Market appetite improved during the US session, with the optimism rolling into the Asia trading today, perhaps as investors continued to place more bets on a potential economic recovery. As for today, focus is likely to fall on the preliminary PMIs for June, while tonight, during the Asian morning Wednesday, the RBNZ will announce its monetary policy decision.
The dollar traded lower against all but one of the other G10 currencies on Monday and during the Asian morning Tuesday. It underperformed the most versus SEK, GBP, AUD, and NZD in that order, while it gained slightly only against JPY.
The weakening of the dollar and the yen, combined with the strengthening of the risk-linked Aussie and Kiwi, suggests that market participants traded in a risk-on fashion, at least for the biggest part of the day. Looking at the equity world, we see that major EU indices traded in the red, perhaps due to fresh record on coronavirus infections on Friday, as well as another 44% tumble in Wirecard’s stock as the company said that a quarter of its assets that auditor EY was unable to account for probably did not exist.
That said, the broader market appetite took a 180-degree turn during the US session, with all three of Wall Street’s main indices closing positive. The upbeat morale rolled over into the Asian session as well. It seems that, once again, investors placed more bets on a potential economic recovery as governments around the globe continue to ease their lockdown measures, despite being concerned over the latest surge in coronavirus cases. New York City celebrated the lifting of several restrictive measures, while White House economic adviser Larry Kudlow said that there is no second wave and that widespread shutdowns across the country are unlikely.
Apart from headlines surrounding the coronavirus, we also got some on the US-China trade saga. Equities and risk linked assets came under selling interest during the Asian session today, after White House trade adviser Peter Navarro said that the trade deal with China is “over”. However, Kudlow was quick to defuse the situation, saying that the deal is still in place. Even President Trump himself tweeted that the deal is still intact, with equities rebounding and erasing the Navarro-related losses.
For another day, headlines suggest that there is still an ongoing battle between those who see a potential economic recovery as lockdown measures continue to ease, and those who are afraid of a second coronavirus outbreak. As we noted in the past, we are in the first group, and we will maintain that view as long as restrictions are getting lifted, and data continues to point to improvement in global economic activity. We repeat that in order to start considering changing our view, we need to see more nations re-imposing lockdown measures, something that could result in a second hit to the global economy.
From around June 16th, the FTSE 100 index is seen moving sideways, but remains above its short-term tentative upside support line taken from the low of June 15th. Although there is a chance to see the price rising again, we would prefer to wait for a jump above the high of last week, at 6321, in order to get a bit more comfortable with higher areas. Hence our somewhat bullish approach, for now.
If the FTSE 100 pops above that 6321 barrier, this would confirm a forthcoming higher high and it could attract a few extra buyers into the game. The index may rise to its next resistance area between the 6389 and 6421 levels, marked by the high of June 10th and the low of June 8th, where it could stall temporarily. The price might even correct slightly lower. That said, if it remains above the previously-discussed 6321 hurdle, or the aforementioned upside line, the bulls may take charge again. If this time they manage to overcome the 6421 obstacle, that could clear the way to the 6513 level, marked near the highest point of June.
Alternatively, if the index breaks the above-discussed upside line and falls below yesterday’s low, at 6190, that may temporarily spook some buyers from the arena. The FTSE 100 could then drift to the 6145 obstacle, marked by the lows of June 18th and 21st. Around there the index might get a temporary hold-up, as it might also test the 200 EMA on our 4-hour chart. However, if the sellers are still feeling confident and continue applying pressure on the FTSE 100, this may lead to further declines. The price could drop to the 6062 level, marked by an intraday swing high of June 15th.
As for today, apart from headlines and developments surrounding the coronavirus, investors may pay some attention to the preliminary PMIs for June. During the European day, we get the preliminary prints for June from several Eurozone members and the bloc as a whole. Both the Euro-area manufacturing and services indices are forecast to have risen further, but to have remained within the below-50 territory. Specifically, the manufacturing index is expected to have risen to 44.0 from 39.4, while the services one is forecast to have inched up to 40.5 from 30.5. This would drive the composite PMI up to 41.0 from 31.9.
At its latest meeting, the ECB decided to increase its pandemic emergency purchase program (PEPP) by EUR 600bn to a total of EUR 1350bn, extending the horizon of the purchases to “at least the end of June 2021.” Officials also repeated that they remain ready to adjust all of their instruments as appropriate, to ensure that inflation moves towards their aim in a sustained manner. With the headline CPI rate at +0.1% yoy and the core one at +0.9% yoy, another month of contraction in both the manufacturing and services sectors – despite at a slower pace – may keep the door for further easing by the ECB in the foreseeable future wide open.
Thus, the euro is unlikely to gain much on the relative improvement of the PMIs. We expect the short-term direction in EUR-pairs to mainly depend on the counterpart. For example, if the counterpart currency is a safe haven, like the dollar and the yen, we would expect the euro to outperform it. The opposite could be true against a risk-linked currency.
We get preliminary PMIs from the UK and the US as well. No forecast is currently available for the UK indices, while with regards to the US ones, both the manufacturing and the services indices are expected to have increased to 47.8 and 46.0 from 39.8 and 37.5 respectively. Having said that though, as we noted several times in the past, market participants tend to pay more attention to the ISM indices which are due to be released on July 1st and 6th.
Tonight, during the Asian morning Wednesday, the RBNZ announces its monetary policy decision. At their latest gathering, policymakers of this Bank decided to keep interest rates unchanged, but nearly doubled their QE purchases from NZD 33bn to NZD 60bn, adding that they could still go higher. In the minutes accompanying the decision, it was noted that that negative interest rates will become an option in the future and that discussions about preparing for negative rates are ongoing.
Since then, the only top-tier indicator we got was the GDP for Q1, which showed that the economy contracted 1.6% qoq after expanding 0.5%. This pushed the yoy rate into the negative territory, to -0.2% from 1.8%. That said, this was above the Bank’s own projection for the quarter, which in May was at -2.4% qoq, and thus, this may allow policymakers to stay sidelined at this meeting. They may prefer to wait for more data before they start considering further rate cuts, or not. However, we will still dig into the statement and the meeting minutes for clues as to how willing officials are to push interest rates into the negative territory if upcoming data comes on the soft side. Another round of dovish signals may bring the Kiwi under selling interest. However, its overall path may remain dependent on changes in the broader market sentiment. If governments around the globe continue to ease their lockdown measures, this may spur more market optimism, which could benefit the currency.
EUR/NZD is still trading below a short-term downside resistance line taken from the high of May 18th. However, from around June 10th, the pair is struggling to move below a key support area, at 1.7330. Despite the current trend still being to the downside, we will take a cautiously-bearish approach and wait for the 1.7330 hurdle to break, in order to get comfortable with further downside.
A drop below the aforementioned 1.7330 territory, which is marked near the lows of June 10th, 17th and 22nd, would confirm a forthcoming lower low, this way potentially inviting more sellers into the game. EUR/NZD could then slide to the 1.7255 obstacle, a break of which may clear the way to the 1.7190 level, marked by the current lowest point of June.
On the upside, in order to consider the pair’s move higher, the previously-discussed downside line would need to be violated. Such a move may confirm a change in the current trend, possibly attracting more buying interest. In addition to that, we would wait for the rate to climb above the current high of this week, at 1.7505, as this would confirm a forthcoming higher high. The pair might then travel to the 1.7595 obstacle, a break of which could set the stage for a move to the 1.7654 level, marked by the high of June 11th.
From the US, we get the new home sales for May, which are expected to have accelerated to +3.5% mom from +0.6%, and the API (American Petroleum Institute) report on crude oil inventories, for which no forecast is available.
Tonight, besides the RBNZ decision, we also get the Summary of Opinions from last week’s BoJ gathering. At that meeting, officials kept their main policy tools untouched, but noted that they are likely to increase the size of money pumped out via market operations and lending facilities from the current JPY 75trln to JPY 110 trln. We will scan the summary to see how willing officials are to act again, but we don’t expect this release to impact the yen. The Japanese currency has been wearing its safe-haven suit in recent months, reacting mainly to developments affecting the broader market sentiment.
As for the speakers, we have only one on the agenda, and this is BoE Governor Andrew Bailey.
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