It’s been a mixed session so far in Asian trade, with the ASX 200 +0.1%, while the Hang Seng and Nikkei 225 are lower by 1.4% and 0.7% respectively. Notably, we’ve seen strong two-interest early in gold, and crude (more on that below), while most of the focus in FX markets has centred on AUDUSD, which was facing headwinds anyhow after RBA Luci Ellis re-enforced the idea that the RBA see full employment (or the NAIRU rate) in Australia at 4.5%.
The Aussie employment data has seemingly only fuelled the AUD bears belief for further downside, with the unemployment rate ticking up to 5.2%, driven by a higher participation rate at 66.0%. Granted, we saw a revision higher to last month’s print, but with 42,300 net jobs created in May, 94% of these jobs were part-time. The market has told us what they think though, and while we have seen small downside in the AUD, the currency has reacted to a 3bp move lower in the Aussie 3-Year Treasury, which is threatening to break 1%. The implied probability of back-to-back cut from the RBA in July sits at 65%, so with the unemployment rate now 70bp above full employment, the market says a July cut is on and we have it reasonable to expect a lower cash rate.
One focus in yesterday’s commentary was the set-up on the EURNZD daily. After the break of the January and 23 May highs, price action lacked conviction from the bulls, resulting in a clear failed break of the 1.7209 resistance level. I was keen to see if the move through resistance, with recoil back to confirm support, and as we have seen, that wasn’t the case. It’s for this reason why I tend to wait for a close above a resistance level (on a set time frame) to feel there is an increased probability that we’ll see a continuation of the underlying trend.
EURNZD aside, we saw a number of EUR negative headlines. Trump detailing that he will consider using sanctions if Germany commences the construction of a gas pipeline between Russia and Germany. As was credit rating agency Fitch issuing a warning on Italy’s fiscal position, although this was largely overlooked, but certainly worth noting given Fitch is due to review Italy’s sovereign rating on 9 August. We also heard from an ECB member Coeure, who suggested the global outlook was worsening and the central bank stands ready to support if needed.
EU inflation expectations at record lows
We can look at EU 5-year inflation expectations, which we monitor through swaps pricing. At 1.1590%, we have never seen expectations this low, and while this would have been impacted by a punchy sell-off in the oil market, current levels have to worry the ECB who would be doing the numbers on renewed asset purchases. Either way, I have my eye on a daily close above 1.7209 and what is obvious supply zone on EURNZD.
We have to consider the moves in EURUSD too, as the sellers waded in pretty much as soon as we breached Tuesday’s high of 1.1337. We saw an outside period on the pair and thus a move below yesterday’s session low of 1.1283 (in the period ahead) would suggest a test of horizontal support just below at 1.1260. The fact the EUR has a 57% weight on the US dollar index (USDX on MT4/5) has seen an interesting move in this market too, with the USDX rallying off the 200-day MA, in what can be considered a position adjustment. Granted, we have seen further tweets and narrative on trade from Trump, but it’s interesting to see USD strengthen, considering US CPI came in below expectations at 1.8% headline and 2% core, with US 2-year Treasuries closing 5bp lower at 1.87% and the implied probability of a July cut (from the Fed) pushing up a touch to 81.5%.
USDJPY a sell into 109
USDJPY looks interesting here, with a price printing a series of higher lows with increasing (candle) wicks, showing the buyers have probably got the upper hand for now. Again, a position adjustment, but the price is forming a bear flag, and a close through the lower channel support should be respected, likely resulting in a test of 107.85, and what has been strong support of late.
Jobless claims as a recession indicator
US economic data in the session ahead really centres on weekly US jobless claims, with the consensus estimate set at 215,000 claims, which would be in-line with the prior week’s print of 218,000 claims. One chart that gets attention here is the 4-week rolling average of jobless claims (white line) vs the 36-month average (or three years). Here, over the past 30 years, when the rolling 4-week average crosses the 3-year average, it can be the precursor for a recession as companies retrench. That isn’t happening yet.
Crude oil getting slammed
It doesn’t surprise one bit that our flow in WTI and Brent crude has picked up, as a 4% move will generally be of interest to clients. A 2.2m build in the weekly EIA crude inventory data was higher than the estimates for a 713,000-barrel draw, with the build at Cushing taking total US crude stockpiles to 485.5m barrels – the highest level since December 2017. When there is enough uncertainty around global trade, and we see renewed supply concerns, then the bid will come out of the market, and it was all sellers. All eyes on whether the price will break last week’s pin bar candle low of $50.60, which could accelerate the selling into $50. We should consider that the UAE did disclose that OPEC is close to agreeing to an extension of the production cuts, which will be a clear theme when we come to the next OPEC meeting, so there are risks we see headlines designed to support the move lower.
Boris Johnson to lead the Tories in a new general election?
We’ve seen renewed interest to short GBP, with GBPUSD and the GBP crosses reacting to a failed motion from Labour (309 to 298), which had it passed would have effectively blocked a ‘no deal’ Brexit. So, ‘no deal’ is still on the table, and this will be quite a useful tool for Boris Johnson in his negotiating tactics with the EU. That assume Boris gets the gig, although that seems elevated given some 80 Tories have publicly backed him.
Campaigning starts tonight, and we should see the likes of Ester McVey, Andrea Leadsom and Mark Harper being eliminated. All roads lead to a general election or second referendum though, so expect higher GBP vols.
Published by Chris Weston, Head of Research, Pepperstone