Global factory activity drops, treasury yields tumble, stocks dip

Yen, Swiss Rise; Euro, Aussie Fall as Recession FX Comes into Play

Summary: Market volatility stayed elevated with major FX pairs trading in at least 100-point ranges overnight. The Euro (EUR/USD) was the biggest loser, falling 0.47% to 1.0525 from 1.0570 yesterday. European Manufacturing and Services PMIs all softened in June weighing on risk appetite. The ongoing war in the Ukraine due to Russia’s invasion disrupted Europe’s supply chains while keeping inflation at its highest levels in years. The Eurozone Flash Manufacturing PMI slumped to 52.0 in June from a previous 54.6, and missing estimates at 53.9. Across the Atlantic in the US, Flash Markit Composite PMI slid to 51.2 in June from May’s 53.6. In a speech delivered to the US Congress on Monetary Policy, Fed Chair Jerome Powell said that the US central bank is fully committed to bringing prices under control even if doing so risks an economic downturn. US Treasury bond yields tumbled with the benchmark 10-year rate tumbling to 3.09% from 3.16% yesterday. The Dollar Index (USD/DXY), which measures the value of the Greenback against a basket of 6 major currencies edged higher to 104.37 from 104.17 yesterday. Against the Japanese Yen though, the US Dollar (USD/JPY) plunged to 134.95 from 136.10 yesterday, down 0.79%. Risk leader, the Australian Dollar (AUD/USD) dipped 0.36% to 0.6888 (0.6925) while the Kiwi (NZD/USD) lost 0.1% to 0.6270 (0.6285). Sterling (GBP/USD) closed little changed at 1.2257 (1.2265 yesterday) while USD/CHF (Dollar-Swiss Franc) eased to 0.9612 from 0.9620 yesterday. The US Dollar gained versus most Asian and Emerging Market currencies. The USD/THB pair (Dollar-Thai Baht) rose to 35.50 from 35.37 while USD/SGD (US Dollar-Singapore Dollar) was up modestly to 1.3897 (1.3870 yesterday).

Other global bond yields fell. Germany’s 10-year Bund yield plunged to 1.42% (1.63%). The UK 10-year Gilt yield was last at 2.31% (2.50%). Japan’s 10-year JGB yield dipped to 0.22% from 0.23% yesterday. Australia’s 10-year bond yield edged up to 3.85% from 3.83%.

Wall Street stocks finished with modest gains. The DOW settled at 30,587 (30,460) while the S&P 500 climbed to 3,782 from yesterday’s 3,755.

Other data released yesterday saw Australia’s Flash Manufacturing PMI edge up to 55.8 from an upward revised 55.7 (55.5). Japan’s Flash Manufacturing PMI fell to 52.7 from 53.3, missing expectations at 53.5. French Flash Manufacturing PMI slid to 54.4 from a previous 58.3, missing estimates at 57.6. Germany’s Flash Manufacturing PMI fell to 52.0 from 54.8. The UK’s Flash Manufacturing PMI edged lower to 53.4 from 54.6 but beat estimates at 53.0. UK CBI Realised Sales fell to -5 from -1, missing forecasts at -2. US Flash Manufacturing PMI dropped to 52.4 in June, missing median expectations at 56.0, and lower than a previous downward adjusted 57.0. UK GFK Consumer Confidence for June fell to -41 from a previous -40, missing estimates at -40.

• EUR/USD – Slip-sliding away, the shared currency slumped 0.47% to 1.0525 (1.0570) weighed by softer readings in European and Eurozone Manufacturing and Services PMIs. Overnight low traded for the EUR/USD pair was at 1.0483 while the high recorded was at 1.0581. Trading was choppy within the recorded range.

• USD/JPY – Weighed by the lower finish in US bond yields, the Greenback tumbled against the Japanese Yen to 134.95 from 136.10. Falling global factory activity saw FX flows pouring into the Yen as risk appetite waned. In volatile trade, the overnight low recorded was at 134.26. On the topside, overnight high traded was at 136.20 bringing the trading range to almost 200 pips! Happy days!

(Source: Finlogix.com)

• AUD/USD – The switch to risk-off stance by financial markets weighed on the Aussie Battler. The Australian Dollar broke back under the 0.6900 support to close at 0.6888 (0.6925 yesterday), down 0.36%. Overnight low traded was at 0.6869 while the high recorded was at 0.6926. The Aussie was also lower against other rivals. The AUD/JPY cross lost a whopping 1.17% to 92.95 from 94.23 yesterday.

• USD/SGD – Against the Singapore Dollar, the Greenback edged up to finish at 1.3897 from yesterday’s 1.3870. Overnight high traded was at 1.3913 while the overnight low recorded was at 1.3893. Apart from the Japanese Yen and Swiss Franc, the Singapore Dollar is one of the currencies to hold during times of global recession, according to this writer’s experience.

On the Lookout: Today’s calendar is relatively light which after a volatile week for markets is welcome. That said, it has been central bank talk that has kept FX trading choppy. Today’s economic data releases kicked off with Japan’s May Headline CPI (m/m) which dipped to 0.2% from 0.4% and (y/y) was unchanged at 2.5%. Japanese May Core CPI (y/y) matched April’s 0.8%. There are no other major economic data releases out of Asia. The UK starts off European data with its UK May Retail Sales (m/m f/c -0.7% from 1.4%; y/y f/c -4.5% from previous -4.9% - FX Street). UK May Core Retail Sales (m/m f/c -1% from 1.4%; y/y f/c -5.1% from -6.1% - FX Street). Germany follows with its June IFO Business Climate (f/c 92.9 from previous 93.0 – FX Street), German IFO June Expectations (f/c 87.4 from 86.9 – FX Street), China releases its Final Current Account (no f/c, previous was +USD 118.4 billion). The US rounds up today’s releases with its Revised University of Michigan Consumer Final Sentiment (f/c 50.2 from 50.2 – ACY Finlogix), US May New Home Sales (f/c 0.588 million from previous 0.591 million -FX Street).

Trading Perspective: Welcome to Friday. Expect heightened volatility to dominate FX trade today as global central banks continue in their commitment to bring prices under control even if doing so risks the “R” (recession) word. Expect the Yen, Swiss Franc, US, and Singapore Dollar to continue to attract flows while the Australian, New Zealand, and Emerging Market Currencies remain vulnerable. Historically, this has been the trend over the past five recessions. However, it is not a rule and the best tool a trader can have during these times is flexibility. Trading ranges will remain wide, but they provide room to manoeuvre. Keep a mental record of those ranges, particularly the highs and lows. This is the best preparation for more of what is to come.

• EUR/USD - The shared currency remains vulnerable due to Europe’s proximity to Russia Ukraine conflict. While the Ukraine became a candidate to join the European Union on Thursday, meeting the criteria for joining will take time. The Euro closed at 1.0525 (1.0570). Immediate support for the Euro lies at 1.0500, 1.0480 and 1.0430. On the topside, immediate resistance is found at 1.0550, 1.0580 and 1.0610. Look for further choppy trade in a likely range today of 1.0470-1.0570. Just trade the range on this puppy today.

• AUD/USD – The Australian Dollar remains vulnerable during times of uncertainty. Overnight, the Aussie Battler traded to a low at 0.6869, climbing in late New York to settle at 0.6887 (0.6925 yesterday). Immediate support lies at 0.6870, 0.6840 and 0.6810. On the topside, look for immediate resistance at 0.6910, 0.6940 and 0.6980. Look for the Aussie to remain under pressure in the current environment. Likely range 0.6850-0.6930. Sell rallies.

• USD/JPY – Expect trading in this currency pair to remain volatile. On the day, lower US bond yields will weigh on USD/JPY. The Greenback closed at 134.95 from 136.10 open yesterday. Overnight low traded was at 134.26. The overnight high recorded was at 136.20. For today, look for immediate support at 134.60, 134.30 and 134.00. Immediate resistance lies at 135.30, 135.60 and 136.00. Look for more violent moves in the USD/JPY pair. Likely range today 134.20-136.20. Just trade the range shag on this one, lots of pips in it.

• USD/SGD – We look at the most liquid of Asian/EMFX today. The Singapore Dollar is as stable as they come, although it has had its volatile moments (Asian Currency Crisis in 1997). Overnight the USD/SGD pair rose modestly to finish at 1.3897 from 1.3870. Immediate resistance lies at 1.3920 (overnight high traded was 1.3913). The next resistance level lies at 1.3950 followed by 1.3980 and 1.4010. On the downside, immediate support can be found at 1.3870, 1.3840 and 1.3810. Look for a choppy one today, likely range 1.3870-1.3930. Prefer to sell rallies.

Have a good trading Friday ahead all, and top weekend too.