Equities were a sea of red yesterday, with the negative sentiment rolling into the Asian session today as Fed Chair Powell warned over an “extended period” of weak growth, and noted that negative interest rates are not something the Committee favors. In the FX world, the Aussie was among the main losers, coming under selling interest due to Australia’s employment data revealing a record jobs loss.
The dollar traded higher against all but one of the other G10 currencies on Wednesday and during the Asian morning Thursday. It gained the most versus SEK, AUD, GBP and EUR in that order, while it underperformed only against JPY.
The strengthening of the dollar and the yen, combined with the weakness in the Aussie, suggests that risk appetite remained subdued for another day. Indeed, major EU and US indices were a sea of red yesterday, with the negative investor morale rolling into the Asian session today. Both Japan’s Nikkei 225 and China’s Shanghai Composite are down 1.34% and 0.71% respectively.
Following remarks by the leading US infectious disease expert Dr. Fauci that a coronavirus vaccine may take some time to come out to the market, and his warning that removing restrictions too quickly will put lives back at risk, Fed Chair Jerome Powell came to add to investors’ concerns. Speaking in a webcast, the Fed Chief warned over an “extended period” of weak growth and stagnant incomes due to the pandemic, while he made it clear that he and his colleagues are unlikely to push interest rates below zero. On top of that, global infections returned to acceleration mode the last couple of days, increasing even further fears over a second wave of the virus.
Our latest view was for further recovery in risk sentiment, but we’ve been highlighting the risk of reopening economies too quickly. Now, with expectations over a vaccine being ready soon diminishing, and with infections returning to acceleration mode, we prefer to sit to the sidelines and carefully monitor to see whether this will last for longer, or whether this was something temporary. Everyone is suggesting that a V-shape recovery in global economies is unlikely, but this is something already known, we believe. That’s why we will not call for deeper declines in the equity world, neither for decent rebounds though. We prefer to wait for the fog to clear out.
The Dow Jones Industrial Average index continues to move sideways, roughly between the 22940 and 24902 levels. However, some might say that DJIA is forming somewhat of a head-and-shoulders pattern, which may be seen as a reversal sign. That said, still, a break of the 22940 hurdle would be required, in order to aim for lower areas. Until then, we will take a neutral stance.
A drop below the 22940 zone, which is marked by the lows of April 21st and 22nd, would confirm a forthcoming lower low and may open the door to some further declines. That’s when DJIA may drift to the 22370 obstacle, a break of which could set the stage for a move to the 21498 level, marked by the high of April 2nd.
Alternatively, to examine higher areas, we would prefer to wait for the price to push above the April’s high first. If such a move occurs, more buyers may see this as a good opportunity to step in drive the index further north. The price could then test the 25769 obstacle, a break of which may send DJIA to the 27093 level, marked by the highest point of March.
Back to the currencies, the Aussie was the second loser in line, coming under decent selling pressure following Australia’s employment data. The unemployment rate rose to 6.2% from 5.2%, instead of surging to 8.3% as the forecast suggested. However, looking at the slide of the participation rate, the not-that-big increase in the unemployment rate may be due to many people losing their jobs and refraining from registering for unemployment benefits. Indeed, looking at the employment change, we see that the economy lost 594.3k jobs, which is the biggest plunge on record.
At their latest meeting, RBA policymakers announced that they have scaled back their QE purchases, but the disappointing jobs data may have raised speculation that they could stop doing so and start scaling QE back up. That said, our own view is that officials are aware that data for March and April may come on the soft side. If the spreading of the coronavirus returns to a slowdown mode and, at the same time, governments around the globe continue easing their restrictions, we think that the prospect of better days may allow them to continue reducing their bond purchases.
From around the end of April, AUD/USD is moving sideways, roughly between the 0.6373 and 0.6570 levels. The pair is currently declining, however we will take a neutral stance, as long as the rate remains inside that range. We need to see a clear break through one of the sides of the range first, before considering the next directional move.
A drop below the 0.6373 hurdle, which is the lower side of the aforementioned range, would confirm a forthcoming lower low and more sellers could join in. If so, the rate may slide further south, possibly overcoming the 0.6337 obstacle and targeting the 0.6283 zone, marked by the low of April 23rd. Initially, if that area provides some good support, AUD/USD might rebound slightly. That said, if the pair remains below the lower bound of the range, this may attract the sellers, who could take advantage of the higher rate and drag AUD/USD down again. The rate might drop to the 0.6283 obstacle again, a break of which may set the stage for a move to the 0.6253 level, marked by the low of April 21st.
In order to aim for higher levels, we will wait for the upper side of the range to get violated first. If the rate manages to climb above the 0.6570 barrier, such a move will confirm a forthcoming higher high, potentially allowing more bulls to run into the field. AUD/USD could then travel to the 0.6613 obstacle, a break of which might clear the way to the 0.6684 level, marked by the highest point of March.
From the US, we get the initial jobless claims for last week. Although expectations are for a slowdown, they are still expected to see a strong jump once again. The forecast is for 2.5mn new claims, with continuing claims set to climb to 25.1mn from 22.65mn the week before.
Tonight, during the Asian morning Friday, we have China’s fixed asset investment, industrial production and retail sales, all for April. Fixed asset investment is expected to have fallen at a slower pace than in March (-10.0% yoy from -16.1%), while industrial production is expected to have rebounded 1.5% yoy after sliding 1.1%. Retail sales are expected to have slid 7.5% yoy, after falling 15.8% in March.
As for the speakers, we have three on today’s agenda: BoC Governor Stephen Poloz, ECB Vice President Luis de Guindos and Minneapolis Fed President Neel Kashkari.
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