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The Daily Edge is authored by Ivan Delgado, Market Insights Commentator at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth look of market dynamics, factoring in fundamentals, technicals, inter-market in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube.
The surge in US Dollar demand after the temporary truce reached between the US and China at the G20 has been the dominant theme so far. Granted, the market is still holding the firm belief that the Fed will go through an insurance rate cut by the end of July when they meet again (Fed’s Clarida gave us a clear hint on Monday) even if the S&P 500 hits a record high and the softening of US-China tensions argue the risks are building up for a hold in July. Should this scenario materialize, it would be a major upset for the market as the Fed funds currently prices in a nearly 80% chance for a cut. Throw into the mix that the US June ISM manufacturing index came upbeat on Monday, and should this week’s US NFP post a solid number, the case would be gaining massive traction for the Fed to have a rethink over the aggressiveness of its easing cycle.
Amid such changing landscape, as the chart below shows, the US Dollar attracted the most demand with aggregated tick volume showing decent commitment by buyers, while the close near the highs by the NY close yet another key clue that the momentum remains strong as the market adjusts its view on the Fed and the trade war. On the flip side, there is fear that the trade war may now pivot towards the European Union, as the US proposes fresh tariffs, starting with $4bn on EU goods. With the ECB clearly on a dovish mode, the Euro is certainly not anchored by fundamentals, and the latest EU PMIs are only making it look like an even weaker currency, fundamentally speaking. From a technical standpoint though, the structure in EUR/USD is still rather promising but as long as fundamentals are not congruent, it’s hard to envision consistent demand. The EUR index below clearly reflects this idea of a vulnerable Euro, as it accumulates 5 days of losses in a row when crosschecked vs an equally-weighted basket of major currencies.
The same dark clouds are hovering over the Sterling, which is the currency most punished as the Brexit process remains on standby until a new Conservative leader is chosen and becomes prime minister. The plan is that the process should be concluded before the summer recess. What happens next on Brexit will depend on who wins.
We then have the circle of the three darlings of the market as of late, referring to the commodity-linked currency complex, with the Canadian Dollar clearly the standout as the BoC appears to be one of the only exceptions in terms of a Central Bank that, through Canada’s economic indicators, is finding it hard to justify further rate cuts. This comes in stark contrast with the RBA, which just an hour ago made good on its series of hints that further rate cuts were warranted in Australia by slashing the cash rate by 25bp to 1%. Lastly, the Japanese Yen, while still on a downtrend from a daily perspective as the left chart below shows, saw solid demand after the opening gap, with the premise that best resonates to rationalize the move to have found sufficient buyers being that most of the China trade truce-led positivism had been largely priced in since mid last week.
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
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