The market awaits the President’s comments today regarding Covid-19, technology, and his response to China’s new security law for Hong Kong. Secretary of State Mike Pompeo did announce that Hong Kong had lost its autonomy and would no longer warrant special treatment by the United States. Additionally, New York Fed President Willams dismissed the negative interest rate idea saying “We have other tools that I think are more effective and more powerful to stimulate the economy.” He also commented that the consumer will be the biggest question mark for the economy saying “How long will people take to really want to take advantage of tourism and other things?” Dallas Fed President Kaplan expects the economy to grow in the second half of 2020 and 2021 as consumers return and re-engage in the economy. He expects the unemployment rate to fall to 10-11% by year-end and to 7% by the end of 2021. Traders will react positively to this as they look to the release of jobless claims falling for the eighth consecutive week as good news. DOW Futures are lower this morning pointing towards a negative 100-point opening. US Treasury yields are lower this morning as well, with the 10-year note trading at 0.6640% and the 30-year bond trading at 1.4288%.
EUR/USD has hit a two-month high as traders hope for a fiscal boost in Europe and US-China tensions push the USD lower. Technically, the EUR has broken through several resistance levels in overnight trading and is currently in an overbought situation as EUR/USD RSI sits at 82. Any number above 70 indicates the currency is “overbought” and a reversal of position is possible. The main reason for the jump in the single currency is the European Commission’s plan to add EUR500 billion in grants which would be funded by mutual borrowings. France and Germany are on board but there is concern that Austria, Netherlands, Sweden, and Denmark may continue to voice objections over this plan which may cause a correction in the EUR. Concerns over the European economy remain for traders.
GBP/USD is also higher this morning, breaking resistance levels as USD pressure has helped the cable as well. The UK government announced that they were relaxing restrictions and would now allow groups of six to congregate in public. Brexit uncertainty continues as nothing has changed regarding getting a deal in place. The risk continues that the UK will fall back on World Trade Organization rules beginning in 2021. The specter of negative interest rates continues to hang over the British economy as BOE Governor Bailey and Chief Economist Haldane have kept the door open for that possibility, but it seems to be placed on the back-burner for the moment. Lastly, the political scandal regarding UK advisor Dominic Cummings seems to be fading away as well. The last day of the month trading moves could affect the pound as uncertainty over President Trump’s speech will add to volatility.
USD/JPY has come under some heavy selling pressure as traders seek safe-haven trades. Technically support levels have been broken and the currency pair has fallen to two-week lows. This latest move of the USD/JPY has seen pushed the RSI level lower to 20, well below the oversold level of 30. As markets prepare for President Trump’s news conference later today, the possibility that his sanctions will not be as strong as expected could see a reversal of USD/JPY positions. USD/JPY is now trading below the 50, 100, and 200-day moving averages. In economic news overnight, core consumer prices in Tokyo rose by 0.2% in May from a year earlier. The core consumer price index for Japan’s capital, which includes oil products but excludes fresh food prices, compared with economists' median estimate for a 0.2% annual fall. The Tokyo Consumer Price Index is released by the Statistics Bureau and is a measure of price movements obtained by comparison of the retail prices of a representative shopping basket of goods and services, excluding fresh food. This index captures inflation in Tokyo. The purchasing power of JPY is dragged down by inflation. Generally, a high reading is seen as positive for the JPY.
USD/CAD is also lower this morning, despite a fall in oil prices overnight. Brent crude fell $0.25 to $35.04 per barrel, while US West Texas Intermediate crude was down $0.53 at $33.18 per barrel. The reason for the lower prices was due to US inventory data showing little demand for fuel in the last few days. USD/CAD has traded pretty quietly overnight with the move lower occurring in the last few hours. Most believe this move is due to US-China tensions as well as failure to break resistance levels. Technically the currency pair is now trading below the 50, 100, and 200 moving day averages RSI levels are approaching 30, but USD/CAD is not yet in an oversold position. Canada's GDP is expected to fall to around 10% annualized for the first quarter of 2020, which is worse than the US number but better than the Eurozone number. A print of single-digit contraction would be positive for the loonie.
China announced on Thursday that it plans to introduce a new national security law in Hong Kong which is expected to ban sedition, secession, and subversion against Beijing. It will also enable mainland Chinese national security agencies to operate in the city for the first time. This has prompted a strong response from the US and a press conference later today by President Trump is expected to include sanctions against China. China has stated overnight that it will take necessary countermeasures against any meddling of its internal affairs regarding both Hong Kong and Taiwan. Analysts are waiting to see how these moves by China affect the relationship between President Trump and Xi.