Major forex and equity indices remain stuck on a see-saw of risk-on/risk-off as a lack of conviction has taken over in recent sessions. Depending upon how the wind blows, there is consideration of the bearish factors of second waves COVID-19 infections versus the more bullish positioning for continued stimulus from central banks and governments. However, the feeling is that the risk recovery of Q2 which drove record gains on Wall Street. However, in the past couple of weeks, uncertainty has crept into markets, The US dollar has gone almost nowhere over the past week and this is reflected across the outlook of consolidation across major forex pairs. One market is though making ground, with the breakout on gold to multi-year highs. Can this be sustained? In the past 24 hours we have seen Treasury yields starting to pick up once more and a mild yield curve steepening. This tends to come with more positive risk environment, which is good for equities but less so for gold. The PMI data (manufacturing and services) and crucial US jobs data (ADP today, Nonfarms tomorrow) in the coming days could be key to whether this improvement in yields continues. Initial signals from the Chinese PMIs are positive and it will be interesting to see if this continues with the European data and ISM later today.
Wall Street closed decisively higher for a second day, with the S&P 500 +1.5% at 3100. US futures are ticking slightly lower early today (E-mini S&Ps -0.2%) which has given a mixed look to Asian markets (Nikkei -0.8%, Shanghai Composite +1.1%). European markets are a shade lighter, with FTSE futures -0.2% and DAX futures -0.1%. In forex, there is little real direction once more, although JPY is a mild outperformer (despite a negative read from the Tankan survey), whilst GBP is lower. In commodities, gold and silver are consolidating their breakouts, whilst oil is pulling over 1% higher.
The first trading day of the month is always important on the economic calendar with the announcement of a raft of Manufacturing PMIs. Eurozone final Manufacturing PMI is at 0900BST and is expected to confirm the flash reading of 46.9 (46.9 flash June, 39.4 final May). The UK final Manufacturing PMI is at 0930BST and is expected to be 50.1 (50.1 flash June, 40.7 final May). The US ISM Manufacturing is at 1500BST and is expected to improve to 49.5 in June (from 43.1 in May). There will also be focus on the ADP Employment change at 1315BST which is expected to show growth of +3.000m jobs (a significant improvement on the -2.760m from May). Markets may not read too much into the ADP data though as it spectacularly failed at steering for Nonfarm Payrolls last month. The EIA Crude Oil Inventories are at 1530BST and are expected to show a drawdown of -0.95m barrels (after a stock build of +1.44m barrels last week).
Chart of the Day – USD/CAD
We last looked at USD/CAD as a rebound was setting in from the channel low, noting that a rebound could see a move back towards the 50% Fib level (of the big 1.2947/1.4667 bull run). However, the move has been a struggle for the dollar to find any sustainable traction. The unwind has now come to the top of the downtrend channel and signs are that this could be another chance to sell. Trend resistance comes at 1.3710 today, whilst the rebound faltered last week at 1.3715. Yesterday’s decisive negative candle means the market is now breaking a near term recovery trend, whilst also closing back under the 61.8% Fib level (at 1.3605) which increases the negative pressure. Once more we see the RSI faltering in the low 50s (where the rallies failed throughout April and May), whilst the Stochastics have posted a “bear cross” (which have been excellent selling gauges in recent months). This looks to be a market setting up for a renewed leg lower. The fall back in the past couple of sessions does though bring the market into the belly of a congestion zone between 1.3480/1.3715 so there is a degree of uncertainty, but a move below 1.3480 would really re-open the downside now.
The outlook continues to consolidate as another small bodied daily candlestick was posted yesterday. After the big swings seen early last week have dissipated, even on an intraday basis, conviction has been lost. After Friday’s doji candle, this week has had two candles that almost entirely cancel each other out. It comes as little surprise then that momentum indicators have moderated and lack conviction too, with RSI and Stochastics flattening. Support at $1.1165/$1.1190 has been bolstered as yesterday’s session low bounced from this recent band to maintain what is effectively a growing trading range (between $1.1165/$1.1420). However, with the market faltering slightly once more this morning, there is a hint of negative bias in the market. This is reflected on the hourly chart, where hourly RSI is gravitating towards 30, Stochastics are pulling decisively lower and hourly MACD lines bear cross at neutral. It lends a mild preference towards testing $1.1190 once more, whilst yesterday’s high of $1.1260 is initial resistance protecting $1.1290.
Over the past couple of weeks, sterling has been the worst performing major currency by some way. Although there was a degree of kick back against this yesterday, we expect this underperformance to continue. Subsequently, today is an important session for the continuation of the near term corrective outlook on Cable. A strong positive candle posted yesterday was counter to a three week downtrend and gives another chance to sell. This trendline sits at $1.2405 today as the early move has dropped back again. However, if the bulls can rally again and post another positive candle, then it would break the three week downtrend and suggest the market is ready to pull higher once more. Momentum indicators are at an intriguing crossroads too, where they remain negatively configured on a near term basis, but With Stochastics ticking higher, this could also be a turning point for a rally. The hourly chart shows the importance of how the market responds around $1.2400 resistance (an old basis of support which capped yesterday’s recovery) will be for the near term outlook. We favour a continuation of the move lower, with another leg to test $1.2250 and potentially $1.2160 before the medium term range support kicks in. Above $1.2450 drives for recovery again.