Global equities traded north, while safe havens came under selling interest as improving data may have increased hopes over a faster-than-previously-thought economic recovery around the globe. The British pound was the second loser in line among the G10 currencies, coming under pressure due to concerns on how the UK government will pay for infrastructures after PM Johnson pledged to increase spending.
The dollar traded mixed against the other G10 currencies on Monday and during the Asian morning Tuesday. It gained versus JPY, GBP, CHF, and SEK in that order, while it underperformed versus AUD and NOK. The greenback was found virtually unchanged versus EUR, CAD, and NZD.
The weakening of the safe-havens yen and franc, and the strengthening of the risk-linked Aussie suggest that market sentiment improved yesterday. Indeed, shifting attention to the equity world, we see that major EU and US indices were a sea of green, with the positive morale rolling into the Asia session today. Both Japan’s Nikkei 225 and China’s Shanghai Composite were up 1.27% and 0.66% respectively.
This may have been due to improving data enhancing hopes over a faster-than-previously-thought economic recovery around the globe. Germany’s inflation numbers came in better than expected, raising speculation that Eurozone’s prints, due out today, may also beat their estimates. However, with both the bloc’s headline and core inflation rates well below the ECB’s objective of “below, but close to 2%”, we believe that the door for further easing by the ECB may stay wide open. In the US, pending home sales surged 44.3% in May, the biggest jump ever, suggesting that the housing market is staging a decent recovery. On top of that, Fed Chair Powell reiterated his view that more monetary stimulus may be necessary, adding to speculation that the US central bank will do whatever is necessary to support the world’s largest economy. As for today, during the Asian session, China’s PMIs for June came in better than expected, with both the manufacturing and services indices signaling expansion for the fourth consecutive month, despite the new flare-up in infections from the coronavirus.
As we noted several times in the recent past, it seems that there is a battle among market participants. Between those who believe that the global economy will recover faster than previously anticipated, and those who are afraid of another round of fast spreading of the coronavirus around the world. With infected cases hitting a new daily record on Friday, coming in just shy of the 200k mark, and with several US states reversing their re-openings, we prefer to stay sidelined for now. The neutral technical picture of global equity indices as well as that of currency pairs which act as major gauges of the broader market sentiment, adds more credence to our view. We prefer to wait for clearer signals with regards to the market’s forthcoming directional move. On one hand, further loosening of lockdown measures around most of the world may allow economies to continue their road to recovery, but on the other hand, the re-introduction of restrictions may result in a second hit to the global economy, and thereby bring equity indices and risk-linked assets back under renewed selling pressure.
Apart from the yen and the franc, the pound was also among yesterday’s main losers, coming under selling interest on concerns on how the UK government will be able to pay for infrastructures after PM Boris Johnson pledged to increase spending. This, combined with doubts over whether the UK will find common ground with the EU with regards to their future relationship post Brexit, may keep the pound under selling interest, in our view. Remember that the latest round of negotiations resulted in no progress, and with the UK insisting that a solution should be found before December 31st, the default option remains a no-deal Brexit. Conditional upon further improvement in the broader market sentiment, we would prefer to exploit any further pound losses against currencies which tend to benefit from the increased risk appetite, like the Aussie and the Kiwi.
After hitting the 20825 barrier last week, Nikkei225 moved lower and tested a short-term upside support line taken from the low of April 3rd. The index remained above that upside line, which suggests that the bulls are not yet ready to give up. However, in order to get a bit more comfortable with higher areas, we would prefer to wait for a push above the high of last week first, hence why we will take a cautiously-bullish approach.
If Nikkei 225 does eventually move above the high of last week, at 22825, this could spark some hope in the eyes of a few more buyers, what may lead to some larger extensions to the upside. The price could then travel to the highest point of June, at 23302, a break of which might set the stage for a further acceleration north, as a higher high would be confirmed. The next possible resistance then could be seen near the 23806 level, marked by the high of February 20th.
Alternatively, if the previously-discussed upside line breaks and the price falls below the 21958 hurdle, which is yesterday’s low, that might be a sign of worry for the bulls, who could get temporarily spooked from the field. Nikkei 225 could then drift to the 21372 obstacle, marked by the lowest point of June, where the index may get a temporary hold-up. Around there the price might also test the 200-day EMA, which could provide additional support. That said, if the bears are still feeling a bit more comfortable and they eventually manage to push Nikkei 225 below the 200-day EMA, together with the 21372 hurdle, this would confirm a forthcoming lower low, potentially opening the door to some lower areas. The next potential support zone could be at 20815, marked by the high of May 20th.
GBP/NZD bulls are still struggling with finding a way of how to lift the pair higher. The rate continues to trade below a short-term tentative downside resistance line taken from the high of June 2nd. This morning, the pair seems to be showing willingness to move even further south, however, we would prefer to wait for a drop below yesterday’s low, at 1.9122, before considering lower areas.
Eventually, if the fall below the aforementioned 1.9122 hurdle happens, this would confirm a forthcoming lower low, what might attract more sellers into the game. GBP/NZD may then travel to the 1.9055 obstacle, a break of which could clear the path to the 1.8996 level, marked by the lowest point of September 2019.
In order to get comfortable with the upside, preferably a break of the previously-mentioned downside line would be needed. In addition to that, to support the bullish case, a push above the 1.9405 barrier could invite more buyers into the field. GBP/NZD might then drift towards the high of last week, at 1.9474, a break of which may set the stage for a move towards higher areas. That’s when we will aim for the 1.9600 hurdle, or even the 1.9636 level, marked by the highs of June 16th and 11th respectively.
Ahead of the EU open, we already got the UK’s final GDP for Q1, with the preliminary estimate being revised down to -2.2% qoq from -2.0%. The pound barely reacted to the release, perhaps because we already have data showing how the UK economy has been performing in Q2. The monthly GDP for April pointed to a 20.4% mom contraction.
Later in the day, apart from Eurozone’s inflation data, we also have Canada’s monthly GDP for April and the US CB consumer confidence index for June. Canada’s GDP is forecast to have contracted 12.0% mom after deteriorating 7.2% in March, while the US CB index is expected to have risen to 91.6 from 86.6.
With regards to the energy market, the API (American Petroleum Institute) weekly report on crude oil inventories is coming out, but as it is always the case, no forecast is available.
Tonight, during the Asian morning Wednesday, we have Japan’s Tankan survey for Q2 and China’s Caixin manufacturing PMI for June. In Japan, both the large manufacturers’ and non-manufacturers’ indices are expected to have declined to -31 and -18 from -8 and +8 respectively, while China’s Caixin PMI is anticipated to have slid to 50.5 from 50.7.
As for the speakers, we have seven on today’s agenda: Fed Chair Jerome Powell, Fed Board Governor Lael Brainard, Minneapolis Fed President Neel Kashkari, ECB Vice President Luis de Guindos, ECB Executive Board member Isabel Schnabel, BoE Chief Economist Andy Haldane, and BoE MPC member Jon Cunliffe.
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