Equities and risk-linked assets gained yesterday, while the greenback slid, after the US employment data for June came in better than anticipated. However, the party stopped early, perhaps due to the continues surge in infected cases from the coronavirus, which forced several US states to halt or reverse their reopening plans.
Equities Up on NFPs, but Gains Stay in Check Due to Record Infections
The US dollar traded higher against the majority of the other G10 currencies on Thursday and during the Asian morning Friday. It gained versus NOK, EUR, GBP, SEK, and JPY in that order, while it underperformed against NZD, CAD, and AUD. The greenback was found virtually unchanged versus CHF.
The fact that the main winners were the commodity-linked currencies Kiwi, Loonie and Aussie, combined with the relative weakness in the safe-haven yen, suggests that market sentiment remained supported for another session. Indeed, looking at the performance of equity markets, we see that major EU and US indices were a sea of green, although appetite was softer during the US session. Today, Asian bourses also traded in positive territory, with Japan’s Nikkei 225 and China’s Shanghai Composite gaining 0.57% and 1.14% respectively.
Yesterday, the main economic release may have been the US employment report for June. Non-farm payrolls rose by a record of 4.8mn, with the unemployment rate falling to 11.1% from 13.3%, while the forecast was for a slide to 12.3%. Average hourly earnings slowed to 5.0% yoy from 6.6%, but this is still a very high rate, which combined with the NFP number and the unemployment rate, points to a strong report. The report suggests that the labor market continued to improve, but still, even with May and June seeing consecutive record job gains, the economy has a long way to go before recovering the 22mn jobs lost during March and April.
The market reaction was more or less as we anticipated, namely higher equities and a lower US dollar. Yes, the dollar slid on the better-than-expected numbers as the improvement in risk appetite prompted investors to reduce their safe-haven holdings, and as we saw in the aftermath of the coronavirus outbreak, the greenback has been acting as a safe haven. That said, the excitement did not last for long, with US indices closing on average only around 0.45% higher, and the dollar rebounding against some of its major counterparts. This may have been due to the continues surge in infected cases from the coronavirus in the US, which forced several states to halt or reverse their reopening plans. It is worth mentioning that, yesterday, infected cases around the globe hit a new daily record, with the US reporting more than 55k cases within a day, for the first time since the outbreak of the virus. With all that in mind, we see decent chances for the July jobs report to paint a softer picture.
The weakness in the euro and the pound may have not only be due to the aftermath rebound in the dollar, but also due to individual stories. With EU members failing to agree on a recovery fund, the common currency continued trading on the back foot, while the pound may have reversed some of the gains made on Tuesday and Wednesday due to the lack of progress in this week’s talks with regards to the post-Brexit relationship between the EU and the UK.
As for our view, it has not changed. We remain neutral because markets are trading in consolidative patterns, and this may have been the case due to the ongoing battle between those who, due to improving data, see a faster-than-previously-thought economic recovery as most nations around the globe continue to ease their lockdown measures, and those who are concerned over a second round of restrictions due to the re-acceleration of global infections. We prefer to wait for clearer signals in order to start considering the market’s forthcoming direction. On one hand, further loosening of the restrictions may allow economies to continue to recover, and thereby support further recovery in equities and other risk linked assets. In such a case, safe havens like the dollar are likely to trade on the back foot. On the other hand, if more nations start reintroducing lockdown measures, this may result in a second hit to the global economy, and thus, force investors to reduce again their risk exposures. Namely, equities may reverse south, as investors seek for shelter in safe havens.
AUD/USD – Technical Outlook
On one hand, AUD/USD is still struggling to overcome the 0.6975 barrier, which has been acting as a strong resistance from around mid-June. But on the other hand, from the same mid-June, the pair is forming higher lows, allowing us to draw a short-term upside support line taken from the low of June 15th. This may help keep the bulls active for some time, however more of them may join in on a break of the 0.6975 barrier, hence why we will take a cautiously-bullish approach for now.
A strong move higher and a break above the previously-mentioned 0.6975 barrier, marked by the highs of June 16th and 23rd, could invite a few extra buyers into the game, as the pair would confirm a forthcoming higher high. AUD/USD might then travel to the 0.7020 obstacle, a break of which may clear the way to the highest point of June, at 0.7062.
On the downside, in order to shift our attention to some lower areas, a violation of the aforementioned upside line would be needed. In addition to that, a drop below the 0.6832 hurdle, marked by the low of June 30th, may strengthen the bearish case, as it would confirm a forthcoming lower low. AUD/USD could then drift to the 0.6810 obstacle, which is the low of June 21st, where the rate might get an initial hold-up, as it may also test the 200 EMA on the 4-hour chart. That said, if the bears still feel that they can continue dominating the field, a break of that support area might open the way to the low of June 15th, at 0.6776.
FTSE100 – Technical Outlook
Yesterday, the FTSE100 managed to break its short-term downside resistance line taken from high of June 9th but failed to get above one of its key resistance barriers, at 6265. Given that the price momentum is still to the upside, there is a chance to see a further move north. However, to get a bit more comfortable with that idea, we would like to see a break above the 6265 barrier first, hence why we will stay somewhat bullish.
If, eventually, FTSE 100 makes a run higher and breaks above the 6265 hurdle, marked near the high of June 26th and by the high of June 30th, that would confirm a forthcoming lower low and allow more bulls to make their way into the field. The pair could then travel to the 6342 zone, marked by the high of June 23rd, where it may stall temporarily. That said, if the bulls continue to apply pressure and break that zone, this could help them lift the FTSE100 to its next potential resistance area, at 6389, marked by the high of June 10th.
Alternatively, if the price starts sliding heavily to the downside and falls below the aforementioned downside line, that could make the bulls worry. The buyers might abandon the arena if the index breaks a short-term tentative upside support line drawn from the low of June 15th and also drifts below this week’s low, at 6080. That way, the FTSE100 could move to the low of June 25th, at 6024, a break of which may clear the path to the lowest point of June, at 5930.
As for Today’s Events
US markets will stay closed in celebration of the Independence Day. Elsewhere, we get the final services and composite PMIs for June from the Eurozone and the UK. As always, expectations are for confirmations of the initial estimates.
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