The surge in US Dollar demand after the temporary truce reached between the US and China at the G20 has been the dominant theme so far. Granted, the market is still holding the firm belief that the Fed will go through an insurance rate cut by the end of July when they meet again (Fed's Clarida gave us a clear hint on Monday) ...
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The Daily Edge is authored by Ivan Delgado, Market Insights Commentator at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth look of market dynamics, factoring in fundamentals, technicals, inter-market in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube.
The surge in US Dollar demand after the temporary truce reached between the US and China at the G20 has been the dominant theme so far. Granted, the market is still holding the firm belief that the Fed will go through an insurance rate cut by the end of July when they meet again (Fed's Clarida gave us a clear hint on Monday) even if the S&P 500 at record highs and the softening of US-China tensions argue the risks are building up for a hold. Should this scenario materialize, it would be a major upset for the market though, the Fed funds currently price in a nearly 80% chance for a cut. Throw into the mix that the US June ISM manufacturing index came upbeat on Monday, and should this week's US NFP post a solid number, the case would be gaining massive traction for the Fed to have a rethink over the aggressiveness of its easing cycle.
Amid such context, as the chart below shows, the US Dollar attracted the most demand with aggregated tick volume showing decent commitment by buyers, with the close near the highs by the NY close another key clue that the momentum remains strong as the market adjusts its view on the Fed and the trade war. On the flip side, there is fear that the trade war may now pivot towards the European Union, as the US proposes fresh tariffs, starting with $4bn on EU goods. With the ECB clearly on a dovish mode, the Euro is certainly not anchored by fundamentals, and the latest EU PMIs are only making it look like an even weaker currency, fundamentally speaking.
From a technical standpoint though, the structure in EUR/USD is still rather promising but as long as fundamentals are not congruent, it's hard to envision consistent demand. The EUR index below clearly reflects this idea of a vulnerable Euro, as it accumulates 5 days of losses in a row when crosschecked against an equally-weighted basket of the most-traded currencies. The same dark clouds are hovering over the Sterling, which is the currency most punished as the Brexit process remains on standby until a new Conservative leader is chosen and becomes prime minister. The plan is that the process should be concluded before the summer recess. What happens next on Brexit will depend on who wins.
We then have the circle of the three darlings of the market as of late, referring to the commodity-linked currency complex, with the Canadian Dollar clearly the standout as the BoC appears to be one of the only exceptions in terms of a Central Bank that, through Canada's economic indicators, is finding it hard to justify further rate cuts. This comes in stark contrast with the RBA, which just an hour ago made good on its series of hints that further rate cuts were warranted in Australia by slashing the cash rate by 25bp to 1%. Lastly, the Japanese Yen, while still on a downtrend from a daily perspective as the left chart below shows, saw solid demand after the opening gap, with the premise that best resonates to rationalize the move to have found sufficient buyers being that most of the China trade truce-led positivism had been largely priced in since mid last week.
Narratives In Financial Markets
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
The RBA decided to cut its cash rate by 25 bps from 1.25% to 1.00%, noting that the rate will help to make inroads into spare capacity and achieve progress towards inflation target. Again, the RBA put emphasis on the jobs market as the key sector the cut needs to support. The Australian Dollar saw the typical seesaw but found buyers as the accompanying monetary policy statement does not make a clear case for more cuts from here on out.
The USD has greatly improved its appeal on the back of the US-China trade truce at the G20 alongside the rather off-the-cuff meeting between President Trump and North Korea's Kim, where they agreed to resume denuclearization talks.
The selling of Euros on Monday comes as a combination of a pretext that is gaining traction in the trading floors, that is, the Fed won’t be as aggressive easing policy as the US and China go back to the drawing table to find a trade compromise, while concerns are mounting that the US may soon pivot towards Europe as it proposed fresh tariffs, starting with $4bn on EU goods. Dairy, certain metals are set to be proposed to a list of goods to have tariffs levied further.
The array of EU PMIs releases does not help the outlook for the Euro either, as Germany’s, Spain’s, Italy’s, Switzerland’s manufacturing sectors remained into contraction territory.
US June ISM manufacturing index came at 51.7 vs 51.0 expected. The positive read strengthens the case for the Fed to be less dovish. Understandably, the USD reacted positively. According to the Fed funds watch tool via the CME, the market still expects a 78% chance of a rate cut by the end of July and odds of a 50bp cut still stand at a surprising 20%.
Fed vice chair, Richard Clarida, gave a speech in Helsinki, giving no hint that the Fed is going to backtrack from what seems a well-telegraphed insurance rate cut by the end of July, hence the above 78% chance. Fed's Clarida said there's more uncertainty about trade negotiations, global growth prospects, adding that there is room for more accommodative policies.
EU leaders' summit was suspended and set to reconvene again on Tuesday. What should command most of traders’ attention is further clues on the "favourite" runners for EU top jobs.
According to New Zealand’s Quarterly Survey of Business Opinion (QSBO), business confidence for Q2 came at -34%, which is a rather dramatic level not seen since Q1 of 2009. It implies the risks of further rate cuts by the RBNZ are a real prospect to be accounted for.
China’s June Caixin Manufacturing PMI underwhelmed at 49.4 vs. 50.1 expected and 50.2 prior, which is a very poor result, weighted by output and new work declines. The headline read is the second lowest since June 2016 and indicates a clear contraction in the manufacturing sector as domestic demand continues to slow down.
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