The ebb and flow of the tide of risk appetite seems to be in the process of another turn as the risk aversions is coming back to the fore in recent days. This comes as we begin to gather more data on how the economic impact is hitting across the major economies for March. US retail sales and industrial production paint a grim picture for the US economy, whilst the IMF forecasts for a slump in global growth is also painting a very dark picture. In this environment of slipping risk appetite, we see the US dollar regaining strength, even as Treasury yields fall back again. The safe haven flows are key here and the dollar (along with the Japanese yen) remain the key performers when risk appetite ebbs away. The higher beta major currencies (the Aussie and Kiwi) are under pressure today, not helped by the dovish comments from RBNZ Governor Orr noting that negative rates are not being ruled out at this stage. Oil remains depressed by the grim outlook, whilst equity markets are increasingly testing their recovery trends and breakout supports. This has a feel of being a crucial crossroads for markets now. As we move into the European session today, there is a mild positive bias to equities, but the dollar is outperforming on major forex. We view rallies on risk with increased caution with this set-up.
Wall Street closed lower last night, with the S&P 500 -2.2% at 2783, although futures are holding up today as the E-mini S&P futures climbs back by +0.5%. In Asian there was a mixed picture, with the Nikkei -1.3% and Shanghai Composite +0.3%. European markets are edging positively higher, with FTSE futures +0.8% and DAX futures +1.0%. In forex, there is a USD positive bias across major pairs, with the underperformance of AUD and NZD the standouts. In commodities, gold and silver are holding ground this morning, whilst oil is also holding up around key support too.
For the economic calendar, the main focus once more is on US data later in the session. Every week, Thursday is becoming the day where the latest grim readings of the scale of COVID-19 impacting the US labor market is seen. US Weekly Jobless Claims are at 1330BST and are expected to show another 5.10m claims this week (after the record 6.61m claims last week). There is also some housing data for the month of March with the US Building Permits at 1330BST which are expected to drop to 1.30m (from 1.45m in February) whilst US Housing Starts are expected to fall to 1.30m (form 1.61m in February).Finally there is another regional Fed survey for April with the Philly Fed Business Index at 1330BST expected to plummet to -30.0 (from -12.7 in March).
Chart of the Day – AUD/JPY
When considering the outlook for risk appetite, the Aussie/Yen cross is a very good gauge. The Aussie is a higher beta/higher risk major currency, whilst the yen is the classic safe haven. So it is with great interest we see that the rally on Aussie/Yen has been hit by yesterday’s decisively negative candle and whether the recovery is now turning into reverse. The retreat from 69.25 means that the market is now breaking several of the technical factors that have been reasons to still be positive about the recovery. An uptrend from the crucial March low of 59.90 has been broken by this morning’s slip back, along with the market breaking below the 50% Fibonacci retracement (of the big 76.54/59.90 sell-off) around $68.20. The bulls will also be concerned that the improvement on the RSI has tailed off around 60, a level which has not been overcome since the sell-off began (this points to this move still being a bear market rally). Furthermore, the Stochastics are bear crossing lower (not yet a confirmed sell-signal) and the recovery on MACD lines faltering around neutral. The key will now be how the market reacts to the breakout of 67.62 which was the original March rebound high and is a basis of support. A closing breach today would add weight to the likely renewed selling pressure. The 38.2% Fib around 66.25 would be a target area. The hourly chart already shows corrective momentum building and a confirmed move below 67.50 would complete a six session top pattern, implying a further -175 pips of decline towards 65.75. The bulls need to decisively recover back above 68.20/68.50 overhead supply to regain some impetus.
There is a lack of certainty over who is in control of EUR/USD right now. Yesterday’s decisive move lower suggested that the dollar bulls were making a comeback. There was a considerable breakdown on the hourly chart, but the move bounced off $1.0855 which effectively forms an uptrend (of the past three weeks) on the daily chart. The legacy coming into today’s session is one of caution and the market is again pulling lower. Yesterday’s negative candle is weighing on sentiment of the recovery, whilst momentum indicators also rolling over again around neutral levels is a concern. Even though the hourly chart broke below key support at $1.0890 yesterday and posted decisive negative signals on hourly momentum, the bull rebound suggests that the dollar bulls are not quite ready to regain control yet. Given the supply of old bulls in the range $1.0890/$1.0925 this is an area that is now a barrier to recovery and a failure around here overnight suggests would really suggest growing negative sentiment in EUR/USD. This is a market that has the feel of a change in outlook. A move back under $1.0855 would confirm a trend breach on the daily chart, but also build a new negative trend (lower highs and lower lows) on the hourly chart which would open for a likely retest of $1.0770 again.
The breakout for the sterling recovery of the past week took a significant knock yesterday, as a decisive negative candle breached the uptrend since the key March low. Although the dollar bulls are yet to grasp control, there is a sense that there is a shift in sentiment underway. Given that this trend breach has come with the threat of renewed corrective signals on momentum indicators, there is a suggestion that the Cable rally is at a key juncture. The breakout support of $1.2485 was breached intraday yesterday and despite holding into the close, another slip back today is testing the breakout support once more. It comes as Stochastics have crossed decisively lower (not yet a con