The threadbare economic calendar throughout this week has weighed on markets. Traders have been looking elsewhere for a steer on sentiment, and they are finding a string of negatives to weigh on the mind. US COVID-19 infection rates are rising at record levels, now growing by 60,000 per day. President Trump may try to spin this by talking about improved testing, but increasing numbers of daily deaths is the true barometer (now rising at the highest rate since early June). With several of the major southern states re-engaging lockdown procedures (and also New York too), this will hit the economic data for July. Markets are beginning to respond to this. Market breadth on equities does not look great right now. The mega-cap tech stocks look good still, but delving deeper into the old economy stocks, the outlook for US equities becomes more concerning. Treasury yields are reacting lower, with a “bull flattening” move on the yield curve. Yield spreads are around 10 week lows on the curve and this is risk negative. This negative risk bias is now impacting through forex markets where the dollar (still playing as a safe haven) is benefitting along with he Japanese yen. Equities are lower, and oil (playing on the reduced demand fears) is also beginning to slide. There is little once more on the economic calendar to change the narrative today, so unless there is some positive news out there, sentiment could struggle into the end of the week.
Wall Street closed broadly lower with the S&P 500 -0.6% at 3152, whilst futures are showing further weakness (E-mini S&Ps -0.8%). This has weighed on Asian markets, with the Nikkei -1.1% and Shanghai Composite -1.7%. European indices also look set for negative early moves, with FTSE futures -0.6% and DAX futures -0.5%. In forex, there is a risk negative bias, with JPY being the big outperformer, whilst a resurgent USD is not far behind. AUD seems to be the big underperformer. In commodities, there is a pullback on gold by around half a percent, whilst silver is also slightly lower. Oil has slid around -1.5% in early moves.
It is yet another quiet day to end a quiet week on the economic calendar today. The US factory gate inflation is at 1330BST with the US PPI for June. Headline PPI is expected to increase by +0.4% on the month which would pull the year on year reading back to -0.2% (from -0.8% in May). Core PPI is expected to rise by +0.1% and increase the year on year inflation to +0.4% (from +0.3% in May).
Chart of the Day – USD/CAD
There is a fascinating battle for control playing out on USD/CAD. The trend channel lower has been a key technical feature since the spike March high. The dollar has continued to weaken as the pair has posted a series of lower highs and lower lows. A couple of weeks ago, we highlighted the rally from the channel support to channel resistance, where the rebound was then starting to roll over again. This left resistance at 1.3715 as the market has since fallen away to form lower highs and lower lows again. However, in the last two sessions the dollar bulls have once more survived a test of the key pivot around 1.3480 which has been an important gauge for the outlook over the past month. A decisive bounce from the pivot support is now testing the downtrend resistance once more (today at 1.3600). Wednesday’s bearish engulfing candlestick adds to resistance at 1.3625 and this really does have the feel of a key inflection point for USD/CAD. A breakout above 1.3625 would confirm a breach of the near four month downtrend channel, which would improve the near term outlook and re-open 1.3715. Momentum indicators look to be at a turning point. Daily RSI is again around 50, where most of the rallies have failed in recent months. MACD lines have converged and also reflect a turning point, whilst Stochastics threaten a bull cross. However, the bulls have consistently faltered on USD/CAD recently and the medium term downside bias remains. A near term rally threatens but unless the bulls can break above 1.3715 we would be sceptical about looking at long positions. A move failing under 1.3715 would likely represent another selling opportunity for further pressure on 1.3480. A move above 1.3715 would signal a decisive improvement.
Has this been another false move on EUR/USD. Early in yesterday’s session, the dollar bulls were on the ropes as the pair had pulled through the resistance of $1.1350. However, a failed upside break saw a turn lower to leave resistance at $1.1370 and form a negative candle. This has dragged the price back under $1.1300 and now threaten initial support at $1.1250 this morning. Already this move has breached what was a building mini uptrend and is certainly a disappointment for long positions looking for a breakout of what is still a medium term range. Does this now mean that EUR/USD will be swinging lower within the range back towards the lows around $1.1165/$1.1190 again? A close under initial support at $1.1250 may well determine this. Also watch daily RSI for a move below 50 which would suggest growing negative momentum bias. Our preference remains to buy into supported weakness within the range, so this move is likely to be the source of another chance to buy. Playing this range in recent weeks shows the need to have limited time horizons for long positions and active use of stops. The latest disappointment from yesterday once more reflects this as resistance has firmed between $1.1350/$1.1370.