Analysts at Citibank argue that “much of the good news appears discounted” in currencies from the commodity bloc. They forecast the AUD/USD pair at 0.72 for the third quarter and at 0.73 in the fourth quarter. 

Key Quotes:

“A lot of upside drivers for AUD and NZD (advanced COVID-19 containment, reopening economy and sizeable government and central bank support) seems discounted. This makes both AUD and NZD vulnerable to renewed bouts of risk aversion should US-China and AustraliaChina tensions escalate. Taking a longer term view, the prospect of the RBA keeping its current ultra-low policy rates for an extended period and Reserve Bank of New Zealand potentially entertaining negative rates means further extensions of recent gains look unlikely.”

“There seems to be a lot of oil-related bearishness priced into CAD and the trade weighted CAD looks to have found support around the lows of the last oil price collapse. At the same time however, Citi analysts’ forecast for a significant rebound in 3Q to pre COVID-19 levels is contingent on a sharper economic recovery. Meanwhile, Canadian domestic fundamentals are in a similar place to Australia and while the fiscal / monetary policy response has been robust, as with AUD and NZD, much of this “good news” now appears well discounted into the currency. “
 

  • WTI is trading 0.79% higher on Monday as risk sentiment remains positive. 
  • There is a support level close by at USD 40.50 that should be watched.

WTI 1-hour chart

Like many other of the commodities markets, WTI is struggling with the balance of short term supply issues and lack demand due to the COVID-19 crisis. Companies like Chesapeake Energy have gone bankrupt in the US due to the recent oil price crash and this could have affected supply. 

For the most part, WTI has been trading higher on Friday. More recently the price has moved lower in the US session. The price is now heading towards a support area at USD 40.50 per barrel. One of the key features on the chart is the rising wedge pattern marked in black. If there is to be a break in either direction it could give us an indication of the future trajectory of the commodity. 

The indicators have started to turn south too. The Relative Strength Index has moved toward the 50 mid-point. The MACD histogram has turned red but the signal lines are still above the zero-line. This could mean that the price is still in an uptrend and until there is a lower low lower high price wave this would still be the case. 

WTI Price Analysis

Additional levels

 

XAU/USD is currently trading at $1,785.16, having travelled between a low of $1,769.64 and a high of $1,786.83.

Gold is elevated by some 0.6% on the day so far, performing well despite a risk-on environment while the greenback flakes away below a critical hourly support level.  

Despite the concerns pertaining to COVID-19, the week started off on the front foot in Asian financial markets, with stock indices rallying. 

European and US equities have also rallied with stocks on Wall Street accelerating gains with NASDAQ rallying 2% to a new all-time high. 

Everything, fundamentally, is starting to really add up for gold.

We have geopolitical tensions rising along with economic uncertainty, boosting safe-haven demand. 

“Gold is the midst of a regime shift, transitioning from trading as a safe-haven asset to an inflation-hedge product,” analysts at TD Securities have argued. 

Long-term inflation expectations are rising in sync with risk-on behaviour, while rates-vol remains deeply constrained amid uber-supportive policy, fueling a process that weighs on real yields. With 10y breakevens continuing to print new post-COVID highs, the normalization in inflation expectations may remain a powerful driver lifting gold prices deeper into $1,800/oz territory. 

US cases have been continuing to rise

  • US COVID-19 storm clouds, transmission rate on the rise, concerns over airborne spread

Meanwhile, the latest US COVID-19 headlines do not make for nice reading, especially for the rise and spread of cases in some of the worst-hit the US states. 

US cases have been continuing to rise over the weekend, with the total number of cases nearing 2.9 million and deaths closing in on 130,000. 

The situation in Houston is being compared to that seen in New York in early April and Florida seeing around 10,000 cases per day. 

The latest updates come from the transmission rate in the US state of New Jersey rising to the highest level in 10 weeks. 

“I see storm clouds on the horizon,” Gov. Andrew Cuomo said last Wednesday as he announced indoor dining New York City was postponed indefinitely. 

Today, he warned that “this is a warning sign”.  

DXY treading on thin ice, gold at critical resistance 

As for the US dollar, it is losing its safe-haven allure, perhaps as investors continue to expect green shoots on the global economy to continue to grow as nations manage the spread of the virus while opening their economies and keep business going where they can. 

The DXY has a negative correlation to gold price trajectory and gold bears will be alarmed by the progress the dollar bears are making below a critical hourly trend line support in the 97 zone. 

A break of 96.70s opens the flood gates to 95.80 which could be just the nudge that gold needs to break the $1,790s on a spot basis. 

XAU/USD levels

 

 

COVID-19 news has not been pretty over the weekend and still, the concerning headlines are breaking through. 

The latest updates come from the transmission rate in the US state of New Jersey rising to the highest level in 10 weeks. 

“I see storm clouds on the horizon,” Gov. Andrew Cuomo said last Wednesday as he announced indoor dining New York City was postponed indefinitely. 

Today, he warned that “this is a warning sign”.  

US cases continuing to rise

US cases have been continuing to rise over the weekend, with the total number of cases nearing 2.9 million and deaths closing in on 130,000. 

The situation in Houston is being compared to that seen in New York in early April and Florida seeing around 10,000 cases per day. 

Concerns over airborne spread of COVID-19
 

Meanwhile, a recent report in the New York Times has caught the attention of the World Health Organisation (WHO). 

WHO is reviewing a report that suggested its advice on the novel coronavirus needs updating, after some scientists told the New York Times there was evidence the virus could be spread by tiny particles in the air, Reuters wrote in an article pertaining to the matter. 

Key paragraphs

The WHO says the COVID-19 disease spreads primarily through small droplets, which are expelled from the nose and mouth when an infected person breaths them out in coughs, sneezes, speech or laughter and quickly sink to the ground.

In an open letter to the Geneva-based agency, 239 scientists in 32 countries outlined the evidence they say shows that smaller exhaled particles can infect people who inhale them, the newspaper said on Saturday.Because those smaller particles can linger in the air longer, the scientists – who plan to publish their findings in a scientific journal this week – are urging WHO to update its guidance, the Times said.

‘We are aware of the article and are reviewing its contents with our technical experts,’ WHO spokesman Tarik Jasarevic said in an email reply on Monday to a Reuters request for comment.

The extent to which the coronavirus can be spread by the so-called airborne or aerosol route – as opposed to by larger droplets in coughs and sneezes – remains disputed.

Market implications

Despite the bearish news flows pertaining to COVID-19, the week had started off on the front foot in financial markets, with stock indices rallying in Asia and setting the scene for the West.

The latest headlines do seem to have put a cap on the US session rally, however, with the S&P 50 topping out at 3,182.59 and giving back some ground to 3,172.74 (time of writing) since the New Jersey headline.

We have seen optimism out of China with China’s Securities Times saying that a healthy bull market is more important to the economy than ever, accompanying the vast amount of bullish spun Chinese media coverage of late. 

Citi Bank has also been out with a note saying that the bank is no longer bearish on risk assets. 

For the time being, investors are finding relief in the fact that central banks continue to pump increasingly more liquidity at the same time that economic data continues to impress. 

Analysts at National Bank of Canada estimate the USD/CAD pair will trade at 1.38 in three months, at 1.36 in six and at 1.30 in twelve. They point out that weakness in equity markets is more likely to keep the US dollar on an upward trend over the coming weeks. 

Key Quotes:

“After falling to a multi-month low of 1.33 in June, USD/CAD is back above its 200-day moving average. This recent bout of weakness it not estranged to the rising geopolitical uncertainties (…) to which we must add the recent downgrade by Fitch for Government of Canada debt from AAA to AA+.”

“While it is clear that a reliance on foreign bond investors creates a vulnerability to the currency, it’s likewise important to recognize the importance of the Bank of Canada QE/CE programs, which not only help keep rates low/spreads tight (and thus debt affordable) but absorb much of the current surge in net federal and provincial borrowing that comes from unprecedented deficits. In other words, we do not perceive the Fit downgrade to be as lethal to the CAD as those that happened in the 1990s.” 

It is unfortunate that the Fitch downgrade occurred at a time when a potential dampening demand for oil because of tightening lockdown restrictions in some large US states because of COVID-19 cases. Also, we cannot ignore the fact that despite the new Canada-US-Mexico trade agreement, the US is contemplating imposing tariffs on Canadian aluminum. In light of all the above factors, we set our three-month target USD/CAD at 1.38.” 

  • AUD/USD is trading 0.50% higher on Monday with only the EUR performing better from the G6.
  • The market has hit some resistance at the 0.6981 level.

AUD/USD 4-hour chart

AUD/USD is performing very well on Monday as the global risk appetite for equities improved. Whenever stocks are performing well the AUD seems to rise too and overnight the commitment from the Chinese government to the economy would have helped the AUD to catch a bid.

Looking at the chart, the pair seems to be struggling at the blue resistance line at 0.6975. Just as it looked like the pair was about to test the psychological 0.70 area it stopped just short. Beyond that, the next resistance is at the high on the chart of 0.7064. 

On the downside, if the price does decide to move lower, the top or apex of the pattern the pair burst out of could be tested again. This could take the price back to around 0.69 and the area has been pretty sticky in the past.

Looking at the indicators, the Relative Strength Index has just pulled away from the overbought zone. This could mean the price was overstretched and due a pullback before rising again. The MACD is looking very bullish at the moment with the signal lines above the mid-point and the histogram in the green. 

AUD/USD resistance zone

Additional levels

 

In their 2020 Mid Year Outlook report, analysts at Citibank, point out gold continues to lead all commodities in YTD performance, proving to be an outperformer as a safe haven asset and acts as a risk hedge in portfolios. 

Key Quotes:

“Gold markets appear to be in the midst of a multi-year bull cycle and are likely to trade in a higher range. Lower for longer interest rates with QE in full swing, potential lingering macro uncertainty (COVID-19 impacts and new wave of US-China tensions) and strong investor flows could continue to support gold prices and offset weakness in Asian jewelry demand.”

“Gold prices are likely to be non-linear and prices may consolidate around the US$1,600/oz area in 3Q, before advancing again. Citi analysts’ forecasts are for 2020 prices to average between US$1,625 – $1,775/oz, while 2021’s prices may average US$1,925/oz. Adding gold to a portfolio may also improve risk-adjusted performance while volatility in global markets stays elevated.”

  • Correction in EUR/GBP from monthly highs finds support around 0.9000.
  • Technical indicators starting to favor the upside, euro to gain momentum above 0.9070.

The EUR/GBP pair reached levels under 0.9000 on Friday but it quickly rebounded back above. On Monday it surged, recovering levels above 0.9050. The move higher was capped by 0.9070.

The euro completed a pullback to the 0.9000 area and it rebounded. A consolidation above 0.9070 could activate more gains in line with the dominant trend. The next resistance stands at 0.9100 followed by 0.9130.

A firm decline below 0.9000 would clear the way for an extension of the bearish correction from 0.9176 (June 29 high), with the immediate target at 0.8940.

EUR/GBP 4-hour chart

eurgbp

 

  • The S&P gapped higher on Monday and trades 1.54% higher on the session.
  • The price has broken through an important resistance but will it hold.

S&P 500 4-hour chart

Looking at the S&P 500 chart below its clear to see stocks are moving in the right direction. Risk sentiment has been improving recently despite the growing coronavirus case count in the US. The rise in the PMI numbers out of the US initially boosted the risk sentiment in the markets but traders will need to think about how much stimulus the Fed will continue to add if the numbers keep improving. The markets seem to have become used to the additional liquidity but if there is to be a “v-shape” recovery will the Fed still continue to flood the market with cash.

Looking at the chart, the price has broken through both the red resistance zone and black trendline. The price traditionally moves in waves and now it will be interesting to see if the red line at 3,155.75 holds. Beyond that, if the support level does break the price could move back the trendline again for a retest or even back to fill the price gap at 3,128.25. On the upside, bulls will be looking to target the high on the chart of 3,233.25.

Both of the technical indicators are looking positive. The MACD histogram is green and the signal lines are above the mid-point. The Relative Strength Index is in a positive overbought zone but this could indicate a small pullback is on the cards.

S&P 500 support level

Additional levels

 

The Bank of Canada published the second quarter Business Outlook Survey and the Canadian Survey of Consumer Expectations. Nathan Janzen, Senior Economist at RBC Economics points out both reiterated that the economic recovery from an unprecedented economic pullback over March and April will take time.

Key Quotes:

“The Q2 survey was conducted after the easing in virus containment measures had already begun in most regions. And there were corresponding green-shoots in business expectations. Employment growth is still expected to be positive over the next year – although significantly less-so than in early quarters.  About 40% expected sales to be at to pre-shock sales levels by next year and another 15% expected sales to “mostly recover” by that time.”

“Still that leaves almost half of businesses expecting at best a partial recovery. Unsurprisingly, a lot of the more pessimistic businesses are in the services-sector, and particularly tourism-dependent industries that will probably see virus containment measures last longer, as well as energy companies. Concerns were not so much on businesses’ ability to produce (most reported they could return to pre-shock production levels within a month once restrictions are lifted), but more that demand will be weak even as social/physical distancing measures are relaxed.”

“We continue to expect a partial bounce-back in economic activity in the third quarter – provided virus spread remains contained in Canada. But that will still leave the level of activity well-below pre-shock levels at the end of this year, and remaining under-performance is unlikely to be fully unwound at least until there is a vaccine or more effective treatment widely available.”