Daily Market Pulse

Coronavirus resurgence dampening the pace of the US economic momentum


As the northeastern part of the US braces for the season’s first hurricane, the viral pandemic remains in the eye of the “economic storm”. While the number of cases in the U.S. seems to have stabilized, Richmond Fed President Barking said that the coronavirus resurgence is dampening the pace of the US economic momentum and the path of the economy depends critically on the path of the virus. On the data front, yesterday, the Institute for Supply Management’s (ISM) manufacturing PMI came in at 54.2 for July, up from 52.6 in June and the reading signaled a faster-than-expected expansion for the sector. Economists that were polled by Dow Jones expected a print of 53.8 for last month. The USD gained in trading yesterday as well, as investors unwind positions after the weakest trading month in a decade The dollar index, which measures the greenback against a basket of leading currencies, posted a more than 4% decline for July, its biggest monthly drop since September 2010. The weakness had been tied to market expectations of further easing by the FED and according to analysts, sentiment was overdone. US equity markets also finished higher yesterday as the DOW finished up 238 points. After gaining yesterday, the USD is back under pressure against the major currencies as US lawmakers continue to haggle over a coronavirus relief deal. DOW Futures traded quietly overnight after yesterday’s rally and are expected to open close to flat later this morning. U.S. Treasury yields are lower this morning, with the 10-year note trading at 0.5592% and the 30-year bond trading at 1.2374%. Focus today will remain on Congress regarding the stimulus package. Continued failure to come up with an agreement will weigh on the USD.


EUR/USD is trading higher this morning, taking advantage of the pressure on the USD. Technically, the EUR bounced off support levels and is once again trading above the moving averages. RSI currently is around. 62, so the bullish sentiment looks to continue. Coincidentally, the EUR is trading around the level where the currency was launched back in 1999. Expect traders to take advantage of the impasse on fiscal relief in the US. According to House Speaker Pelosi, no agreement is expected to occur this week which will add pressure to the USD. The longer the impasse, the more pressure on the economy, the more likely the FED will act and this will weigh on the USD. Looking at the viral flareups in Europe, they are occurring but seem to be under control. Spain reported a drop in unemployed workers of around 90,000 which was unexpected and benefitted the EUR. Expect the EUR to remain better bid throughout the day.


GBP/USD is also trading higher this morning, taking advantage of the pressure on the USD. Moving averages have converged and there is concern that the move higher in sterling could be a “dead-cat bounce”. At the moment, momentum remains positive but that could change quickly. RSI is trading around 45. Concerns over the coronavirus remain and talks of a London lockdown remain a possibility. According to officials, this is only considered to be a worst-case scenario, but the mere idea of adding new limitations to one of the world’s financial capitals could weigh on the pound. Because of the rise of infections, Prime Minister Boris Johnson is once again considering slowing down the re-opening of the economy. The pound could also see pressure due to a lack of progress in both Brexit talks as well as negotiations with the US on a new trade agreement. Look for GBP to feel some pressure if it moves higher today.


USD/JPY is trading mid-range this morning, as the upside move has not seen any follow-through. Yesterday’s move upward occurred after 50 and 100-day moving averages crossed the 200-day moving average, but overall USD weakness has capped the upside for the time being. RSI is at 50 and range trading in USD/JPY could be the move for today. Overnight in an interview with the Yomiuri newspaper, BoJ Governor Haruhiko Kuroda warned that risks to economic recovery in Japan remain high. He added concern over the increasing coronavirus infections outside of Tokyo. The central bank is also considering extending the March 2021 deadline for lending facilities that support companies hit by the pandemic. Kuroda also reiterated that options of further easing, including expanding the loan scheme, cutting short-, long-term rate targets, ramping up ETF buying remain on the table for helping the economy through this pandemic. There was some positive economic news out of Japan yesterday as Tokyo CPI climbed to 0.6% year-on-year in July, up from 0.3%.


USD/CAD is lower this morning as the 50-day moving average has crossed the 100-day moving average to the downside and technicals remain bearish. RSI is at 45 after trading a bit lower overnight. Oil prices are on the rise and that has also benefitted the “loonie”. As economic data around the globe was positive yesterday, traders moved oil prices up nearly 2%. While the concerns over supply and demand remain, yesterday was a very positive day for oil. Brent crude futures rose $0;86 to $44.38 per barrel, while West Texas Intermediate crude futures rose $0.74 to $41.01 per barrel. As the industrial sectors around the globe pick up the oil demand will continue. Concerns are there regarding oversupply if economies are forced once again to shut down or slow down. Look for USD/CAD to test some longer-term support levels today as long as commodity prices continue on the upswing.


Mexico has overtaken the United Kingdom as the country with the world's third-highest coronavirus death toll - more than 46,600. Late last week, a multibillion-dollar agreement with the United Nations was announced to buy medical equipment and supplies. Distance learning will begin for more than 30 million Mexican school children Aug. 24, but a return to classrooms will remain an uncertain goal, the country’s education secretary said Monday. USD/MXN has broken through resistance levels and is now trading near an overbought condition as RSI is at 70. There were calls for the Assistant Health Secretary to resign but he will continue on despite 9 out of Mexico’s 32 state governors calling for his ouster. Mexican President Andres Manuel Lopez Obrador is being blamed for “erratic handling of the epidemic and lack of efficient response”. The government has given mixed messages about wearing facemasks and the President rarely wears one. There are continuing concerns over the government’s handling of when states can re-open businesses. 


US-China tensions remain high as the Chinese state media has labeled the U.S. a “rogue country” and has said the potential sale of TikTok to Microsoft is nothing more than a “theft”. The state-backed China daily said there are “plenty of ways to respond to the US is it carries out its planned smash and grab” of TikTok which is owned by Beijing based ByteDance. TikTok has been under pressure from the US government which accused the Chinese owned app of collecting data on Americans and passing it on to the Chinese government. This has been denied by TikTok and the Chinese. Tensions between the US and China have continued to rise and some news commentators are calling their relationship the “new Cold War”. Technology remains a key part of the dispute between the two nations, with TikTok the latest piece of the puzzle. 


Things are looking up for the Brazilian economy as a survey of central bank economists conducted by Reuters showed the average forecast for 2020 GDP now showing a decline of only 5.7%, compared with a decline of 6.5% a month ago. While it would still represent the steepest annual downturn on record, it is the most optimistic outlook since May. Central bank President Roberto Campos Neto said last month that the bank's own -6.4% GDP call for this year was too pessimistic, and Economy Ministry officials are confident the contraction will be closer to the government's -4.7% forecast. Brazil’s central bank is set to cut its key interest rate to a record low of 2.00% on Wednesday in a final 25 basis points move to cushion an economic collapse amid the worst COVID-19 upsurge in the world outside the United States, a Reuters poll showed. Brazil’s central bank’s decision “could be accompanied by signaling that there is no more space for conventional tools,” according to economists at HSBC Global Research in Mexico City.


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