The USD is lower this morning against the EUR, GBP, and JPY, while trading a bit higher against the CAD. The USD came under pressure yesterday as the bounce in equity markets as well as hopes for a Covid-19 vaccine improved traders’ feelings for riskier currencies. Traders remain cautious ahead of central bank policy meeting announcements in the US on Wednesday and in Japan and Great Britain on Thursday. While no changes in interest rates are expected, comments by the central bank governors will be closely watched to get a look at any change in policy. This is the first FOMC meeting since Chairman Jerome Powell unveiled a shift toward greater tolerance of inflation, effectively pledging to keep interest rates low for a longer period. US equity futures are higher this morning, as traders look to extend Monday’s rally, which saw the DOW rise 327 points and the NASDAQ and S&P have positive performances as well. All three futures indices point towards a positive opening this morning, with the DOW expected to rise 140 points at the opening bell. Monday’s gains came after equity markets had their worst week last week since March. NASDAQ improved by 1.9% yesterday, while the DOW and S&P 500 rose more than 1% as well. As the FED begins their two[day meeting this morning, US Treasury yields have moved higher, with the 10-year note trading at 0.6691% and the 30-year bond trading higher at 1.4116%. The USD may remain under pressure ahead of the FOMC meeting with equity markets possibly moving higher.
EUR/USD is trading near its overnight highs this morning. The single currency has moved above the 50, 100, and 200-day moving averages and RSI has settled in around 56 after trading as high as 71 overnight. The next step for the EUR will be to test resistance levels slightly above where it is trading now. On the economic side of the ledger, the German ZEW headline numbers for September showed that the Economic Sentiment Index came in at 77.4 versus 69.8 expectations and 71.5 last. Meanwhile, the Eurozone ZEW economic sentiment for Sept stood at 73.9 vs. 62.8 expected and 64.0 last. ZEW President Professor Achim Wambach noted: “Stalled Brexit talks and rising COVID-19 cases could not dampen the positive mood. A negative outlook for the banking sector reveals concerns of a rising number of loan defaults in the coming six months.” These releases were EUR positive. The EUR continues to benefit from the European Central Bank's lax approach to the recent rise in the value of the currency. Officials have reiterated that the exchange rate is not a target of concern. As the equity markets appear to continue to rise, the EUR could benefit as well.
GBP/USD traded higher overnight and is near the overnight highs as we begin the North American trading day. Technically, the 50-day and 100-day moving averages have converged and the 50-day looks ready to cross above the 100-day, while RSI has steadily risen overnight, and is now just below the 70-level at 69. A break of the resistance level set on Monday could see the pound move higher. Traders are focused on the Bank of England meeting on Thursday and the central bank will take employment, the virus situation, and Brexit uncertainty into consideration when it announces its rate decision on Thursday. Investors also will expect to hear a fresh assessment of the economy. The Brexit bill passed its first hurdle. Prime Minister Boris Johnson's controversial Internal Markets bill, which knowingly violates the Brexit accord he signed only last year, passed the first vote with a majority of 77 MPs. Brussels laid down an ultimatum to London; rescind the bill by the end of the month or face sanctions. The legislation unwinds Johnson's consent to creating a separate customs regime for Northern Ireland from the rest of the UK, which allows for refraining from having a border between NI to the Republic of Ireland, which is part of the bloc. UK labor market statistics were mixed, with the unemployment rate rising from 3.9% to 4.1% in July, which is still a low level and has been helped by the government's furlough scheme, but jobless claims increased by 73,700 in August, which was better than expected.
USD/JPY is trading at its overnight low this morning as the currency pair has dropped well below the moving averages. RSI has risen slightly to the 36-level after spending most of the overnight trading at 30. As pressure hits the USD, the safe-haven JPY trade becomes popular and downward momentum could continue. According to the latest monthly Reuters Tankan survey, released on Monday, the mood amongst the Japanese manufacturing firms remained pessimistic for the 14th consecutive month, reflecting slow recovery from the coronavirus pandemic. Manufacturers’ morale mirrored poor sales in key sectors such as the auto and the construction industry. The Reuters Tankan sentiment index for manufacturers inched up to minus 29 in September from minus 33 in the previous month, still deeply pessimistic even though it marked the least gloomy level in six months. The service-sector index stood at minus 18, up from minus 23 in August, but sentiment among wholesalers, transport, and utilities weighed on broad business confidence. Negative USD sentiment may continue to benefit the JPY.
USD/CAD is trading higher this morning as lower oil prices are hurting the loonie. Technically, the moving averages have converged and RSI is trading quietly at the 42-level. As a commodity currency, the Canadian Dollar is affected by news from the oil industry and in its latest monthly report, the International Energy Agency, (IEA) has cut its forecast for 2020 oil demand growth, citing a treacherous path ahead, as weakened market sentiment coupled with an upsurge in coronavirus cases around the world out a dent in the oil demand. “We expect the recovery in oil demand to decelerate markedly in the second half of 2020, with most of the gains already achieved,” the IEA report revealed. Oil prices remain depressed as demand has been affected by the coronavirus and that has seen oil prices fall around 40% since the start of the year. In overnight trading, Brent crude futures were down $0.05 to $39.56 per barrel, while U.S. West Texas Intermediate crude futures were down $0.03 at $37.23 per barrel. It appears that the oil demand will continue to remain depressed as virus cases weigh on the economy, and it is expected that Brent and WTI prices will probably remain between the $35 and $40 level per barrel until demand in the US rises as we move into the autumn and winter seasons and heating oil demand improves.
The Mexican Peso is trading at a 6-month high versus the US Dollar as tech shares have led the way for higher risk appetite in the last few weeks. That said, a three-day sell-off in equity markets managed to halt the slide in the US Dollar, but the bounce was particularly weak against the Peso. Despite the Peso’s relative strength, the Mexican economy is predicted to shrink 10% this year, following a small contraction in 2019, leaving more than 34 million people out of work. Forecasts are not optimistic, as the impact of Covid-19 has led to an increase in poverty, which in turn has led to an increase in violence in the country. This has had a big effect on tourism, which accounts for more than 15% of Mexico´s GDP, adding more fire to the unemployment issue. Mexico is also struggling to control the spread of the coronavirus as the country has limited access to testing and has found it hard to keep people off the streets. The government has also been reluctant to inject a lot of stimulus into the economy, which isn’t helping the economy, and the Peso is losing its long-term attractiveness as a carry trade given its interest rate is being reduced to aid domestic spending. Looking ahead, this week has no major economic events in the calendar for Mexico. USD/MXN may remain sensitive to broader market risk themes and USD pressures, which could be aided by the FOMC meeting on Wednesday.
China and the European Union should be committed to peaceful coexistence, open cooperation, multilateralism and dialogue, and consultation, Chinese President Xi Jinping said yesterday, calling on the two sides to firmly promote the healthy and stable development of their comprehensive strategic partnership. Xi made the remarks while co-hosting a China-Germany-EU leaders’ meeting yesterday in Beijing via video link with German Chancellor Angela Merkel, whose country currently holds the EU’s rotating presidency, European Council President Charles Michel and European Commission President Ursula von der Leyen. This year marks the 45th anniversary of the establishment of China-EU diplomatic ties, and this was the second video meeting between Chinese and EU leaders in less than three months. It also comes after recent visits by senior Chinese diplomats to EU member states such as Italy, the Netherlands, France, Germany, Spain, and Greece. The two sides also vowed to accelerate the negotiation of the China-EU investment agreement and reaffirmed the goal of concluding the negotiation by the end of the year. China is the EU’s second-largest trading partner after the US, and the EU is China’s biggest trading partner with two-way trade totaling US$710 billion in 2019.
Stronger-than-expected activity indicators and the growing investor focus on inflation and fiscal risks are among the factors that have helped consolidate the view that, even though Brazil’s central bank did not close the door to additional rate cuts, the policy rate should remain stable at 2% in the foreseeable future. Among the most notable developments over the past month in Brazil is strong evidence of a faster-than-expected post-pandemic economic recovery and, on the inflation front, concerns regarding the widening gap between producer and consumer prices and, especially, the fast rise in food prices. Q2 GDP data, and preliminary data for Q3 such as the July/August results for retail sales, construction, industrial production, and workplace mobility data, point to a very sharp expansion in Q3 that could nearly offset the Q2 drop. Congress also enacted a partial extension of the household income-transfer program until December, while Covid-19 remains an impediment for full normalization. This should also contribute to support consumer demand beyond 3Q, and point to a relatively shallower recession in 2020, along with a strongly positive carryover effect into 2021. At this week’s policy meeting, on Wednesday, we expect the Brazilian central bank to match expectations and keep the policy rate steady at 2.0%. In that case, this would be the first time since mid-2019, when the SELIC rate stood at 6.5% that a policy meeting ends without authorities lowering the policy rate.