FX Update: USD and JPY wilt on latest risk on surge

Yesterday saw a viciously strong US equity market rally, one marked by many of the divergences that have characterized the comeback since March, with high concentration and strength in the top names and the big tech Nasdaq 100 index closing at a new high for the cycle while the broader market is still rangebound. Some of the good cheer may be down to hopes for a new round of stimulus in the US, with US President Trump speaking in favour of new measures and specifically, a second stimulus check (the first one was for up to $300 billion) and new In FX, a day like yesterday leads to kneejerk USD and especially JPY weakness as US yields ticked higher. In general, FX trades passively to developments elsewhere.

As I am writing this update, the euro zone flash June PMIs are rolling in, with the “strong” French readings for both Manufacturing and Services eliciting a positive surge in the euro and risk appetite generally. But just want to make the perhaps curmudgeonly reminder that these are diffusion indices and simply compare conditions with  how they were previously, so is it really a surprise that France has improved in June in both manufacturing and services from still near total lockdown conditions in May? I am actually surprised that the numbers aren’t better still and surprised at the degree of divergence. Germany’s June numbers out this morning are both well below 50. Overnight, Australia’s preliminary June services reading was above 50, while Japan’s numbers looked surprisingly sluggish at 42.3 for the flash June services PMI and an even weaker 37.8 for Manufacturing. And diffusion indices only give us a direction and a strength, not actual production numbers, where we will need another quarter or more to establish the shape of the recovery. In the meantime, the Covid19 news is not encouraging, but total lockdowns are unlikely to prove a policy option.

The RBNZ meets tonight, and we watch for guidance after the aggressively dovish mid-May meeting that seemed to have the RBNZ laying the groundwork for negative rates. A more wait-and-see message might be on the table, given the scale of the rebound in confidence and the country’s successful approach on the coronavirus. AUDNZD is mid-range ahead of the meeting and the best proxy for relative strength.

Elsewhere we watch ZAR over tomorrow’s supplementary budget announcement as South Africa’s budget deficit is seen slipping toward 14% of GDP this year, and where Finance Minister Mboweni is warning about dire consequences and the risk of default and IMF support down the road a la Argentina if structural reforms and a tougher stance on SOE’s are required to change the nation’s debt trajectory. The ZAR has recovered more than 10% from its weakest levels at least in part because the Fed opened a swap line with South Africa and credit spreads tightened, but the currency is more than 20% weaker against the US dollar relative to where it started the year.

Chart: EURUSD
The EURUSD is on the move again after finding support in the “ideal” zone below 1.1200. The first resistance here is perhaps something like the 61.8% Fibonacci of the late sell-off coming in around 1.1325, but really all eyes on the cycle top and clear resistance line around 1.1400 that halted the recent advance. To blast through these levels and move on to 1.1500 and higher we likely need continued strength in global asset markets. Bears are without a hook here unless all of today’s gains are unwound by today’s close or soon thereafter.