Summary: Market optimism on the economic rebound from easing lockdown restrictions extended lifting risk appetite, equities, and currencies. Ongoing protests in America and Hongkong, and rising number of confirmed total global Covid-19 cases (6,339,005 latest count from Johns Hopkins USA) were once again shrugged off. The Australian Dollar outperformed yet again, climbing to 0.6898, January 17 highs, settling at 0.6895 (0.6795 yesterday), a gain of 1.6%. Against the safe-haven Japanese Yen, the US Dollar soared 1.03% to 108.70 (107.58). The Euro extended its rally against the Greenback to 1.1170 from 1.1135. Despite mounting concerns over Brexit, the British Pound rose to 1.25756 before easing to 1.2550 from 1.2492 yesterday. The USD/CAD pair hit two-month lows at 1.34837, climbing to 1.3517 (1.3575 yesterday) in late New York. Higher Oil prices also lifted the Canadian Loonie. The Dollar slipped against the Offshore Chinese Yuan (USD/CNH) to 7.1075 from 7.1250. The Greenback retreated against Emerging Market FX. USD/ZAR (Dollar-South African Rand) slumped 1.35% to 17.16 from 17.37 yesterday. Wall Street stocks rose for the third day. The DOW climbed 0.97% to 25,747 (25,503) while the S&P 500 added 0.80% to 3,084 (3,058).
Global treasury yields rose. The benchmark US 10-year yield was up 3 basis points to 0.69%. Germany’s 10-year Bund yield closed at -0.42% from -0.43% yesterday.
The RBA kept its policy and Cash Rate unchanged (0.25%) as was widely expected.
New Zealand’s Building Consents in May fell to -6.5%, bettering the previous months downwardly revised -21.7%. Swiss Retail Sales slumped to -19.9%, worse than forecasts at -4.9%. Spain’s Unemployment Change improved to 26.6K, bettering forecasts at 230.3K. UK Net Lending to Individuals in May fell to -GBP 6.9 billon, missing forecasts of +GBP 1.7 billion.
On the Lookout: Markets preferred to shrug-off the potential negative effects of ongoing protests, rise in confirmed global Covid-19 case as well as the US-China tensions. Risk appetite remains strong for the time being. The price action in the risk currencies and USD/JPY pair tell us that markets believe that the economic impact from these events will be limited.
Events and data releases today, depending on their outcome, could unsettle investors.
The Bank of Canada has its rate policy meeting today. The BOC is expected to keep its policy unchanged, and not increase stimulus. This is the last chair for Stephen Poloz (outgoing) as he hands the reigns to his successor, Tiff Macklem.
Australian data today kick off with the AIG Construction Index followed by Q1 GDP, which will be closely monitored. Australia’s Q1 GDP is forecast to have dropped to -0.4% from the previous quarters +0.5%. China rounds up Asian reports with its Caixin Services PMI.
Euro area reports kick off with Swiss Q1 GDP, and Euro-area Services May PMI’s (Spain, Italy, France, Germany) and the Eurozone Final Services PMI. Eurozone PPI and Unemployment Rate are also released. The UK follows with its Final Services PMI. US data round up the day with ADP Non-Farms Employment Change, Final Services PMI, Factory Orders and ISM Non-Manufacturing PMI.
Trading Perspective: While the US Dollar eased overall against its rivals, bar the Japanese Yen, its drop was more pronounced against the Risk and EM currencies. The risk leading Australian Dollar, outperformer for 3 days, could take a breather today. Markets should be wary of this risk rally which is based purely on sentiment. Any disappointment of expectations will see risk appetite sour. Any flash point from the riots in the US and Hong Kong, a second wave of Covid-19 cases in the US (due to the crowds in the protests) and the negative impact of the economic rebound will see a corrective move in risk assets and the US Dollar. “Lest we forget”, these risk events are still very much around us.
AUD/USD – Robust Rally Soon to be Tested, 0.69 Cents Resists
The Australian Dollar soared anew, hitting a fresh January 17 peak at 0.6898 from 0.6798 yesterday, easing to 0.6892 in late New York. Earlier Australia’s CBA Services Index rose to 26.9 from 25.5 in April and much better than forecasts at 0.13. AUD/USD jumped past 0.69 cents to 0.6916, settling currently at 0.6914.
Yesterday the RBA kept its policy unchanged. While the Australian central bank emphasized the need for accommodative policy, they indicated that interest rates will not increase until there is meaningful progress made on full employment. There were no fresh reports on the China-Australia trade relations where tensions have risen in the past week.
Australia’s Q1 GDP released today (11.30 am Sydney time) is expected to see the first contraction since the GFC in 2008. Expectations are for a contraction of -0.3 to -0.4% for Q1 from 2019 Q4’s +0.5%. If the number is better than -0.3%, we will see a test of 0.6920, and 0.6950. A larger contraction to -0.5% will see a corrective move lower to 0.6850, and 0.6820.
Look for the Aussie to consolidate today between a likely 0.6820-0.6920 range. Look to sell this rally. A correction south is due.
USD/CAD – Slide is Overdone, BOC Meeting Risks Higher, 1.3480 Base
The USD/CAD pair slipped to 1.34837, overnight and two-month lows before settling to finish in New York at 1.3515. This morning USD/CAD is trading at 1.3505. A build in risk appetite, higher Oil prices and a generally weaker US Dollar boosted the Canadian Loonie. The Bank of Canada meets today on interest rates and is not expected to increase stimulus, leaving its current policy and interest rate unchanged. The meeting will be the farewell of Stephen Poloz who will be succeeded by his former deputy, Tiff Macklem. Both are dovish leaning. Economic data has deteriorated significantly between the last two policy meetings. Any mention of negative rates will see USD/CAD soar.
Any souring or risk sentiment will weigh on the Loonie, also lifting USD/CAD higher.
USD/CAD has immediate support at 1.3480 (overnight low 1.34837) followed by 1.3430. Immediate resistance can be found at 1.3520 followed by 1.3570. Look to buy dips in a likely range today of 1.3470-1.3620.
EUR/USD – Profit-Taking Ahead of ECB to Cap at 1.1200, Risks 1.1050
The Euro extended its advance for the sixth day in a row, climbing to an overnight and early March peak at 1.11961 before easing to settle at its current 1.1185. Markets have been bulled up on the Euro ever since the announcement of an increase in the Pandemic Emergency Purchase Program (PEPP) of at least EUR 500 billion. Some are forecasting a rise of up to EUR 750 billion to EUR 1 trillion. The expectations are high and any disappointment, which are likely will see a corrective move lower on the shared currency.
We reported last week that net speculative Euro long bets were elevated to near one-year highs. Profit-taking will limit any Euro gains to the immediate resistance at 1.1200. The next resistance level can be found at 1.1240 followed by 1.1280. On the downside, support can be found at 1.1140 followed by 1.1110 and 1.1080. Look for a likely trading range today of 1.11-1.12, prefer to sell rallies. A corrective move back to 1.1050 could well be in the making.