Repair and Prepare: EU unveils 750 bln euro plan for coronavirus recovery
On Wednesday the European Commission announced an anti-crisis plan, under which it will pay the EU countries €750 billion (instead of €500 billion) in the form of grants and loans.
Most of the money will go to Italy and Spain, as the countries most affected by the pandemic. Together, these 2 countries will receive grants and loans in the amount of €313 billion.
Altogether, this European recovery plan will provide 1.85 trillion euros to help launch the economy and ensure further development of Europe.
#EURUSD reacted with growth to such a statement and reached our previously announced target at 1.10. Against the background of a wider volume of incentives (750 billion instead of 500 billion), further growth of #EURUSD is quite natural.
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Swiss Bank sells off CHF
Yesterday, the head of the Swiss National Bank (SNB), Thomas Jordan, spoke about the state of the monetary policy in Switzerland - the main message is that now it is time to more actively regulate the region’s monetary policy. This is primarily due to the fact that against the background of lower rates and negative returns worldwide, the deposit rate of 0.75% and even in such a reliable currency as CHF provokes an increase in the national currency.
An increase in the value of the franc is detrimental to the entire economy, and especially to Swiss exporters.
The immediate measures voiced by the head of the SNB are:
- Key rate reduction at the next meeting;
- Balance expansion (i.e. there will be more Swiss francs).
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We are waiting for sharp pulses up on these drivers.
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Brexit: deadlock again
Recently the media reported that British Prime Minister Boris Johnson is planning to fly to Brussels in the second half of June. However, there are no special changes in the exit procedure as of today. Both sides cannot agree among themselves and continue to pull a strap.
It is unlikely that the situation will radically change in the near future. It feels like the British, under the pretext of total quarantine, decided to delay this event even further.
The statement by the Central Bank manager of England, Andrew Bailey, adds even more uncertainty: “The key rate of England could go down and this issue was relevant earlier. However, now there is no particular sense in this”.
We believe that political factors can be completely discounted and not taken into account. And here is the rhetoric to not reduce the key rate to use as the key driver of growth #GBPUSD all June.
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Chinese gambit: US imposes sanctions on China
Washington blacklisted 33 Chinese companies, almost all specializing in computer technology and software. The pretext for these sanctions was the “oppression of the Uyghurs” in the country. However, the most likely reason is that Beijing violated the Hong Kong transfer agreement. I think from this and the next round of confrontation between the United States and China will begin after a six-month break.
It must be understood that this is not a one-goal game - the People’s Bank of China is slowly but surely devaluing the yuan, the rate of which has already reached its minimum since the 2008 crisis. For the American economy it is very painful, trade with the region is becoming unprofitable.
America needs a weak dollar like air and they are doing everything possible to achieve this goal. In particular, today Donald Trump announced the holding of a press conference on China. We are waiting for ardent statements about “genocide” and other flashy phrases in the best traditions of Donald.
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Market Watch
Canadian GDP
The world economy is on the verge of collapse with most countries showing record declines, but the situation in the stock markets remains relatively stable. Oil prices are recovering despite the unexpected growth in stocks.
Let me remind you that yesterday the US Department of Energy recorded an increase in oil reserves of almost 8 million barrels, while analysts predicted a decrease of 2.5 million which means the forecast was missed by more than 10 million barrels. In any case the price of WTI crude oil continued to rise. All this indicates that traders and investors are extremely optimistic about the near future.
The expectation of a rapid recovery in the global economy is one of the key bull drivers for the black gold market. At the same time, it is already evident that the reduction in oil production in the framework of the OPEC+ deal, which entered into force on May 1, is not able to fully compensate for the decrease in physical demand for oil. As a result, the risk of a short-term decline in oil prices remains elevated.
I also draw your attention to the published report on inflation figures in the eurozone which came in as analysts had expected and so the market remained quiet. Therefore, only a weakening of the USD can provide the necessary support to the EUR/USD currency pair to reach the target level of 1.1145.
Now let’s move on to the upcoming publication of GDP in Canada. This release is very important, as even rising oil prices can’t provide significant CAD support. Let me remind you that economists expect a decrease in GDP by 10% in March which is a strong bearish factor for CAD. Therefore, if the GDP figures come in below expectations the CAD may come under pressure at the time of release.
And we will complete today’s review with an analysis of a transaction for the purchase of a EUR/USD currency pair in the amount of 2 lots from the technical support level of 1.1000. Let me remind you that this level served as a resistance for a long time. The Take Profit order was set at the next technical resistance level of 1.1075.The Stop Loss order at 1.0975. The profit on this transaction amounted to $1,500, which amounted to three times the risk.
The above review is not a direct guide to trading, and can only be classed as a recommendation.
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USA: GDP fell 5% in the 1st quarter
Preliminary US GDP data released yesterday showed a 5% decline. This is the first quarterly contraction of the economy since the beginning of 2014, as well as the lowest since the fourth quarter of 2008. Then, against the backdrop of the financial crisis, the economy fell 8.4% year on year.
This data has little effect on the dynamics of the US dollar, however, it can be used at the time of publication of similar data in other countries. With more positive indicators, it is possible to strengthen the growth of the national currency, the GDP of which will be published.
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Economic calendar for the week
Slowly but surely, business activity indicators in the world are growing. #Covid19 pandemic has long reached a plateau and is in decline. The OPEC+ ministers are discussing the possibility of holding negotiations scheduled for June 9-10, 2020 almost a week earlier on June 4.
And yet, there are political factors that could trigger a new wave of dollar appreciation:
On Friday, May 29, US President Donald Trump announced a series of sanctions against China; Mass riots across America will force investors to temporarily go cache. This week’s drivers may not work due to a more powerful impulse from America. Nonetheless:
Weekly calendar:
06/01/2020, Monday
Updated PMI in the USA for May;
Updated PMI in the UK for May;
Updated PMI in the EU for May.
06/02/2020, Tuesday
Reserve Bank of Australia Rate (RBA).
06/03/2020, Wednesday
Bank of Canada rate;
US Crude Oil Reserves.
06/04/2020, Thursday
ECB rates, forecast - unchanged; Lagarde press conference.
06/05/2020, Friday
#NonFarmPayroll US Labor Market Data Block for May;
Canada #unemployment in May.
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Market Watch
China is ready for tough countermeasures
Let’s start today’s issue with the conflict between the US and China. I will your draw attention to the fact that China is still trying to restore the fragile peace agreement. The Chinese Ministry of Foreign Affairs calls on the United States to rectify its mistakes and stop heading in the wrong direction or otherwise China will make moves protect its own interests as well as security.
To confirm China is serious with its intentions, Bloomberg published a report informing that the Chinese government ordered large state agricultural firms to suspend purchases of some US agricultural products from the United States. As a result, the US dollar came under intense selling pressure. In early trading in Asia, we observed a significant strengthening of the AUD/USD currency pair, which continued into the first half of the European session and amounted to almost 2%. Which means at this time that active market purchases are no longer appropriate.
Now let’s move on to the oil market, which continues to recover amid optimism regarding the upcoming OPEC + meeting, which will be announced today. Currently the demand for oil of the American grade WTI remains moderate. The Bulls are failing to break above $ 36 per barrel. As a result, the risk of corrective decline remains elevated.
I will also draw your attention to the fact that during the European trading session there will be no important macroeconomic publications. In any case trading activity remains quite high. Given all this, there is a risk of a surge in volatility during the opening of markets in the United States. Any US response to China, as well as certain news releases can have a strong impact on the US currency.
It is also necessary to consider the risks for the US stock market. The main indices began to adjust during the premarket, so I do not exclude an increase in selling activity when the market opens. Pressure is exerted not only by the conflict between the USA and China, but also by internal conflicts and unrest in the country. Therefore, the volatility of trading during the American session may increase significantly.
That’s all from me. It would be wise to closely monitor the latest news and be prepared for any surprises in the market.
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U.S. riots: curfews and troops imposed in 40 US cities
- US authorities impose curfews in major cities due to riots that began with protests against the killing of an African American by police in Minneapolis, and ended with looting and vandalism from Seattle to New York.
- US authorities are ready to use the armed forces to restore order in the country, said President Donald Trump. Trump tells ‘weak’ governors to ‘dominate’ streets amid protests.
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Due to the fact that the protests are predominantly in densely populated cities, it is more likely that this will not have any strong impact on the economy. However, a slight local strengthening of the US dollar is possible against the background of profit taking by large funds.
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Russia and Saudi Arabia extend oil agreement
Russia and Saudi Arabia agreed on the need to extend the maximum level of reduction in oil production at OPEC+ by at least one month. Future plans will depend on the market situation.
And the situation is not so good.
The OPEC+ negotiations scheduled for June 4 are postponed due to Iraq and Nigeria’s failure to comply with their quotas. Iraqi temporary oil minister Ali Allawi referred to “technical problems”, so his country was not able to reduce production to an agreed limit. As a result, due to saboteurs the meeting on June 4 will not take place. Only the technical committee will work. Together with the cancellation of the meeting, the opportunity to formulate delivery schedules and prices for July are postponed. Uncertainty in the oil market will continue until June 9-10 along with a possible local correction in quotes.
Lower oil prices will provoke a local weakening of CAD, NZD, AUD and the strengthening of the US dollar. In major currency pairs, this will result in a possible correction.
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Bank of Canada: believing in a brighter future
At the last meeting, the Bank of Canada left the interest rate unchanged. Steven Poloz, whose term of office ended at midnight on June 2, and Tiff Macklem, his successor, issued a joint interest rate statement on June 3, expressing confidence that the worst of the crisis has ended.
“As market function improves and containment restrictions ease, the Bank’s focus will shift to supporting the resumption of growth in output and employment”.
“The Bank maintains its commitment to continue large-scale asset purchases until the economic recovery is well underway. Any further policy actions would be calibrated to provide the necessary degree of monetary policy accommodation required to achieve the inflation target”.
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ECB extends Covid-19 emergency stimulus
Just a few months after taking a series of emergency measures, the ECB said it would increase bond purchases by 600 billion euros to 1.35 trillion euros and that purchases would last until the end of June 2021, which is six months longer than originally planned.
The last decision was made after the data revealed the severity of the consequences of the coronavirus crisis in Europe. The unemployment rate in the eurozone rose to 7.3% in April from 7.1% in March, as restrictions on blocking affected jobs.
The operational management of liquidity by the ECB gives hope to investors who rely on the restoration of the European economy along with the currency of the region. Forecast for #EURUSD - growth to 1.20 by September 2020.
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EUR/USD: The most powerful rally in 10 years
After the ECB expanded its emergency bond buying program on Thursday, the European single currency continued its nine-day growth (this is the longest series of positive sessions since 2011). EUR/USD reached a three-month high of $1.1362. Thus, from May 25, EUR strengthened against USD by 4.5%.
Currently, the Euro rally, caused by the ECB, is running out and looks overbought against the US dollar. The upward momentum may decline in the next sessions, when the pair approaches its maximum level for the year, which is $1.1495.
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USA: unemployment falls - people return to work
The American labour market unexpectedly recovered in May:
• Unemployment: 13.3% (19.8% expected)
• New jobs: +2.5 million (-8 million was expected).
These labour market improvements reflect the limited resumption of economic activity that was curtailed in March and April due to the coronavirus pandemic (COVID-19). The dollar reacts to this event neutrally.
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Economic calendar for the week
The Federal Reserve will hold a meeting amid gradual exit from the quarantine in the states. During the press conference chairman Jerome Powell will justify the decisions made and share his thoughts on the economy.
Weekly calendar:
06/08/2020, Monday
- Speech by ECB President Christine Lagarde in the European Parliament;
- Semi-annual report on the prospects for the global economy from the World Bank.
06/09/2020, Tuesday
- Eurozone GDP for the 1st quarter (updated data).
06/10/2020, Wednesday
- Consumer Price Index (CPI) for May;
- Fed rate; Jerome Powell press conference;
- US crude oil reserves.
06/11/2020, Thursday
- Producer Price Index (PPI) for May.
06/12/2020, Friday
- Independence Day;
- UK GDP.
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Energy war for the future
Saudi Arabia raised oil prices after a meeting of OPEC+ ministers.
According to the Saudi Aramco export price list in July, the increase for Asian markets averaged $5.60 - $7.30\b.
- This means that in negotiating an extension of the reduction in the framework of the OPEC+ deal, the Saudis continued furious dumping in the Asian market, moderately in the European market, and keeping adequate prices in the US market to not be subject to duties.
— This means that the oil kingdom has led and currently leads a double game. Therefore, Riyadh delayed the announcement of its prices each time before the meeting of the OPEC+ committee.
—- This means that Asia is the main battleground for markets.
—— And in the end, an increase in export prices indicates at least two more months of the upward trend of black gold.
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Research: Gold optimism towards the end of summer
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Gold ETFs have demonstrated the largest quarterly inflows in four years amid global uncertainty and financial market volatility. Reserves of these products reached a record level of 3,185 tons by the end of the first quarter. It was the influx of investments that helped raise the price of gold in US dollars to an eight-year high (global demand for gold reached 55 billion US dollars - the highest figure since the second quarter of 2013). The price also reached new record highs in Indian rupees and Turkish lira, in particular.
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The pandemic has reduced jewelry demand as governments around the world have introduced blocking measures. Demand fell to its lowest level in history, driven by a 65% decline in China, the largest consumer of jewelry and the first outbreak market.
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Central banks continued to accumulate gold, although we expect net purchases to slow down sharply. Amid increased volatility and uncertainty, world gold reserves rose 145 tons in the first quarter.
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The total supply in the first quarter fell by 4% due to the coronavirus (blocking the work of gold mines, shifts of workers were moved to facilities with significant interruptions).
Work was stopped in many projects in an attempt to stop the spread of the virus. By the end of the first quarter, processing of raw materials slipped to almost zero when consumers were limited in their homes.
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Given the desire of the head of the American state to maintain exports, coupled with a weak exchange rate of the national currency and the adopted package of measures to support the national economy in the amount of $3 trillion: we forecast cyclical growth by April 2022 to $2200 - 2500 oz. This will be the main support factor for gold mining companies in the future 1-2 years.
The best time to buy will be the end of summer: against the backdrop of economic recovery in the summer, the demand for protective assets will decline. I suppose that a local decrease in quotations by 4-7% ($1600 - 1650 per ounce) from the current $1720 oz will begin. Decline in jewelry demand until August-September; re-preservation and output of gold mines at full capacity.
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Eurozone GDP
The economy of the Eurozone in the 1st quarter shrank by 3.6% (expected: -3.8%); in relation to the 1st quarter of last year, the decline in GDP amounted to 3.1%. (expected: -3.2% yy).
This is the third assessment and compared to the second (-3.2% yy and -3.8% qq) the numbers were slightly improved.
We remind you that according to the latest forecasts from the two leading financial institutions, growth is not expected in 2020:
#IMF Eurozone GDP this year will decline by 7.5% and grow by 4.7% next year.
#World Bank, in its Global Outlook published yesterday, expects the Eurozone economy to fail by 9.1% this year and grow by 4.5% next year.
Weak economy and trillions of cash are quite a mix for #EURUSD.
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USA: Prices are not rising fast enough
Coronavirus continues to affect US consumer prices. Over 12 months the annual basic consumer price index only grew by 1.2%. However, the reaction of the main financial assets to the worsening inflation rate is zero. The dollar is in flat. The reason for this is the forthcoming publication of the results of a two-day meeting of the US Federal Reserve in a few hours. In fact, the dollar hovered over the abyss - if today the Fed moves to targeting returns, the dollar will collapse. (#EURUSD target 1.1500)
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Fed: The rate will not change for another 2 years
“We’re not thinking about raising rates,” Mr Powell told reporters on Wednesday. “We’re not even thinking about thinking about raising rates.”
- The magnitude of the economic downturn in the United States is extremely uncertain. The Fed forecasts a 6.5% drop in GDP with a jump in unemployment to 9.3% and a slowdown in inflation to 0.8% - and the economy will return to pre-crisis levels only in 2022.
- At the same time, the Fed reacted to the May data from the labour market (Unemployment in May 13.3%), saying that the United States may have bottomed out.
- As expected, the Fed will continue to buy assets at a current rate of $120 billion per month ($80 billion repurchase treasuries; $80 billion repurchase corporate debt securities).
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