Daily Market Pulse

Stronger DOW, weaker USD as the week begins


The USD is lower against the EUR, GBP, and CAD while gaining against the JPY this morning. There is speculation that the USD will close the month with its worst August in 5 years, as comments by the Fed have continued to weigh on the greenback. US equity markets are higher this morning as the market looks to have its best August performance since the 1980s. A strong rally on Friday, enabled the Dow to erase its 2020 losses, as the market shave fully rebounded from their March 23 lows. With the Fed committed to keeping interest rates very close to zero for an extended period the equity markets should continue to benefit. Traders will begin to focus on Friday’s release of US Non-Farm Payroll and unemployment numbers. The U.S. is expected to add 1.3 million jobs and the unemployment rate is expected to narrow to 9.8%. This release will be talked about all week, but there are a few other economic releases to concentrate on before Friday. A new month starts tomorrow with the release of the ISM manufacturing index for August which should improve slightly to 54.7%, from 54.2% in July. On Wednesday, the Fed will release its Beige Book, and Thursday the weekly initial jobless claims will be released. Initially, it looks like all these numbers should be economically positive so we will see how the USD reacts moving forward. US Treasury yields are lower this morning, with the 10-year note trading at 0.7228% and the 30-year bond trading at 1.5010%. 


EUR/USD is trading close to overnight highs as the single currency looks to continue its run through resistance levels. The single currency is trading above the 50, 100, and 200-day moving averages, while RSI remains below the 70-level, presently at 65. EUR/USD has tested resistance earlier this morning and a breakthrough should see a test off the two-year high recorded in mid-August. The ECB meets next week and traders will begin to speculate how President Lagarde reacts to the moves last week by the Fed. The Fed’s dovish stance may continue to pressure the USD, while prospects of lower rates for a long time are already factored into the EUR’s price. Coronavirus cases continue rising in Europe, with French officials sounding more concerned than beforehand and Spain's situation worrying investors as well. For now, the deterioration still seems under control and is not hurting the euro. That could change, but probably not anytime soon. While risks remain to the upside move of the EUR, the trend continues to favor the upside.


GBP/USD is trading slightly higher this morning but has moved towards the lower level of its overnight range. Concerns about a break-down of Brexit talks and new taxes are weighing on the pound. Technically, the move lower over the last hour has seen the GBP dip below the 50-day moving average, while still trading above the 100 and 200-day moving averages. The sell-off has triggered a few stop losses and has RSI trading at 36, moving lower in the last hour. Brexit talks are taking center stage today and this is putting pressure on the pound. French Foreign Minister Jean-Yves Le Drian said that Brexit talks are stuck due to the UK's "intransigent and unrealistic attitude." His words came after David Frost, the UK's chief negotiator, said that he is ready to walk away from the negotiating table. We are getting closer to the end of the transition period, and with an accord, Britain would revert to unfavorable World Trade Organization rules. Also adding to pressure on the pound is Chancellor of the Exchequer Rishi Sunak is reportedly considering raising around GBP30 billion through taxes to plug a hole in UK finances. Apart from investors' dismay at the idea, fellow Conservative MPs have expressed anger at these prospects. The last reason for some pressure on the GBP is simply profit-taking. The GBP has taken full advantage of the USD weakness and on Friday rose to levels not seen since December 2019. Traders are taking advantage of this move and putting some money in the bank. As these three factors converge, we could see GBP move lower through the day.


USD/JPY is trading at overnight highs and looks primed to test resistance levels during the day. The move higher has seen RSI levels reach an overbought 73, while the currency pair trades above the moving averages. According to data from Japan’s Ministry of Economy, Trade, and Industry, industrial production grew 8.0% mom in July, well above the expectation of 5.0% mom. This was the quickest jump on record since these figures have been recorded in 1978. On the other hand, retail sales dropped -2.8% year-on-year in July, much worse than the expectation of -1.7%. Housing starts dropped -11.4%, better than the expectation of -13.7% year-on-year, while Consumer confidence edged down to 29.3, down from 29.5, missing the expectation of 29.4. Japanese Chief Cabinet Secretary Yoshihide Suga indicated that he would stand for the Liberal Democratic Party’s (LDP) leadership election, the Nikkei Asian Review, and Reuters both reported, citing sources familiar with the matter. Earlier today, Jiji news reported that the LDP decided to hold a leadership vote on September 14. Media opinion polls show that Suga remains the second-most popular contender to succeed Prime Minister (PM), Shinzo Abe. Former Defense Minister Shigeru Ishiba is the top favorite. USD/JPY may test higher levels.


USD/CAD continues to push lower, trading below the 50, 100, and 200-day moving averages, while RSI remains close to the 30-level, currently at 31. The loonie is taking advantage of higher oil prices overnight. Brent curse futures for November rose $0.27 to $46.08 per barrel, while US West Texas Intermediate crude futures rose $0.14 to $43.11 per barrel. Both oil prices are set to finish August higher with Brent set to post a fifth straight monthly gain. The markets are once again moving in a positive direction after shrugging off the impact of Hurricane Laura. The Canadian dollar was being supported by Friday's better-than-expected Canadian GDP report. The economy recorded a stronger than expected growth of 6.5% in June. The economic activity contracted sharply by 38.7% annualized during the second quarter of 2020 against 39.6% anticipated. Modest gains in oil prices should continue to provide an additional boost to the commodity-linked currency.


Banxico seems divided into the future path of monetary policy. Banxico released its meeting minutes, and the report showed that central bankers are divided on the future of monetary policy, as some believe there is no more room for interest rate cuts while others wish them to keep on coming. As a reminder, Banxico has cut rates 6 times this year, taking the benchmark from 7.25% to 4.50% in less than 9 months. Mexico’s economic data continues to show a slump in the economy, as data reported this week showed that the Mexican economy had shrunk 18.7% on an annualized basis in the second quarter of the year. Data on trade showed the industry had started picking up but uncertainty about the future of emerging market economies might keep future trade weak. There is limited upside potential in USD/MXN, which is likely to run into key resistance as soon as it attempts to push higher. This means short-term direction will be provided by Mexican fundamentals, with fear and overall uncertainty a big factor of any upside corrections. The outlook continues to be bearish in the medium term, but volatility is likely to creep up as we head into the new month, and traders must watch out for short-term reversions.


The official Chinese PMI Manufacturing number edged down to 51.0 in August, from 51.1, slightly below the expectation of 51.1. PMI Non-Manufacturing, on the other hand, rose to 55.2, up from 54.2, above the expectation of 54.0. Zhao Qinghe a senior statistician with the NBS noted “demand continues to recover, and the supply-demand cycle is gradually improving” with the new order index rising for the 4th month to 52.0. Trade also improved with new export orders rising 0.7 to 49.1. However, “some companies in Chongqing and Sichuan reported an impact from the heavy rains and floods, resulting in a prolonged procurement cycle for raw materials, reduced orders, and a pullback in factory production.” The data further reinforces the line of thought that suggests China's recovery remains on track, but is domestic consumption-led, with export markets still fragile as Covid-19 rampages across the globe.


Brazil reported 758 additional fatalities from the novel coronavirus yesterday. In Brazil, the world’s second worst-hit country after the US, the death toll reached 120,262, while the confirmed cases surpassed 3.84 million, including 41,350 new infections, according to the Anadolu news agency. According to the Brazilian Health Ministry, over 3.68 million people have so far won the battle against the virus in the Latin American country. With a population of over 211 million, Brazil is seen as the epicenter of the COVID-19 outbreak in the region. While the government has been accused of not doing enough to stem the spread of the virus, Vice President Hamilton Mourao has defended its handling, and instead blamed a lack of discipline among Brazilians for the failure of social distancing measures. Brazil’s vibrant financial center of Sao Paolo, with a population of nearly 46 million, is the most affected region in the country. Since it originated in China last December, the pandemic has claimed more than 842,500 lives. The US, Brazil, India, and Russia are currently the worst-hit countries. Nearly 25 million COVID-19 cases have been reported worldwide, according to figures compiled by the US' Johns Hopkins University.


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