A slight tempering of the recent surge in risk appetite has taken hold today. Positive newsflow in recent days over the progress of COVID-19 vaccines (one from US pharma company Moderna, and one out of Oxford University) show that vaccines are in the pipeline. If this turns out to be the case, this will be the one true way that risk appetite can sustainably recover. However, economic data out of China overnight, suggests that in the meantime, economic recovery may be wobbly. Whilst GDP for Q2 came in ahead of expectations (at +3.2%, versus expectations of +2.5%), there was concerning data regarding consumers in China. Retail Sales showed a disappointing -1.8% decline in June, a point at which China was fully out of lockdown. The consumer may still only account for around half the Chinese economy, and industrial production grew as expected, however, it is the read through to other, more consumer driven economies, which is the concern. The US is struggling to get its economy out of lockdown as infection rates are at record levels. This does not bode well for consumer confidence and retail sales in the coming months. June’s Today’s data will show a strong rebound in June, but concerns are for the months in Q3 which will be impacted by the second wave of infections (that’s if the first wave ever really finished). We have a major central bank today on the docket, but the ECB is likely to be very much in wait and see mode, with the extended easing measures undertaken in June.
Wall Street closed solidly higher last night with the S&P 500 +0.9% at 3226. However, with US futures ticking lower this morning (E-mini S&Ps -0.5%) there is a mildly corrective feel to equities today. Asian markets have taken the data out of China quite negatively, with the Nikkei -0.8% and more considerably the Shanghai Composite -4.4%. In Europe there is a risk negative bias, with FTSE futures -0.6% and DAX futures -0.8%. In forex, there is a risk negative and dollar positive skew. This is meaning slips back on AUD and NZD, whilst GBP is also weaker. In commodities, the dollar rebound is weighing on gold (-0.3%) and silver (-1.0%), whilst oil is slightly lower after a move by OPEC+ to taper its production cuts in the coming months.
The ECB rates decision and US Retail Sales dominate the economic calendar today. The ECB monetary policy decision is at 1245BST and is expected to be a muted affair. No change is expected to the main refinancing rate of zero or the deposit rate of -0.50%. There are also no changes expected to the Pandemic Emergency Purchases Program (PEPP) after it was extended in June. The press conference by ECB President Lagarde is at 1330BST and is expected to show the Governing Council very much in wait and see mode. The US Retail Sales data for June is at 1330BST and is expected to show core ex-autos Retail Sales grew by +5.0% in the month of June (after a rebound of +12.4% in May). The Philly Fed Business index at 1330BST is expected to slip back slightly to +20.0 in July (from +27.5 in June). Weekly Jobless Claims are at 1330BST and are expected to show claims of another 1.25m last week (after 1.31m in the previous week).
Chart of the Day – NZD/USD
The risk currencies have been ranging for the past month, but are they preparing for another breakout? Looking at the chart of the Kiwi, we see NZD/USD once more swinging higher within the $0.6370/$0.6600 trading band. Using the support of a pivot around $0.6500 as support the bulls are getting ready. Since the recovery began in mid-March, the Kiwi has already been through one multi-week phase of ranging, only to break to the upside. Holding on to the support at $0.6500 is growing in importance for the next upside break to be seen in the coming sessions. However, despite the positive medium term configuration on momentum indicators, there is still a slightly more cautious look to near term signals, which could question the conviction of a breakout. The MACD lines need to cross higher, whilst Stochastics need to hold above 80 and RSI needs to push into the high 60s (preferably above 70) to really suggest conviction. Subsequently, with the market slightly struggling still around $0.6586/$0.6600, we are minded to wait for a closing break above $0.6600. This would then imply a 230 pip upside projection target and at least a test of the December high of $0.6755. A failure back under $0.6500 would simply continue the month long range.
After a run of strong bull candles, the bulls had a look at a breakout to a new multi-month high yesterday, above $1.1420. The move could not be sustained into the close, but the sentiment is still strong. The question is now of whether confidence in a run higher has been damaged. A failed break coming ahead of the ECB monetary policy meeting today and the EU Recovery Fund discussions tomorrow is slightly concerning. However, for now, the bullish outlook for EUR/USD remains intact. In breaking above $1.1420 yesterday, the support of the previous resistance around $1.1350 grows in importance. With momentum of the move higher still strong (despite yesterday’s slight disappointment) we would now view supported weakness within this $1.1350/$1.1420 band as being an opportunity for the bulls. With the MACD lines rising off a bull cross, Stochastics strong above 80 and RSI above 60, these are momentum conditions set up for a sustainable upside break. Once these key fundamental events are passed (i.e. by Monday), a close above $1.1420 would be a key break. It would then open a test of the hugely importance resistance $1.1490/$10.1500 which has been a barrier for the past two years. A close back under $1.1350 is a disappointment, but only under $1.1255 have the bulls lost control.