The dollar weakness that has been such a feature of trading over the past week or so has begun to just slow down slightly this morning. As Treasury yields tick slightly lower, this could be a function of a near term waning of the positive risk appetite that has driven equity markets to breakout of the medium term ranges. It comes as a tinge of caution is beginning to leak into sentiment. Although the US did not come down too hard on China over the security bill for Hong Kong, there are hints of something bubbling under the surface. According to media reports, China is ordering state authorities to scale back purchases of US soy beans. This would potentially restrict the ability of China to meet its obligations under the Phase One trade agreement and could induce a response from President Trump. Is the tariff war about to re-emerge as a risk that needs to be priced in again? It comes also as major cities in the US continue to see riots and protests which are hampering the ability for a re-emergence from the period of lockdown. Equity markets have thus far seemed to be fairly resistant to these factors (stoked by massive monetary and fiscal support and newsflow of economies re-opening around the world). However, if riots continue and a belligerent President Trump fails to diffuse the situation, it could begin to feed negatively into sentiment. There are hints of this coming this morning. Away from the US, the UK/EU trade negotiations resume today and sterling is benefitting from reports of potential compromise. The talks are into a critical month ahead of a deadline to extend the transition period. The Reserve Bank of Australia came as little surprise as it held rates on hold at +0.25% and maintained its 3 year bond yield target at +0.25%.
Wall Street performed well into the close last night although gains were slight, with the S&P 500 +0.4% at 3055. US futures are giving some of this back today, with the E-mini S&Ps -0.2%. Asian markets were broadly positive, with the Nikkei +1.2% and Shanghai Composite +0.2%. In Europe, there is a mild positive bias, with FTSE futures +0.2% and DAX futures +0.4%. In forex, the strong runner comes with GBP outperformance ahead of the latest round of trade talks, whilst elsewhere there is a mild bounce on USD. In commodities, the upside has been curbed slightly on gold and silver, whilst oil remains supported.
The economic calendar is showing no key economic releases today.
Chart of the Day – NZD/USD
Risk appetite continues to improve and this is reflected in the recoveries of the commodity currencies. Yesterday saw AUD and NZD storming higher. For the Kiwi, the recovery has subsequently taken a key step forward after another decisive positive candlestick on NZD/USD. The market is now leaving behind a consolidation rectangle between $0.5910/$0.6175 in a move that implies c. +265 pips from the $0.6175 breakout to a target of $0.6440. It also means that the key March high at $0.6450 is a realistic upside target for the recovery over the coming weeks. The price action over recent sessions has been all about confirming the breakout and it has been interesting to see the market continually finding a basis of support around the old resistance before using this as a springboard. Momentum confirms the strength of the breakout too, with RSI in the mid-60s and at 5 month highs, whilst MACD and Stochastics lines are similarly bullish. It suggests that buying into weakness is the strategy now. A two week uptrend supports around $0.6210 today as the initial gauge. The hourly chart also shows initial support at $0.6220/$0.6260, with the breakout support around $0.6175 remaining strong. The bullish outlook would defer below $0.6080.
There is a strength to the recovery run on the euro which has pulled EUR/USD towards an ongoing test of resistance at $1.1145. However, two consecutive candlesticks have failed in a breakout and the bulls are just beginning to lose some of the impetus in the recovery that has got them this far. This could simply be part of the process of testing the resistance, but there is a risk that a near term pullback begins to set in. The technicals remain strong, but care must be taken in that momentum is becoming stretched. We discussed yesterday that the RSI was close to around 70 which historically has been restrictive on EUR/USD (although not during the huge volatility of March), and could lend to a near term, corrective unwind. Despite this, we would continue to look for weakness to be a chance to buy. The breakout support around $1.1015 houses good support now, whilst the two week uptrend is supportive at $1.0960 today. Moving into the European session, the pair is all but flat and again consolidating under the resistance area (now $1.1145/$1.1153). The hourly chart shows momentum unwinding in this consolidation, but if hourly RSI begins to slip below 40 and hourly MACD begins to slip below neutral it could be a signal that a corrective move is building. If initial support at $1.1080/$1.1100 breaks then a correction back towards $1.1015 would be likely, although this would then be the source of the next opportunity to buy.
We have recently been concerned by the lack of real traction on Cable, given the underperformance of the dollar across the major pairs. However, Cable took a big leap forward in recovery yesterday as it posted a strong bull candlestick to close above resistance a t$1.2465. The momentum of this recovery within what is a trading range between $1.2075/$1.2645 is now su