Saturday, July 4

FX Update – June 12 – Risk Off Friday

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USDJPY, H1

The Dollar and Yen posted fresh highs against most other currencies, although managed to pare losses as the pre-London session in the Asia-Pacific region progressed, with US equity index futures managing about a 1% rebound after closing sharply lower on Wall Street yesterday. Asian share markets, meanwhile, have been a sea of red, although most of the main indices pared intraday losses, and China’s CSI 300 index managed to creep into the black. Oil prices remain soft, with front-month USOil dropping to an 11-day low at $34.49, which marked a near 15% correction from the three-month high seen on Monday, at $40.40. Investors, having driven many asset prices well into pre-pandemic valuations, are now fretting about a trending rise in new coronavirus infections in some areas where economic reopening has been ongoing for over a month. A surge in new cases in the states of Arizona, New Mexico and Utah (up 40% last week versus the prior week’s levels) are cases in point. With a vaccine and/or effective treatment remaining elusive, the premise for optimism about reopening economies has been based on the r-rate remaining below 1.0 (sub-1 readings indicating a contracting rate of new infections, and above 1 indicating an exponential increase in the rate of new infections). This is now being tested, which is translating into concerns about the possibility for there being another bear phase in the markets.

Safe haven demand for the US currency lifted the narrow trade-weighted USDIndex (DXY) to a three-day high at 96.93, before cooling to 96.60. EURUSD concurrently ebbed to a three-day low at 1.1277 before recouping to the daily pivot at 1.1330. The risk-sensitive AUDUSD and AUDJPY also printed fresh lows before rebounding from lows, to 0.6910 and 0.7410, respectively.

Sterling has remained in the underperforming column of currencies, partly due to the continued lack of encouraging signs on the EU-UK trade negotiation front, and partly due to the UK currency’s pandemic-era sensitivity to risk-off conditions. Cable printed an eight-day low at 1.2545, before moving north of 1.2600 again. UK April GDP data, released before the London interbank open, showed a 20.4% m/m contraction, which left the rolling three-month trend at -10.4%. April industrial production contracted 20.3% m/m. April should prove to be the nadir, as data from this month captured the full effect of the lockdown, which started on March 23rd in the UK. Economic reopening started in mid May. Although the GDP and production data were even worse than median forecasts, the data has had little bearing on UK markets, which are looking ahead to economic reopening, both domestically and internationally, and how successful this can be in the continued absence of either a vaccine or effective treatment for the SARS Cov-2 coronavirus.

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Stuart Cowell

Head Market Analyst

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