Daily Market Outlook, August 3, 2020

Daily Market Outlook, August 3, 2020 

US equity market ended last week on a strong note, bolstered by impressive earnings reports from some of the big tech firms. The USD recovered on Friday, but still recorded its biggest monthly fall since January 2018. There is still no sign of a breakthrough in negotiations over an extension to the enhanced US unemployment benefits, which expired on Friday, which may see risk assets open lower this morning. 

There wasn’t an obvious catalyst for the turnaround in the USD on Friday although, after its recent big move lower, it was probably due for a pullback. July was a terrible month for the USD, with the BBDXY falling 3.3% and the EUR rising almost 5%, its biggest monthly gain since late 2010, buoyed by the €750b EU Recovery Fund.

One of the factors weighing on the USD (albeit not so much on Friday) has been the steady decline in US real (inflation-adjusted) interest rates. The 10-year US real rate fell to an all-time low on Friday, breaking below -1% for the first time. Nominal interest rates were little changed (the US 10-year rate continues to sit just above 0.5%), with the latest decline in real rates more to do with rising market implied inflation expectations. The Fed is expected to alter its forward guidance, possibly as soon as its next meeting in September, to communicate a willingness to accept a period of above-target inflation. Credit rating agency Fitch put its AAA rating on the US government on a negative outlook late in the session, due to the deterioration in the fiscal outlook, but there was little market reaction. 

European markets will digest PPI numbers for June on Tuesday, followed by the Markit Eurozone services and composite PMIs on Wednesday. Eurozone retail sales data for June will also be released on Wednesday. At the national level, a round of industrial and trade readings for the month of June will be released. Industrial production for Italy will be due on Thursday, followed by Germany, France and Spain on Friday, as are trade figures from Germany, Italy and France on Friday. German factory orders are due on Thursday. 

Over in the UK, the Markit UK manufacturing PMI will kick off on Monday. The Markit UK services and composite PMIs will then be released on Wednesday, followed by the Markit UK construction PMI on Thursday. The Bank of England (BOE) will be announcing its monetary policy decision on Thursday. No change to the 0.10% Bank Rate is expected. Forecasts will be updated and could showcase the BOE’s bias towards downside risks. 

Australian markets are closed on Monday (3 August) for a bank holiday. Key data releases this week include June’s trade data as well as retail sales on Tuesday. The week will also see the release of key PMIs – manufacturing on Monday, both services and composite PMIs on Thursday. The Reserve Bank of Australia (RBA) will be announcing its latest monetary policy decision on Tuesday. No policy changes are anticipated, with the cash rate at 0.25% along with the three year yield target. 

In a similar vein to last week’s Commitment of Traders report, the overall bear position in the USD being accumulated by IMM-based traders rose again in the week through July 28th. The aggregate bearish bet on the USD rose nearly USD5.3bn this week to reach USD 24.5bn. This is the largest overall USD short position reflected in this market data since April 2018.  USD bears continue to concentrate their firepower primarily through the EUR; the EUR net long increased to USD23.1bn this week, up USD5.1bn. Gross EUR longs around 20% over the prior week’s total while gross shorts increased by a little over 6%. This extends the pattern of EUR positioning being driven mainly by gross long accumulation at the moment whereas the EUR’s initial recovery in the spring was triggered by short covering activity.

Today’s Options Expiries for 10AM New York Cut (notable size in bold)

• EURUSD: 1.1800 (432M), 1.1870-75 (450M)
• GBPUSD: 1.3000 (550M)
• USDJPY: 104.50-60 (1BLN), 105.50 (222M), 106.05-15 (500M)

Technical & Trade Views

EURUSD Bias: Bullish above 1.1820 Bearish Below

EURUSD From a technical and trading perspective, as 1.1810 acts as resistance anticipate another corrective leg lower to test bids back towards 1.16. On the day a close back through 1.1820 would negate the corrective thesis, opening a retest of 1.19

GBPUSD Bias: Bullish above 1.30 targeting 1.3250

GBPUSD From a technical and trading perspective, price tested pivotal trendline resistance at 1.3166, anticipated profit taking pull back playing out. As 1.30 continues to attract buying interest look for a test of 1.3250.

USDJPY Bias: Bullish above 105.50 targeting 107.50 

USDJPY From a technical and trading perspective, anticipated test of the equality objective at 104.50 attract big bids, printing a key reversal pattern on Friday, as discussed in today’s Chart Hit, as 105.50 acts as a support look for a test of the equality objective to 107.50.

AUDUSD Bias: Bullish above .7090 targeting .7220

AUDUSD From a technical and trading perspective, test of stops and offers above .7220 has delivered the anticipated corrective phase, as .7170 now acts as resistance look for a test .6950 as ascending support.

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