Daily Market Pulse

CPI release for April declined 0.8%


The USD continues to show strength as US bond yields move higher and an increasing safe-haven demand against the concern of a second coronavirus outbreak has traders buying USD. Aiding the dollar are comments from the Fed regarding the prospect of negative interest rates. Officials are saying that will not happen in the US. On the subject of negative interest rates, Atlanta Fed President Raphael Bostic said he is “not a big fan”. As many states plan to re-open, there is a concern of a second spike of new infections which has occurred in South Korea and Germany when their economies went back to work. Adding to the dollar move were US Treasury yields reacting to the need for the Fed to borrow roughly $3 trillion this quarter. Ten-year U.S. Treasury yields rose above 0.7% for the first time in a week overnight, before falling back to 0.6938%, while the 30-year bond was lower at 1.4011%. DOW Futures are expected to open slightly lower this morning, as concerns about re-opening are on most investors' minds. US CPI for April has been released and has declined by 0.8%. This is the largest monthly drop since the height of the financial crisis, when CPI fell 0.9% in October 2008, 1.8% in November, and 0.8% in December. Americans, whether they are working or not, are spending less. Core CPI, which excludes energy and food costs fell 0.4 percent in April, after falling 0.1% in March. This is the largest monthly drop in core prices since November 1982. As the consumer sector is buying less, Retail Sales are also expected to drop 10% in April, after falling 8.4% in March. Despite these poor numbers, the USD remains bid.


EUR/USD is lower this morning, rallying a bit after testing overnight support levels but still looking rather weak. Fears of a second wave of coronavirus in Europe rise as counties gradually re-open. The Reproduction Rate (R) of coronavirus has kept the pressure on the EUR. According to the latest statistics, the R level in Germany is at 1.07, which means that every person carrying the virus infects more than 1 on average. As China and South Korea show new “mini-waves” of infections, there is a fear that as European countries re-open this will occur as well. Spain, Italy, and France R levels are due out later today. The ongoing rift between the ECB and the German constitutional court continues and is affecting the EUR as well. What will the EU do when the PEPP funds run out in September? That is the big question and one that is weighing heavily on the EUR. 


GBP/USD remains under pressure this morning, as confusion continues regarding PM Johnson’s new lockdown restrictions. His latest address about the government’s plan to ease the nationwide lockdown lacked clarity. He is also facing a split in the cabinet regarding his plan to quarantine all travelers coming to the UK for 14 days. Another negative is the ongoing Brexit talks which are showing no progress at all. After testing overnight support levels, there has been a bit of a bounce in the cable, but sellers still are in control. Adding to the pound’s woes, the U.K. may be headed toward negative interest rates according to Deputy Governor for Monetary Policy Ben Broadbent. According to Broadbent, the monetary policy committee "are certainly prepared to do what is necessary to meet our remit with risks still to the downside.” These comments have put more pressure on the GBP.


USD/JPY is higher this morning as well, having tested some resistance levels overnight before falling into the middle of the trading range. Bank of Japan's Kuroda has said that the BoJ is ready to do whatever it can to beat the crisis and will continue cooperating with the government. According to Kuroda, the most important task for BoJ is to smooth corporate funding and stabilize markets. He also said that he doesn’t think the BOJ needs to worry about sharp credit contraction in Japan as banks have sufficient buffers. If the pandemic takes longer to contain or if a second wave of infections occur, the bank would need to scrutinize the impact on the financial system. The BoJ cannot directly intervene in Japan's real estate markets but their monetary easing steps, including their REIT buying, should help stabilize the real estate market. Traders seem to have exited the JPY safe-haven trade for the moment and are concentrating on the USD which could see a further move higher. The quick move upward in USD/JPY has put the pair in an “overbought” situation, so further gains are unlikely for the time being. Overbought or oversold situations usually lead to currency consolidation.


USD/CAD moved lower overnight as a surge in oil prices helped stem the tide of USD buying and strengthen the loonie. Brent crude futures move to a high of $30.11 a barrel, up $0.24, after falling on Monday. U.S. West Texas Intermediate crude futures were also higher, up $0.38 to $24.52. The Canadian dollar moved higher quickly overnight after oil prices received some support from Saudi Arabia’s comments to add to production cuts in June. Traders were quick to react to this announcement. As oil goes, so goes the Canadian dollar. USD buying bias has not as yet affected the Canadian Dollar, and it will be interesting to see how the markets react to US data releases later this morning. According to a report released from the Royal Bank of Canada, the Canadian dollar has “held up quite well in the face of the sharp drop in oil prices”. The RBC report also is optimistic that the Canadian economy will emerge from the virus in the months ahead.


China’s April Producer Price Index and Consumer Price Index were both expected to soften with producer prices slipping further into deflation. The data showed this to be the case as China April PPI came in at -3.1% YoY, which was worse than the -2.6% expected, and April CPI came in at +3.3% YoY, which was also worse than the expected +3.7%. US-China trade talks continue and despite requests from China, President Trump continues with his tough stance and his recent comments weaken the odds to reopen the phase 1 terms for China. A China National Health Commission spokesman said that the resurgence of new virus cases suggests that the relaxation of pandemic measures should not be relaxed yet. Five new cases were reported yesterday in China, the most since March 11th.


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