. Look for some high volatility in the British Pound as Brexit shares the headlines with Covid-19. Likely range today 1.2050-1.2170. Prefer to sell rallies but am prepared to trade both sides as vols ramp up.
