Thursday, July 16, 2020

Asia Times: USD/CAD falls to its 200-day moving average as the BoC pledges to keep rates low for an extended period of time

Tags
  • Dollar
  • Gold
  • Yen
  • Stocks
  • Oil
  • European Central Bank
  • Bank of Japan
  • Bank of Canada

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Market Recap: USD/CAD falls to its 200-day moving average as the BoC pledges to keep rates low for an extended period of time

Stocks on Wall Street ended Wednesday's trading session higher as optimism for a potential vaccine for Covid-19 continued to drive stocks prices. Positive data from early trials for Moderna's experimental vaccine for Covid-19 published Tuesday, boosted investors sentiment going into Wednesday's trading session. A report on the ITV.com website suggesting that there will be positive data from initial trials of the University of Oxford's Covid-19 vaccine backed by AstraZeneca that will be published as soon as Thursday likely helped boost investors' sentiment as well, despite the report's absence of sources. The growing risk appetite was apparent in the stock market, with small-cap stocks and higher risk sectors outperforming the general market. The Russell 2000 and S&P600 small cap indices both ended the day more than 3% higher while air travel, hospitality and cruise liner stocks surged in the S&P500.

News from the virus mostly clouded new developments on the US-China front. US Secretary of State Michael Pompeo said on Tuesday that the US "State Department will impose visa restrictions on certain employees of Chinese technology companies like Huawei that provide material support to regimes engaging in human rights violations and abuses globally", a move that signalled that there we may see the US put more pressure on China by imposing more visa restrictions on Chinese tech giants in future. The move from the US comes after the UK banned Huawei from its next-generation mobile networks earlier this week as well. A Bloomberg report after the US market closed on Wednesday citing people familiar with the matter suggesting that US President Donald Trump has ruled out additional sanctions on top Chinese officials to avoid further escalation in tensions between the US and China may boost investors' sentiment moving into Thursday however.

Among S&P500 sectors, industrials, energy and financials were the top gainers while utilities consumer staples and communication services were the bottom three performers. In company news, stocks of Goldman Sachs jumped on news that it beat analysts’ expectations in its latest quarterly earnings report. Trading revenue from its stocks and bonds division spiked 93%, pushing its overall profits to US$6.26/share, much higher than analysts' estimates for US$3.95/share. Goldman's quarterly report was mostly in line with earlier reports from other major banks, tilting more towards the upside as the bank is more reliant on investment banking and trading revenue in comparison. Shares of Goldman ended the day 1.35% higher on Wednesday as a result.

Indexes Daily Change (%) Net Change Closing Price
Dow +0.85% +227.51 26,870.10
S&P500 +0.91% +29.04 3,226.56
Nasdaq +0.59% +61.91 10,550.49
*Source: Bloomberg

Growing risk appetite was seen in the foreign exchange market as well, with the Swiss franc being the worst performing among the basket of G10 currenices along with the greenback. Commodity related currencies gained the most, benefitting from expectations for a quicker recovery for the global economy thanks to potential vaccines for Covid-19. The Japanese yen was little changed early in Wednesday's trading session after the Bank of Japan (BoJ) kept its monetary policy on hold as widely expected by the financial markets. BoJ Haruhiko Kuroda's tone in the post-meeting press conference remained dovish as expected as well, suggesting that the Japanese economy remains under a large amount of pressure despite its economic contraction likely having had bottomed out.

The Canadian dollar was one of the top performers, after the Bank of Canada (BoC) left its overnight rate at 0.25%. The highlight of the day was that the BoC pledged for the first time to keep interest rates at historically low levels through 2022, based on its latest quarterly forecasts. The BoC's explicit forward guidance likely helped boost confidence among market participants that stimulus measures by the central bank is here to stay until the Canadian economy signals that it has recovered back to pre-Covid-19 levels, fuelling gains for the Canadian dollar and consequently putting downward pressure on USD/CAD back down to its 200-day moving average near 1.3505 on Wednesday.

The European Central Bank (ECB) will announce its decision on monetary policy later today and its decision looks to be in line with the BoJ and BoC as well. No changes to the central bank's monetary policy is expected later today, and instead there may be some cautious optimism among policymakers as the bloc appears to be recovering at a pace closer to its base and best-case scenarios.  Its Pandemic Emergency Purchase Programme (PEPP) still has enough headroom to continue at its current pace into early next year, suggesting that there is little incentive for the ECB to expand it as well. It is also likely that ECB President Christine Lagarde will reiterate the high levels of uncertainty surrounding the current economic environment as well. The euro may in effect have some room to rise today, thanks to some optimism from the ECB in addition to another possible round of easing risk aversion today of the report from IVT.com regarding the University of Oxford's experimental vaccine is true.

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Safe haven assets were mixed on Wednesday, but tilted towards slightly more underperformance for the day. Gold only inched slightly higher as demand for the precious metal may have resulted from rebalancing of profits towards it to hedge against the decline in value of the greenback. The Japanese yen gained against both the dollar and euro. US Treasuries mostly fell across the board as traders continued to shift back into equities. Benchmark 10-year yields were 0.7bps higher at 0.63% as a result.

Safe Haven Assets Daily Change (%) Net Change Closing Price
Gold +0.05% +0.93 1,810.29
Silver +1.04% +0.20 19.42
USD/JPY -0.28% -0.30 106.94
*Source: Bloomberg
US Treasury yields Daily Change (bps) Yield (%)
2-Year -0.2bps 0.16%
10-Year +0.7bps 0.63%
30-Year +2.1bps 1.33%
*Source: Bloomberg

Oil futures advanced thanks to positive news for a vaccine and declining US stockpiles on Wednesday, but gains were likely curbed after OPEC+ decided to proceed with the tapering of its output cuts. Production cuts by the bloc will now fall to 7.7 million barrels a day in August, from a previous of 9.6 million barrels a day. Positive data from the US Energy Information Administration's weekly report likely helped lift oil future prices as well, after US crude oil stockpiles were shown to decline for the week ended July 10th. The decline in US crude oil stockpiles were largely due to declining imports, suggesting that excess crude oil supply was starting to fade. Gasoline demand rising to the highest since late March in the US also helped boost market sentiment that energy demand was continuing to recover.

Oil Futures Daily Change (%) Net Change Closing Price
Brent +2.07% +0.89 43.79
WTI +2.26% +0.91 41.20
*Source: Bloomberg

In Asia, stocks were trading mostly mixed on Thursday morning, likely as a result of a pullback as Asia had already benefitted from positive news surrounding the potential vaccine for Covid-19. The Nikkei and ASX200 were trading lower while the KOSPI was trading slightly higher on Thursday morning. Futures tracking major indices in the US were trading lower, signalling that there may be a regression back down later today in the US as well.

US Futures Daily Change (%) Net Change Last Price As of (GMT +8)
Dow Futures -0.19% -52.00 26,713.00 7:31:27 AM
US Futures -0.26% -8.25 3,211.25 7:31:23 AM
Nasdaq Futures -0.62% -65.75 10,617.50 7:31:20 AM
*Source: Bloomberg

Economic data for the day ahead includes (all timings in GMT +8):

  • UK May Unemployment Rate (ILO) (2pm)
  • ECB Monetary Policy Decision (7pm)
  • ECB President Lagarde's Press Conference After Monetary Policy Decision (8.30pm)
  • US Jul 10th/Jul 3rd Initial/Continuing Jobless Claims (8.30pm)
  • US Jun Retail Sales (8.30pm)

Companies reporting earnings next include (all timings in GMT +8):

  • Bank of America (6.45pm)
  • Morgan Stanley (7.15pm)
  • Johnson & Johnson (8pm)
  • Netflix (4am +1)
  • BlackRock (Aft US Market Close)