The exuberance of an attempted renewal of the risk rally has begun to peter out as a second wave of COVID-19 infections is yet to be contained. Newsflow surrounding additional measures put in place for Beijing to try and counter an emerging second wave of infections is beginning to weigh on sentiment once move. Schools shut, flights cancelled and now hotels shutting too are adding to a drip feed of concerning developments that have apparently previously not been factored into market pricing. Whilst this is not having a significant impact yet, it could develop into something more concerning if China extends its containment measures. Treasury yields have dropped back and there is a mild negative bias to major forex positioning. Equities are slipping back today too. Adding a degree of pressure to the downside bias on commodity currencies, the Australian unemployment data came in worse than expected overnight. The risk recovery has been built upon the massive support than major central banks (and governments) have provided. Focus will turn to how supportive the Bank of England will be today. An extra £100bn of asset purchases are expected to be announced, but could the BoE be another bank that begins to steer towards negative rates? Sterling would certainly be under pressure if so.
Wall Street closed slightly weaker last night as a rebound faded. The S&P 500 closed -0.4% at 3114, whilst US futures are lower again today (E-mini S&Ps -0.1%). This has weighed on sentiment in Asia, with the Nikkei -0.5% but Shanghai Composite was +0.2%. In Europe, there is a negative bias with FTSE futures -0.5% and DAX futures -0.3%. In forex, there is a mixed to slightly risk negative bias. AUD and NZD are the main underperformers, albeit only mildly, whilst GBP is also slightly weaker ahead of the BoE. JPY and EUR shade the outperformers. In commodities, there is an ongoing consolidation on gold, whilst silver has slid back by -0.5%. Oil is similarly lighter, although lacks conviction in the move.
There are a couple of central bank policy announcements to look out for on the economic calendar today. Early in the European session, the Swiss National Bank monetary policy is at 0830BST and is not expected to change rates from the current -0.75%, however, talking up currency intervention is never too far away. Later on the Bank of England monetary policy will be announced at 1200BST. There is no change expected on rates at +0.10%, but could there be some extra asset purchases? The dissenting voices in the last meeting calling for an extra £100bn of QE, along with the end of the current extra purchases are likely to mean an extension announced today. Increasing QE by £100bn is expected, whilst £150bn would be more bold. Onto US data, the Weekly Jobless Claims at 1330BST have been stubbornly high, but still falling recently. Consensus expects the number of claims to have fallen to 1.300m in the past week (from 1.542m previously). The Philly Fed Business index at 1330BST will also be watched. After the Empire States manufacturing positive surprise, is the US economic recovery broadening? The consensus expects an improvement to -23.0 in June (from -43.1 in May).
There is a Fed speaker to look out for today, with Loretta Mester (voter, hawk) speaking at 1715BST.
Chart of the Day – AUD/JPY
The risk recovery tends to be well touted by the movement on the cross of the Aussie (a key risk-on major currency) versus the Japanese yen (the ultra-safe haven play). So when fears over second waves in US and China have re-emerged, it is interesting to see that AUD/JPY has struggled. Is this key gauge of the risk recovery moving into reverse? The key level initially to gauge the mood will be the resistance at 74.50 which marked the old key February high and also a near term top neckline. The implied downside target of 72.25 was all but achieved, but the rebound has struggled around the old neckline this week. Above 74.50 is a source of overhead supply now, but if it can be overcome once more on a closing basis, it will be a key barrier breached. The bulls are backing away again this morning. Momentum indicators are tailing off again, with a “bear kiss” on Stochastics and sliding MACD lines the main concern that this is an ongoing corrective move. The rising 21 day moving average (today around 73.40) has again become the basis of support and is being tested. So this is a key moment now. The limit of last week’s sell-off came at 72.50 but a downtrend is forming near term and 72.50 could come under threat again and is key support near term For the moment, we have to still play Aussie/Yen as a buy into weakness strategy (much like the risk recovery generally), with a three month uptrend at 71.90 today. However, 72.50 support could quickly become key to this as a formation of lower highs and lower lows becomes a whole new corrective set up.
We have been talking up the prospects of a near term corrective move on EUR/USD for the past couple of weeks. In that time a range of conflicting signals are being thrown around by the pair, but as yet no serious correction has set in. Another test of $1.1210 support was seen yesterday, but the bulls prevented this from turning into a bigger correction. However there is growing negative pressure in momentum indicators, with the bear cross on MACD lines and Stochastics which are gathering downside pace. The negative configuration on candlesticks is also building up (four negative candles in the past five sessions). However, we would still see a corrective move as just unwinding within the more positive medium term outlook. There is underlying demand from the good breakout support in the band $1.1015/$1.1145 which we would look for the next buying opportunity if a downside move were to be seen. For now though, the support around $1.1210 is holding (yesterday’s intraday low was $1.1205) and the market is again consolidating today. This seems to be more of an orderly unwinding drift lower than a correction. We draw in a tentative near term downtrend to cap the recent lower highs at $1.1215 today as a gauge for whether the bulls are ready to make their move again.
With a second consecutive negative close, the outlook for GBP/USD is beginning to deteriorate, albeit only slightly. The failure to close above $.12645 has weighed on the market recently and as Cable has drifted off in recent sessions, the recent four week uptrend is beginning to come under threat (currently at $1.2470). However, for now this is not a move lower with any real conviction. The small body of yesterday’s candle reflects a lack of conviction in the decline despite four negative daily candlesticks in the past five ses