The ebb and flow of market sentiment has once more seen flow back into risk at the start of the week. An interview by Fed chair Powell on the programme, 60 Minutes, in the US last night has been taken as a glass half full. Powell talked about the prospect of unemployment peaking at around 20% to 25% and perhaps a GDP shrinkage of over -20%. However, he was also confident of the rebound too, potentially as soon as Q3 this year, although decisive economic recovery may not be seen until a vaccination has been found. Powell continued to re-iterate no desire for negative interest rates but the Fed can do more if needed and it is not out of ammunition. Whilst there was nothing overly new in this interview, it seems to have reassured markets today. One area really reacting positively this morning are the precious metals, with gold breaking out to its highest level since 2012. However, there is also broad positive sentiment across asset classes too. This comes amid further news of economies such as the US, Denmark and Italy stepping up their easing of lockdown measures. Additionally, although Japan fell into recession in Q1, Japanese GDP came in broadly better than expected. The question now, is whether the bulls can build on this positive start to the week.
This has all allowed a fairly positive outlook to take hold this morning. US Treasury yields are ticking higher (with a bear steepening, risk positive shape to the yield curve), whilst equities are showing some decent gains. With the E-mini S&P futures +1.2% higher, Asian markets have been solid (Nikkei +0.5% and Shanghai Composite +0.2%), whilst European markets are over +1.5% higher. In forex, there is broad positive risk appetite, with JPY being the main underperformer, whilst the commodity currencies are all outperforming. For commodities, we see the rallies taking off in gold (breaking out to multi-year highs) and silver, whilst oil is now building up a head of steam too with Brent and WTI around 4% to 5% higher.
It is a light economic calendar today, with the US NAHB Housing Market Index at 1500BST the only data of any real significance due. The index is expected to have improved to +35 in May (from +30 in April).
Chart of the Day – NZD/USD
In spite of this morning’s rally, the outlook for risk in forex still looks to be precarious. Over recent weeks, we have been talking about how the rebound from the March lows across several risk related markets is under growing pressure. The Kiwi dollar is a market considered to be at the higher beta (riskier) end of the scale on the major pairs and there are growing signs of a correction forming. The uptrend channel has been shallow since late March, but has now been broken to the downside by some negative candles towards the end of last week. Closing consistently below $0.5995 means that the market is rolling over to form lower highs and lower lows. NZD/USD is edging closer to what would be a test of key support at $0.5910. This is the mid-April low and a breach would signal a decisive shift in sentiment. A close below $0.5910 would complete a month long top pattern and open for a -220 pip corrective move towards $0.5690. Momentum indicators are already ahead of the move, with RSI falling below 45 and at a four week low, along with Stochastics accelerating lower and now a bear cross on MACD. The 21 day moving average has been a decent gauge over recent months (coming in at $0.6035 today). Increasingly intraday rallies are being seen as a chance to sell. With a mini-downtrend around $0.6000 and overhead supply from old May lows, there is a near term sell-zone between $0.5990/$0.6015.
The euro continues to fluctuate in a near term band of around 125 pips against the dollar. There is little real direction as the market remains steady between support at $1.0765 and resistance of the mid-range pivot at $1.0890. Momentum indicators remain becalmed in a state of consolidation, with the price sitting steady in the lower half of the six week trading range between $1.0725/$1.1015. Across the course of last week the market fluctuated within this tighter band but lacks direction. There is the slightest negative bias as Stochastics (the most sensitive momentum indicator) edge lower, but the last two candles have cancelled each other out and the market is all but flat tis morning. So, breaching the support or resistance is needed for direction. Support of note is at $1.0765 with resistance at the pivot of $1.0890. For now, much else is just noise.
We have been increasingly concerned for the outlook of sterling in recent sessions, and it seems that this concern has been justified. A trend lower has formed over the past two weeks and with a succession of negative candlesticks, Cable has now decisively broken the support of the key April low at $1.2160. This leaves Cable at a seven week low, but more importantly, there is little real support to prevent what could be a significant decline now. During the hugely elevated volatility of the March sell-off and rebound, Cable sliced through previous crucial 2019 support of $1.1957/$1.2020 (which formed during the height of concern over Brexit uncertainty). This is now all that stands between here and the $1.1405 March low. Momentum indicators are increasingly negatively configured now, with RSI confirming the breakdown to multi-week lows but only in the mid-30s (i.e. with further downside potential), whilst Stochastics and MACD lines are also increasingly negative. Near term rallies will be seen as a chance to sell this week, where the breakdown at $1.2160 is now the start of overhead supply of all the stale bulls from April into May. The two week downtrend comes in at $1.2285 today. There is room for a bounce back, but the bulls are really struggling now.