Daily Market Pulse

USD safe haven buying continues


Yesterday was another rocky day for both the USD and the equity markets. Coronavirus concerns continue to grow in Florida, Texas, and Arizona and analysts believe there could be a second wave of cases throughout the US on the horizon. The jobless claims release also was a bit of a disappointment as an additional 1.48 million Americans filed for unemployment last week. Economists had expected this number to be 1.35 million, the second straight week that the number was worse than expected. The equity markets remained under pressure for most of the day until it was announced that U.S. banking regulators are going to ease restrictions created in the aftermath of the Great Recessions, which pushed bank stocks and the markets higher. The Federal Deposit Insurance Corporation announced that it will be loosening the restrictions from the Volcker Rule, allowing banks to easily make large investments into venture capital and similar funds. The Volcker Rule is part of the 2010 Dodd-Frank Act, which looked to prevent another financial crisis caused in part by irresponsible risk-taking at banks. The DOW ended up 300 points. But after the close, the Fed announced that their annual stress test of major banks showed some banks may be close to minimum capital levels due to the pandemic, so because of this, banks must suspend share repurchase programs and keep dividends at current levels for the third quarter. This has caused DOW Futures to fall over 100 points overnight and the market is expected to open lower this morning. Overnight, the USD gained against the EUR, GBP, and CAD, but fell against the JPY as traders continue to look at the USD as a safe haven. US Treasury yields are trading lower as the renewed outbreak in viral cases and disappointing jobless data had investors moving into bonds. The yield on the 10-year note fell to 0.6630%, while the yield on the 30-year bond fell to 1.4060%.


EUR/USD is trading off overnight lows, but still remains pressured as the market awaits a speech to be given by ECB President Christine Lagarde. The speech is expected to include comments on the current EU economic situation, as well as the potential for possible added stimulus. The battle between the ECB and the German Constitutional Courts continues as the ECB defied the court’s ruling earlier this month and added to their stimulus package. Lagarde is also expected to call on the politicians to get involved in providing aid for EU countries fighting to get their economies moving again. Technically, we see a bearish formation developing as the 50-day moving average has crossed the 100 and 200-day moving averages on the downside. Support levels have been tested overnight and with RSI levels around 50, there remains a possibility it will be tested again during the trading day. As we head into the weekend there is concern that coronavirus cases will grow and this will trigger a risk-off mood that would favor the USD and harm the EUR.


GBP/USD is trading in the middle of its overnight range having tested, fallen, then rebounded through strong support levels. Technically, the GBP/USD looks similar to the EUR/USD with the 50-day moving average crossing the 100 and 200-day moving averages. This bearish move comes as Brexit negotiations are set to resume next week and there is not much optimism here. According to the top UK negotiator David Frost, “some of the EU’s unrealistic positions will have to change if we are to move forward.” This pessimistic attitude ahead of the meeting is weighing on the pound. As negotiations begin next week, there are only six months left before the UK leaves the EU without an agreement and will be forced to accept World Trade Organization terms for 2021. Adding to the pound's woes is the risk-off sentiment caused by the surge in US coronavirus cases in the last few days. As traders remain concerned, safe haven USD trades emerge and this adds to the downward pressure on the GBP.


USD/JPY is trading near overnight lows as once again traders are turning to the JPY as a safe haven alternative to risk-on trades. There is some concern regarding the move in USD/JPY as the currency pair has moved into an oversold situation, with RSI levels dipping below 30. Overnight, Bank of Japan governor Haruhiko Kuroda said that “at this moment, we do not see the need to further lower the entire yield curve.” He added that the economy has been in an “extremely severe situation”, which has caused “considerable negative growth” in the second quarter. As the impact of the pandemic on the economy subsides, the Japanese economy is expected to recover to a normal growth path, which will allow the BOJ to curtail the measures taken to combat the virus. Kuroda also said the 2% inflation target is unlikely to be met in the short run. In economic news, Tokyo CPI was unchanged at 0.2% year-on-year, for June with matched expectations. Expect the USD/JPY to trade lower today as traders head into the weekend. 


USD/CAD is trading at overnight highs as technically the 50-day moving average has crossed the 100 and 200-day moving averages. As concern remains over the outbreak of viral cases in the US, the oil market seems to bounce around like a ping pong ball. After being pressured most of the overnight, oil prices are slightly higher as Brent crude futures rose $0.47 to $41.52 per barrel, while U.S. West Texas Intermediate crude futures are also higher gaining $0.42 to $39.14 per barrel. While both prices moved slightly higher, they will both post a slight decline for the week. Fears remain of a spike in virus infections in the US and to a lesser extent in Europe, which could stall oil demand. Florida and Texas, if forced to close down, would be a big deterrent on oil supply as those states are among the biggest gasoline consumers. As a commodity currency, the loonie is at the mercy of oil prices. Expect upward pressure to remain on the USD/CAD.


US-China relations remain tense as we have seen a sharp deterioration due to the coronavirus pandemic. While this fight will be more economic than military, it could have the same dire consequences. The conflict between the two super-powers has extended from a trade war to the financial markets and technology. Hopefully, the continued phase 1 trade agreement will help bring the two countries back to the table where calmer heads may prevail and agreements can be reached. It is to the benefit of both countries and the world that this occurs.


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