Daily Market Pulse

USD remains under pressure as gold, equities rise


Yesterday, US equities closed higher for the third day. Also, the USD lost ground to the major currencies as investors moved to the sidelines as they await fresh news. News that the US Congress has been unable to reach a deal over the next aid-package weighed on the dollar. Democrats and Republicans are pointing fingers at each other for the lack of progress after over 30 million Americans lost their $600 benefit last week. Odds of a deal being struck this week are unlikely, however, there was some positive press in the afternoon as it looked as if talks between both sides were moving in the right direction. The failure to approve the new stimulus package are weighing on the greenback. Meanwhile, the coronavirus continues to take its toll on the US as the country continues to report, on average, roughly 60,000 new cases per day. While no new restrictive measures have been announced, it is still a major negative factor for the greenback. Tensions remain between the US and China and are now focused on the TikTok app. President Trump has given Microsoft 45 days to come up with a deal. The USD is lower this morning as stocks, bonds, and precious metals are all higher. Gold has hit an all-time high, trading above the $2,000 level. DOW Futures are up around 160 points, indicating a positive opening later this morning. After trading near lows not seen since March, US Treasury yields are slightly higher this morning with the 10-year note trading at 0.5216% and the 30-year bond trading at 1.2055%. Without an answer on the stimulus package, expect the USD to remain under pressure.


EUR/USD is trading near overnight highs as traders reject the USD. Eurozone retail sales rose 5.7% month-on-month in June, just slightly below the expected 5.9%, while retail sales rose 1.3% year-on-year in June, beating the expectation of -0.5%. Any further moves higher today will depend on reaction to US date as ISM non-manufacturing PMI for July is due later today and is expected to show a 60 reading after previously coming in at 66. Technically, the EUR has broken through resistance levels and looks to test last week’s high and then possibly move towards levels not seen since May 2018. Adding momentum to the Euro’s rise is the recently agreed-upon deal on the European Recovery Fund, which has eased political fears in the Eurozone as well as the region’s ability to have reigned in the coronavirus. 


GBP/USD is also higher as traders await the Bank of England meeting tomorrow. This meeting isn’t expected to bring any major policy decisions, and analysts expect a limited reaction. While the GBP is enjoying some positive movement due to the pressure on the USD, one cannot ignore the fact that the UK economy has not recovered as well as their neighbors across the channel as well as the lack of progress in Brexit negotiations. Market analysts would like to see the BoE add more QE and support economic recovery. Additionally, traders would like to get a more concrete answer regarding negative interest rates. Previously, Bank of England governor Andrew Bailey has stated that negative interest rates remain under consideration. Traders want a definite response to the question and may get that at the governor’s press conference following the meeting. Any comments regarding lower rates could be sterling negative. 


USD/JPY is also trading lower this morning, but has recently moved towards the higher end of the overnight range, as Japanese Economy Minister Yasutoshi Nishimura said in a statement earlier today that “the COVID-19 infection state has now developed into a major second wave and swept the country.” While this remains a concern for Japan, Nishimura, who heads the response team, has said at the present there is no need for a major lockdown. Japanese Yen has strengthened over the last few days as USD selling continues, and this should continue based on declining moving averages. There could be some reversal as the currency pair tests lower support levels but overall the market is expected a lower USD/JPY. It seems the Covid virus is damaging the support for Japan’s Prime Minister Shinzo Abe, according to Bloomberg. While Japan’s total death toll remains close to the number the US sees in a day, the public fears Japan may be sitting on a ticking time bomb. Abe’s approval slid to a record low of 35.4% in a poll published by JNN earlier this week. More than 60% of respondents said Abe should declare a second state of emergency to bring infections under control -- something his ministers have rejected. The PM has come under fire for failing to hold a press briefing since June, but his spokesman says he is in good health. Any possibility of PM Abe’s leaving office could affect the JPY. 


USD/CAD is trading near overnight lows as a combination of factors has seen the loonie strengthen. A move slightly higher in oil prices, as well as stronger economic numbers, has benefitted the Canadian Dollar. Markit Manufacturing PMI for Canada rose more than expected in July. The economic activity in Canada's manufacturing sector expanded at a modest pace in with the IHS Markit Manufacturing PMI coming in at 52.9. This reading followed June's print of 47.8 and beat the market expectation of 44.1 by a wide margin. According to analysts, production volumes expanded at the fastest pace for nearly two years, helped by a tentative recovery in manufacturing sales as customers restarted spending amid an easing of COVID-19 restrictions. Oil prices are slightly lower this morning after finishing yesterday’s trade at highs not seen in months. Brent crude futures were slightly off at $44.27 per barrel after reaching levels yesterday not seen since March 6, while US West Texas Intermediate crude futures were trading at $41.53 per barrel, after closing at its highest level since late July. Higher oil prices mean stronger CAD. Add better than expected economic news and the USD/CAD could continue its downward trajectory.


USD/MXN rose above a pivotal resistance level in trading over the last 24 hours, opening to door to more gains. There has been some profit-taking slowing the USD/MXN rise, but a retest of these levels and beyond is likely. The 50 and 100-day moving averages are trading above the 200-day moving average, while the RSI level is moderately low around 45. Having broken these levels, the USD looks ready to extend gains, after reaching a level not seen in the last month. Failure to break through resistance could occur as the USD rally that was seen in all currencies seems to have been short-lived.


China’s Caixin PMI Services dropped to 54.1 in July, down from 58.4, missing expectations of 56.8. The PMI Composite dropped slightly to 54.5, down from 55.7. According to Wang Zhe, Senior Economist at Caixin Insight Group, “Both the manufacturing and services sectors continued recovering, especially manufacturing. New orders kept increasing and the backlog of work also rose. The gauge for business expectations remains high, suggesting that companies are confident about the economic recovery.” Overseas demand continues to be a troubled area for both sectors. Employment is still a key problem. The combination of expanding demand and production with shrinking employment has dogged the economy for several months. On a positive note, the US and China will have representatives meet to assess Phase One of the trade agreement. After weeks of clashes on other issues, this meeting is being looked at as a positive development.


In July, the Brazilian real, benefitted from the improvement of external and domestic markets and appreciated against the USD. According to analysts, the improved political and economic outlook may lead the USD/BRL to even lower levels by year-end. One of the reasons for economic recovery is the re-opening of the economy in several parts of Brazil, although the pandemic is still far from control, it has stabilized at a high level. The better political/economic environment has improved the popularity of the president as around 30% assess the government positively. Altogether, the political noise and odds for the presidential impeachment almost vanished. The central bank of Brazil is expected to lower interest rates from 2.25% to 2.0% today.


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