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by Charalambos Pissouros

US Dollar Slumps as Risk Appetite Returns

The dollar traded lower against all the other G10 currencies as market sentiment improved again, with US and Asian indices trading in the green. It seems that those who believe in a faster-than-previously-though economic recovery still hold the upper hand. Gold also continued its journey north, surpassing the 1800 mark for the first time since November 2011.

Equities Rebound, USD Slides Despite Accelerating Virus Cases

The US dollar traded lower against all the other G10 currencies on Wednesday and during the Asian morning Thursday. It lost the most ground against NOK, SEK, EUR, CAD, and AUD in that order, while it underperformed the least versus JPY.

USD performance G10 currencies

The tumble in the dollar, the relative weakness in the yen, and the fact that the Aussie and the Loonie were among the main gainers suggest that risk appetite rebounded again at some point yesterday. Indeed, although major EU indices continued sliding, things changed during the US session, with all three of Wall Street’s main indices trading in the green, gaining on average around 1%. It is worth mentioning that Nasdaq was up 1.44%, hitting a new all-time high. The positive investor morale rolled over into the Asian session today, with Japan’s Nikkei 225 and China’s Shanghai Composite rising 0.52% and 1.01% respectively.

Major stock indices performance G10 currencies

Although infected cases from the coronavirus continued to accelerate yesterday, getting closer to their daily record, investors decided retake risk, pushing equities up and safe havens down. With no clear catalyst behind the rebound, yesterday’s market action confirms our view that Tuesday’s slide was just an opportunity for some investors to lock profits after a decent winning streak.

Daily change in coronavirus cases and deaths

Lately we’ve been repeatedly highlighting the battle between those who believe that the global economy will recover faster than previously anticipated, and those who are afraid of a second wave of coronavirus infections worldwide. Although there is evidence supporting both views, the first group appears to have the upper hand. Therefore, we will hold the view that as long as most economies around the world continue to ease their lockdown measures, the recovery is likely to continue, which means more gains for equities and risk-linked assets. We repeat that, in order to change our view, we would like to see more lockdown measures being reintroduced around the world, something that may result in a second hit to the global economy. However, we see the chances of that happening as very low and the reason is because, following the damages from the first round of restrictions, the global economy may not be able to weather another couple of months of freezing activity. Thus, governments may not be willing to take the risk.

Another interesting development is that gold surpassed the 1800 mark yesterday for the first time since November 2011 and continued to trade north. In our view, the current trading pattern in the financial world is a win-win situation for the precious metal. During periods of market optimism, it gains due to the broader weakness in the dollar, while when investors are nervous and afraid, it still gets benefit as it acts as a safe haven itself.

Nikkei 225 – Technical Outlook

After hitting the 23302 barrier on June 7th, 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 ready to give up yet. However, in order to get a bit more comfortable with higher areas, we would first prefer to wait for a push above the high of June 23rd, at 22825, hence why we will take a somewhat-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, who may lead the price to the highest point of June, at 23302. A break above that barrier 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 the current lowest point of July, 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.

Japan Nikkei 225 daily chart technical analysis

AUD/USD – Technical Outlook

At the time of writing, AUD/USD is balancing above a short-term tentative upside support line taken from the low of June 30th. In addition to that, the pair is near its psychological 0.7000 mark, which is currently acting as a resistance barrier. The RSI and the MACD on our 4-hour chart are also pointing higher, which supports the bullish case, at least for now. However, we would prefer to wait for a strong push above that psychological mark first, before examining higher areas.

A strong move above the current highest point of this week, at 0.6998, and a push above the psychological 0.7000 territory, would confirm a forthcoming higher high. Such a move may attract more buyers into the field, what could result in AUD/USD traveling to the 0.7038 hurdle, marked by an intraday swing high of June 10th. That hurdle may temporarily stall the rate, however, if the buyers are still quite active, this might lead to another uprise, where the next resistance barrier could be at 0.7062. That barrier marks the highest point of June.

On the downside, a break of the aforementioned upside line and rate-drop below the 0.6922 area, may signal a change in the short-term trend, potentially opening the door to some further declines. We will then examine a possible move to the 0.6877 obstacle, a break of which might clear the path to the 0.6833 level, which is the low of June 30th.

AUD/USD 4-hour chart technical analysis 

As for Today’s Events

The only items on the agenda worth mentioning are Canada’s housing starts and building permits for June and May respectively, as well as the US initial jobless claims for last week. Canada’s housing starts are expected to have increased to 198k from 193.5k, while no forecast is available for building permits. The US initial jobless claims are forecast to have slowed again, to 1.375mn from 1.427mn.

Disclaimer:

The content we produce does not constitute investment advice or investment recommendation (should not be considered as such) and does not in any way constitute an invitation to acquire any financial instrument or product. The Group of Companies of JFD, its affiliates, agents, directors, officers or employees are not liable for any damages that may be caused by individual comments or statements by JFD analysts and assumes no liability with respect to the completeness and correctness of the content presented. The investor is solely responsible for the risk of his investment decisions. Accordingly, you should seek, if you consider appropriate, relevant independent professional advice on the investment considered. The analyses and comments presented do not include any consideration of your personal investment objectives, financial circumstances or needs. The content has not been prepared in accordance with the legal requirements for financial analyses and must therefore be viewed by the reader as marketing information. JFD prohibits the duplication or publication without explicit approval.

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