Flight-to-Safety Boosts US Dollar; AUD, Risk, EMFX Slump

Yen Outperforms, EUR, GBP Fall; US Bond Yields Slide

Summary: The US Dollar benefited from a flight-to-safety as markets went into risk off mode ahead of the release of the FOMC meeting minutes. Weaker than expected European and US economic data weighed on sentiment. Wall Street stocks ended lower. Risk currencies slumped, led by the Australian Dollar which finished 0.63% lower at 0.7492. US Treasury yields slid after data revealed a fall in the services industry. US ISM Services Index slid to 60.1 in June from a previous 64.0, and lower than expectations of 63.5. Across the Atlantic, both German and Eurozone ZEW Economic Sentiment Index’s were softer than expected. The Euro eased to 1.1822 from 1.1862 yesterday while Sterling closed 0.39% lower at 1.3798 (1.3832). Best performing major was the Japanese Yen, USD/JPY ended lower, at 110.65 (110.95 yesterday). The Aussie hit a high at 0.7599 earlier in the day. The RBA announced it would trim the pace of its bond buying from September. RBA officials also said that there would be no rate hikes before 2024. The USD/CAD pair soared to 1.2460 from 1.2340 on the broad-based Greenback strength. Oil prices slumped as OPEC and other oil producing nations cancelled their upcoming meeting. A double whammy that whacked the Canadian Loonie. A favourite gauge of the Dollar’s value against a basket of 6 major currencies, the Dollar Index (USD/DXY) climbed 0.38% to 92.55 (92.25).

The benchmark US 10-year Treasury yield slid to 1.35% from 1.42% yesterday, its lowest since February 24. Two-year US bond rates fell 3 basis points to 0.22%. Other global bond yields were also lower. Germany’s 10-year Bund yield was last at -0.27% (-0.21%), UK 10-year rate settled at 0.63% from 0.71%. Canada’s 10-year bond yield slid 9 basis points to 1.31%.
The DOW settled at 34,547 (34,825) while the S&P 500 was last at 4,343 (4,352 yesterday).
Data released yesterday saw Japanese Average Cash Earnings slip to 1.9% from estimates at 2.1%. Japan’s May Household Spending rose 1.6% from April’s 0.1%, beating forecasts at -3.7%. Germany’s Factory Orders fell -3.7% from -0.2%, missing expectations at +1.3%. UK June Construction PMI rose to 66.3 in June from 64.2 (May). Germany’s ZEW Economic Sentiment Index slumped to 63.3 from 79.8, underwhelming estimates at 75.4. The Eurozone ZEW Economic Sentiment Index fell to 61.2 from 81.3, missing forecasts at 79.0.

• AUD/USD – had a roller coaster of a day, soaring to just under 0.7600 (0.7599) after the RBA announced it would pare their bond purchases from September. The Australian central bank also reiterated that it would not hike rates until 2024. This and broad-based USD strength pushed the Battler back down to earth, closing at 0.7492. Overnight low was 0.74806.
• EUR/USD – The Euro initially rose to 1.1895 overnight highs as the US Dollar extended its post US Payrolls report slide. Softer than expected German and Eurozone ZEW Economic Sentiment Index data weighed on the shared currency, which slumped to a 1.1822 close.
• USD/JPY – lower US bond yields and a souring of risk sentiment favoured the Japanese currency which was the only major currency to gain versus the Greenback. Japan’s 10-year JGB yield was unchanged at 0.03%. USD/JPY eased to close at 110.65 from 110.95 yesterday.
• GBP/USD – Sterling settled 0.39% lower to 1.3795 (1.3840 yesterday) on renewed USD strength. Despite strong UK Construction PMI data, Britain’s Covid-19 infections hit its biggest one day increase since January (28,773 cases). UK Prime Minister Boris Johnson reaffirmed that restrictions would be lifted on July 19.

On the Lookout: Market participants will now focus on the release of the minutes of the US Federal Reserve’s FOMC June meeting - (Sydney, 8 July at 4 am). Traders will be looking for clues from the Fed as to when it plans to start tapering its bond purchasing spree induced by the Covid-19 pandemic. Any hawkish rhetoric will boost the US Dollar.
Data released ahead of the FOMC minutes kick off with Australia’s AIG June Services Index (May 61.2, no forecasts given). New Zealand reports on its July ANZ Business Confidence Index (previous was -0.4, no forecasts given). Japan follows with its May Leading Economic Index (previous was 103.8, no forecasts). European economic reports begin with Germany’s May Industrial Production (f/c 0.5% from April’s -1%: ACY Finlogix), French May Trade Balance (April Deficit of -EUR 6.24 billion, no forecasts), UK Halifax May House Price Index (m/m f/c 1.5% from previous 1.3%: ACY Finlogix). China releases its June Foreign Exchange Reserves (f/c USD 3.202 trillion from USD 3.22 trillion May).
Italian Retail Sales for May round up Europe’s data releases (previous was -0.4%, no forecasts). Canada follows with its IVEY PMI for June (previous was 64.7, no forecasts), the US releases its US JOLTS Job Openings for May (f/c at 9.31 million from previous 9.286 million: ACY Finlogix). FOMC meeting minutes release follow.

Trading Perspective: The Dollar renewed its climb against its Rivals despite lower US treasury yields. The Greenback’s strength was the result of a flight to safety in a risk-off environment and anticipation of the release of the FOMC’s pivotal June meeting minutes. However, without yield support, further USD strength will be difficult. Last month Fed officials opened the door to the discussion on reducing asset purchases which underpinned the Greenback. Friday’s US Payrolls report saw the largest growth in Job’s created in 10 months. However, the Unemployment rate climbed to 5.9% and Wages fell short of expectations. Last night the US ISM Services PMI slid to a level much lower than expected. Japan’s Yen was the only currency to gain versus the Greenback. This could all change tomorrow morning. For now, the market’s risk off mode will keep the Dollar underpinned.

• AUD/USD – The Aussie Battler had a choppy session which saw an overall trading range between 0.74806 and 0.7599, happy days! AUD/USD closed at 0.7492 after initially climbing to 0.7599 following the RBA’s announcement. Australia’s 10-year treasury yield closed at 1.46% (1.43% yesterday). In contrast, the US 10-year bond yield slid to 1.35% from 1.42%. The Aussie should find good support at its overnight low around 0.7480. The next support level lies at 0.7450. Immediate resistance can be found at 0.7510 and 0.7540. Look for a likely trade today between 0.7485-0.7585. Am not bearish down here just yet.
• USD/CAD – The Dollar had a good day against its northern neighbour the Canadian Loonie. The Greenback slumped to an overnight low at 1.23026 before soaring to 1.2492 (that’s almost 200 points!), then settling to 1.2461 where it finished. Falling Oil prices also weighed on the Canadian Dollar. Tonight, Canada’s IVEY PMI data is released. It is a diffusion index of 175 purchasing managers selected geographically – and a leading indicator of economic health. A slight improvement is expected. USD/CAD has immediate resistance at 1.2490 followed by 1.2540. Immediate support can be found at 1.2430 and 1.2380. Look to trade a likely 1.2385-1.2485 range today. Preference is to sell into USD strength.

(Source: Finlogix.com)

• EUR/USD – The Euro rose to just under 1.1900 resistance, at 1.1895 before sliding to its overnight close at 1.1823. German and Eurozone ZEW Economic Index readings underwhelmed. Germany’s Factory Orders missed forecasts with a lower reading. This weighed on the shared currency. EUR/USD has immediate support at 1.1805 (overnight low traded was 1.1807) followed by 1.0780. Immediate resistance can be found at 1.1860 and 1.1900. Look for a likely trade between 1.0785-1.0885 today. Just trade the range shag on this one today.
• USD/JPY – The Japanese Yen, often the preferred haven currency did not disappoint. It was the only currency to gain versus the Greenback. USD/JPY slipped 0.25% to 110.65 from 110.95 yesterday. The combination of lower US bond yields and a souring of risk appetite buoyed the Japanese currency. USD/JPY has immediate support at 110.50 (overnight low 110.52) followed by 110.20. Immediate resistance can be found at 110.90 (overnight high 110.93) followed by 111.20. Look to trade a likely 110.45-111.05 range today. Neutral here right now, trade the range works best.

Have a good trading day ahead all, happy Wednesday