A recovery on the US dollar is gathering momentum. With traders increasingly concerned about second wave COVID infection rates rising across Europe and trends also turning higher for the US, there is a shift into the dollar. Throughout the summer months the perception was that the US was in for economic underperformance. However, this perception is now being re-set as France, Spain and increasingly the UK are struggling with rising infection rates which are forcing the reinstatement of social containment measures. Congress may have been able to pass a stopgap funding bill to keep government open, but a fiscal support package remains some way off. Fed chair Powell may have towed the dovish line, but there has also been surprisingly hawkish comments from the FOMC’s Charles Evans over limiting QE and raising rates sooner than expected. The dollar has seen the benefit of all this, driving higher through 94.00 resistance on Dollar Index. This equates to two month lows on EUR/USD whilst gold has also broken decisively below $1900. The Reserve Bank of New Zealand maintained a fairly steady ship on monetary policy (rates at +0.25%, asset purchases steady at NZD 100bn) and kept the door open to negative rates. This has not helped the Kiwi too much though this morning.
Wall Street closed with good recovery gains, with the S&P 500 +1.1% at 3315, whilst US futures are steady this morning (E-mini S&Ps +0.1%). Asian markets were all but flat overnight, with the Nikkei just -0.1% lower after two days of public holiday and the Shanghai Composite basically flat. European markets look set for a decent rebound with FTSE futures +0.9% and DAX futures +0.5%. In forex, we see USD strengthening continuing across the major pairs, with AUD and NZD underperforming, whilst EUR and JPY are only slightly weaker. In commodities, the big declines continue in the precious metals, with silver -5% and gold -1% lower again today. Oil is also around -1% lower.
The economic calendar is awash with flash PMIs for September today. Eurozone data is at 0900BST and is expected to show Eurozone flash Manufacturing PMI improving to 51.9 (from 51.7 final August) and Eurozone flash Services PMI to remain at 50.5 (50.5 final August). This would see the Eurozone flash Composite PMI slipping slightly to 51.7 (from a final 51.9 in August). The UK flash Manufacturing PMI is at 0930BST and is expected to drop back to 54.1 (from 55.2 final August) whilst UK flash Services PMI is expected to fall to 56.0 (from 58.8 final August). This would leave the UK flash Composite PMI at 56.3 (down from 59.1 in August). The US flash Manufacturing PMI is at 1445BST and is expected to remain at 53.1 (53.1 final August) with the US flash Services PMI to slip slightly to 54.7 (from a final 55.0 in August). Aside from that, the EIA Crude Oil Inventories are at 1530BST and are expected to show an inventory drawdown of -2.3m barrels (after a drawdown of -4.4m barrels last week).
Once more there will be focus on Fed chair Jerome Powell who testifies before the House Select Committee at 1530BST about impact of COVID-19. Again, any clarity on Fed monetary policy could drive volatility. There are two other Fed speakers today too, with Loretta Mester (tends to lean hawkish) at 1400BST and Randall Quarles (centrist) at 1900BST.
Chart of the Day – AUD/JPY
Aussie/Yen remains a classic signal for risk sentiment. So as risk appetite heads south in the early part of this week we have seen an acceleration lower on AUD/JPY. This move has dragged the cross back to the old June/July pivot at 75.00 again, a level coming under significant scrutiny early today. This seems to be a sharply deteriorating market right now, but a closing breach of 75.00 would effectively open the way towards 72.50 again. The concern for the bulls is that having broken the final (shallowest) uptrend (since mid-June) of the recovery late last week, the market is now building a new downtrend of lower highs and lower lows. The move below 75.55 in the last couple of days confirms the retreat now underway. A three week downtrend is in play, whilst momentum indicators are increasingly correctively configured. It suggests now selling into near term strength, with a band of resistance 75.55/76.10 being a band of overhead supply. On a close below 75.00 the initial support is 74.00.
The euro is under mounting pressure now. Two decisive negative candles in the early part of this week have completely changed the outlook. A strong bear candle that closed below the support at 1.1750 has now been followed by an early move this morning to breach 1.1695. This is the market now looking to confirm a topping out. A close below 1.1695 would be the confirmation of a downside break of a two month trading range (effectively a top pattern) that implies around -300 pips of further downside in the coming weeks. An unwind towards the old resistance levels 1.1420/1.1490 would then be a viable target. Momentum is increasingly corrective with RSI into the mid-30s whilst also having downside potential. Increasingly the outlook is becoming one where intraday rallies are a chance to sell now, and any bull failure between 1.1695/1.1750 would add weight to this strategy. Below 1.1695 the first real support is not until 1.1490.
Selling pressure is mounting. After the recent rebound failed around 1.3000, three decisive negative candles have driven