CFD Markets News and Forecasts — 10-08-2021

FXStreet notes that China is confronting an outbreak of the COVID-19 Delta variant. So far, daily new local cases have not exceeded double-digits but it appears to be the most severe resurgence since the second quarter of 2020. Strategists at ANZ Bank analyze the idiosyncrasy of this new wave.

“First, the outbreaks due to the more contagious Delta variant. Second, the number of affected provinces is the highest since Q2 2020. Previous local outbreaks were mainly controlled within one province without further contagion to other provinces.” 

“Given restricted movement due to local lockdowns, we expect local activities especially in the service sector to be affected temporarily. The manufacturing sector appears to be well-positioned to withstand the shock again.” 

“The length and breadth of the resurgence will determine the impact on China’s near-term growth outlook and policy direction. It has generally taken one to two months for previous outbreaks to dial down. If the strict lockdowns work and there is more vaccination progress, we may see local economies reopen in mid-August or early September. Otherwise, we will need to revisit our 8.8% 2021 GDP forecast."

eFXdata reports that analysts at MUFG Research discuss the USD outlook and maintains a bullish bias in the near term.

"The release of the latest IMM positioning report at the end of last week revealed that Asset Manager/Institutional investors had started to rebuild short US dollar positions in the week ending 3rd August. Total short US dollar positions increased by 28,233 contracts to 310,328 contracts. It brought an end to four consecutive weeks in which short US dollar positions had been scaled back. Short US dollar positions still remain well below the recent peak from the start of June at 586,589 contracts."

"We expect the US dollar to remain bid in the near-term and to continue challenging short positions that have been built up. Position unwinding could be less important though in driving upward US dollar momentum after the large position adjustment that has already taken place in recent months."

FXStreet reports that in the opinion of economists at TD Securities, EUR/USD should find additional support at 1.1704 and 1.16.

“EUR/USD has breached primary support at 1.1750. The next line in the sand is 1.1704, which is the YTD lows. This is the last line of defense before a more substantial move towards the November lows near 1.16.”

“If there is one central bank that is content in lagging the Fed as much as it can, it's the ECB.”

U.S. stock-index futures traded flat on Tuesday, as investors took a cautious stance ahead of a Senate vote on a much-anticipated infrastructure bill, expected at 15:00 GMT.

Global Stocks:

FXStreet reports that the Credit Suisse analyst team suggests that EUR/USD is on course for a test of medium-term support at 1.1703/1.1695. 

“We stay bearish for a test of medium-term support at 1.1703/1.1695. Although a rebound from 1.1703/1.1695 should be allowed for, our broader bias is for an eventual clear and sustained break in due course.”

“A break below 1.1703/1.1695 would mark the completion of a large and important bearish ‘head & shoulders top’ to mark a significant change of trend lower. We would then see support initially at 1.1662 ahead of the September and November 2020 lows at 1.1612/04, which we would look to hold at first.” 

“Resistance moves to 1.1770 initially, above which can see a minor base for a recovery back to the 13-day exponential average at 1.1805/10, with fresh sellers expected here.”

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The preliminary data from the U.S. Labour Department showed on Tuesday that nonfarm business sector labor productivity in the United States rose 2.3 percent q-o-q in the second quarter of 2021, as output surged 7.9 percent q-o-q and hours worked increased 5.5 percent q-o-q (seasonally adjusted). This was worse than economists’ forecast for a 3.5 percent q-o-q advance after a revised 4.3 percent q-o-q gain in the first quarter (originally a 5.4 percent q-o-q climb).

In y-o-y terms, the labor productivity went up 1.9 percent in the second quarter, reflecting a 15.8-percent jump in output and a 13.6-percent climb in hours worked.

Meanwhile, unit labor costs in the nonfarm business sector in the second quarter rose 1.0 percent q-o-q compared to a revised 2.8 percent q-o-q drop in the prior quarter (originally a 1.7 percent q-o-q increase). Economists had forecast a 1.1 percent gain in first-quarter unit labor costs.

Unit labor costs quarterly gain reflected a 3.3-percent q-o-q increase in hourly compensation and a 2.3-percent rise in productivity.

Compared to the corresponding period of 2020, unit labor costs edged up 0.1 percent, as hourly compensation increased 2.0 percent and productivity grew 1.9 percent.

FXStreet reports that the Credit Suisse analyst team believes that USD/CHF has now broken above its downtrend from April at 0.9197, which suggests a broader upmove is starting.

“USD/CHF has now broken above the downtrend from April, today seen at 0.9197, reinforced by a renewed turn higher in daily MACD. The breakout suggests a broader move higher can take place for a move back to 0.9264/75, the July highs and the 61.8% retracement of the April/June fall.”

“Whilst the 0.9264/75 zone is likely to prove a tough barrier again, a break would open up a move to our prior Q3 objective at 0.9356/85, which is the downtrend from 2019.” 

“The pair should now ideally hold onto its break above 0.9197/93 to keep a clean break higher.”

FXStreet reports that Jane Foley, Senior FX Strategist at Rabobank, suggests that EUR/USD, the world’s most popular currency pair, could fall to 1.17 and below.

“The surge in jobs creation last month combined with the uptick in wage inflation and some hawkish comments from various Fed officials could be sufficient to keep the USD on the front foot into the Fed’s Jackson Hole symposium later this month. This assumes firms readings for the US CPI and PPI inflation reports due later in the week.” 

“We assumed that perceived inflation risks in the eurozone and expectations around ECB policy were likely to remain much more contained. While this assumption has held up well, the ground has shifted a fair degree since the spring. In our view, this raises the risk of a breach below 1.17.” 

FXStreet reports that Karen Jones, Team Head FICC Technical Analysis Research at Commerzbank, notes that USD/CHF reclaimed the 0.9200 mark on Monday and is set to reach the 0.9274 June high. 

“USD/CHF’s aggressive rally higher has now eroded the 4-month downtrend and this clears the path to the 0.9274 June high.”

“Above 0.9274 lies the March 12 high at 0.9325, the early March high can be seen at 0.9375 and the 2019-2020 downtrend at 0.9380.”

“Dips should find interim support at the 55-day ma at 0.9116 and the 200-day ma at 0.9074.”

USD rose against most of its major rivals in the European session on Tuesday, as stronger-than-expected U.S. July jobs data boosted expectations that the Federal Reserve could soon start paring back its lofty stimulus.

The U.S. Dollar Index (DXY), measuring the U.S. currency's value relative to a basket of foreign currencies, rose 0.15% to 93.08.

In addition, several Fed policymakers, including Atlanta Fed president Raphael Bostic, Richmond Fed president Tom Barkin and Boston Fed president Eric Rosengren, who spoke after the latest jobs data, suggested the time is right to start trimming the U.S. central bank’s $120 billion in monthly bond purchases.

Market participants are now awaiting the U.S. inflation data, set to be released on Wednesday, hoping to get further clues of when the Fed might start tapering.

FXStreet reports that Benjamin Wong, Strategist at DBS Bank, notes that gold is attempting a tepid rebound around $1735 from five-month lows of $1688 but a taut break under prior March $1677 minor double bottom remains a possibility.

“Gold remains susceptible unless it can return quickly above the $1803-$1831 resistance band.”

“There is a fair chance a shakeout on the weight of a break of the March minor $1677 double bottom could still see the market probe towards a support located at $1637 or the $1618 Fibonacci marker.”

“The gold market would stay sensitive to inflation-driven data and US taper talk, so watch out for tomorrow’s US July CPI data.”

FXStreet notes that EUR/USD still looks vulnerable after erasing 1.1750. As economists at Société Générale suggest, the pair must hold the 1.1740 area to avert breaking down to 1.1700.

“EUR/USD struggled to maintain above short-term Moving Averages resulting in regain of downward momentum.”

“The pair should drift towards next support at March low of 1.1700.”

“Signals of bounce are still not visible.”

FXStreet reports that economists at ING suggest that an expected hawkish Federal Reserve is set to underpin the US dollar and send USD/JPY higher.

“USD/JPY has held up pretty well in the face of the drop in US 10-year yields under 1.20%. We feel that thin summer conditions and heavy Fed buying are behind the drop in US yields – such that the move will be reversed in September. That could keep USD/JPY supported even though speculators are reasonably short JPY already.” 

“Probably the biggest risk to USD/JPY now is that the Delta variant shuts down Asia and especially China more broadly – prompting a re-assessment of global growth and equity valuations. But that seems a risk case at present. Instead, a Fed sounding quietly confident can see US money market rates and USD/JPY firm up.”

Bloomberg reports that according to a UBS Group AG gauge, surging property prices mean Switzerland’s residential property market is close to a bubble. 

The UBS Swiss Real Estate Bubble Index rose to 1.90 points in the second quarter. The cost of residential housing shot up by the most in eight years during the period.

Switzerland, which deactivated a bank capital buffer early in the pandemic, isn’t alone in seeing house prices rise. Both Britain and the U.S. have seen increases, and New Zealand, Canada and Sweden are considered to be among the world’s frothiest markets.

The UBS analysts say the index is likely to decline in the latter half of 2021 as the economy rebounds.

Reuters reports that Tokyo Shoko Research, a private-sector credit research firm, said that the number of corporate bankruptcies in Japan fell at the fastest rate this year to hit the lowest in 50 years for a July, thanks to funding support from the government and banks.

There were 476 company bankruptcies in July, down 40% from the same month a year ago. That was less than the previous July low of 482 in 1990, during the peak of Japan's asset bubble economy, based on comparable data available since 1972.

It was the lowest corporate bankruptcy total in 50 years for the month of July, the credit research firm said, with the amount of liabilities at 71.5 billion yen ($647 million) down 30% from a year earlier.

However, pandemic-induced bankruptcies amounted to 138 in July, compared with 98 in the same month a year ago and bringing the total for January-July to 900, above the roughly 800 recorded in February-December 2020, it said.

According to the report from ZEW, the Indicator of Economic Sentiment for Germany decreased in August 2021, falling 22.9 points to a new reading of 40.4 points compared to July. This is the third time since May that the indicator has dropped, this time even somewhat stronger than in the previous month. The assessment of the economic situation in Germany improved in August, and currently stands at 29.3 points, 7.4 points higher than in July.

“Expectations have declined for the third time in a row. This points to increasing risks for the German economy, such as from a possible fourth COVID-19 wave starting in autumn or a slowdown in growth in China. The clear improvement in the assessment of the economic situation, which has been ongoing for months, shows that expectations are also weakening due to the higher growth already achieved,” comments ZEW President Professor Achim Wambach on current expectations.

The financial market experts’ sentiment concerning the economic development of the eurozone also decreased for the third consecutive time, bringing the indicator to a current level of 42.7 points in August, 18.5 points lower than in the previous month. The indicator for the current economic situation in the eurozone climbed 8.6 points to a level of 14.6 points compared to July.

eFXdata reports that Nordea Research discusses the USD outlook.

"We expect July core inflation to reach levels of 4.8%, driven by local supply shortage from the motor vehicle industry, airline fares and accommodation. We have by the way been almost alone in calling for CLEAR upside to the actual core inflation prints since January, and we are firm that we haven’t seen the peak yet, even despite the rent of shelter tricks by the Biden administration. This means that tapering bets are still fully alive, and now they even risk being solidified or accelerated by the debt ceiling suspension in late-September or early-October," Nordea notes.

Bloomberg reports that the Swiss National Bank may say it, and valuation metrics may show it, but traders are unconvinced the franc has gotten too strong.

The haven currency’s surge to a nine-month high against the euro has brought its valuation back into focus among investors. Yet the central bank’s own data on real effective exchange rates show that the franc has shed most of its premium seen at the height of the pandemic.

Its potential for even more gains remains undiminished as traders say Switzerland’s persistently low inflation makes the franc a reliable store of value.

The central bank assessed the franc to be “highly valued” in June, and the currency has only strengthened 1.5% since then. It is also the most overvalued currency in the Group of 10, according to OECD’s model based on purchasing-power parity.

Still, investors have ignored those signals and piled in to the franc alongside the Japanese yen in recent weeks, seeking a refuge from fears the spread of the delta coronavirus variant could derail global growth. The plunge in bond yields from Treasuries to bunds has also boosted the currencies’ appeal.

All this raises the inevitable specter of central-bank intervention. Bouts of global risk aversion typically drive investors into the franc, and the SNB has battled a too-strong currency for more than a decade.

FXStreet reports that  Lee Hardman, Currency Analyst at MUFG Bank notes, Fed QE taper comments encourage a stronger USD.

“The US dollar and US yields have been lifted by the positive follow through from last week’s robust Nonfarm Payrolls report for July which has reinforced speculation over tighter Fed policy ahead.”

“Atlanta Fed President Bostic believes that the Fed is ‘well on the road to substantial progress toward our goal’. These comments help reinforce bullish sentiment towards the US dollar in the near-term. We expect the US dollar to remain bid in the near-term and to continue challenging short positions that have been built up. Position unwinding could be less important though in driving upward US dollar momentum after the large position adjustment that has already taken place in recent months.”

CNBC reports that veteran strategist David Roche said that China has tightened Covid-19 measures - a move that could hold back the country’s economic growth and hit its stock markets.

“Markets have got into the mode of thinking Covid is very ... bad, but economic recovery (is) taking away lockdowns, removing social restrictions — that’s kind of the world recipe at the moment,” Roche, president and global strategist at Independent Strategy, said.

“Well it’s very much not the world recipe in China for good reasons, and therefore markets have to come to terms with the fact that there are economic costs not only within China, but globally as a result of this,” he added.

Chinese authorities last week ordered mass testing in Wuhan city — where the coronavirus was first detected — and imposed widespread movement restrictions in major cities including Beijing.

Some economists have raised concerns about China’s “zero tolerance” approach to Covid, which refers to the country’s aggressive clampdown on any flare-ups in Covid cases. The approach, which includes strict lockdowns and mass testing, helped China keep previous outbreaks under control before the latest resurgence.

But the delta variant is more contagious and could be more difficult to contain — and that could hurt economic recovery in China, economists have warned.

“If lockdowns and vaccination progress do not allow local economies to reopen by mid-August or early September we will need to revisit our 8.8% 2021 GDP forecast,” economists from Australian bank ANZ wrote in a Tuesday report.

During today's Asian trading, the US dollar was trading steadily against the euro and the pound, but rose slightly against the yen.

The chairman of the Federal Reserve Bank of Atlanta, Rafael Bostic, believes that the Fed should start curtailing the asset purchase program against the background of a significant increase in the number of jobs in the United States in the last two months. "We are on the way to significant progress in achieving our goal, "Bostic said, calling the latest statistical data "certainly very encouraging in this regard."

The number of jobs in the US economy increased by 943 thousand in July, the highest pace in 11 months, according to data from the Ministry of Labor, published on Friday. Unemployment in the country last month fell to 5.4%, the lowest level since March 2020, compared with 5.9% in June. Experts expected an increase in the number of jobs in July by 870 thousand and a decrease in unemployment to 5.7%.

During a separate event on Monday, the head of the Federal Reserve Bank of Richmond, Thomas Barkin, also said that he sees the economy moving in the direction of the goals set by the Fed.

The ICE index, which tracks the dynamics of the dollar against six currencies (euro, swiss franc, yen, canadian dollar, pound sterling and swedish krona), rose by 0.02%.

Bloomberg reports that according to a Federal Reserve Bank of New York survey, U.S. consumers’ expectations for inflation over the medium term rose to an eight-year high in July.

The median survey respondent anticipated an inflation rate of 3.7% in three years’ time, the highest since August 2013 and up from 3.6% in June, the New York Fed said. Expectations for inflation over the next year rose to a record 4.8%.

Fed officials follow measures of inflation expectations closely because they believe them to be key determinants of actual inflation.

Consumers polled by the New York Fed said they expected rents to increase 9.8% in the coming year, the highest reading since the survey began in 2013. Expected changes in medical care costs over the next 12 months ticked up to 9.5%, while the expected change in gas prices moderated to 8.1%.

FXStreet reports that economists at ING expect the Chinese yuan to depreciate in the coming months.

“After revising down our stronger yuan view last month, we look at the economic situation, including the possible RRR cut in 4Q21 and the policy directions set by President Xi on 30 July, and we conclude a change of exchange rate direction is more likely. We have changed the yuan trend from appreciation to mild depreciation until mid-2022.”

“The RRR cut in China contrasts with the Fed discussion of tapering and rising policy interest rates. This will persist for the rest of this year and even into the first half of next year.”

FXStreet reports that analysts at Goldman Sachs offer their view on AUD/NZD.

“Our economists also revised their forecast to include a RBNZ 25bp hike at each of the next (and last) three meetings of 2021, now roughly in line with market expectations. But we maintain a more hawkish RBNZ view than the market in the medium-term, especially relative to the RBA, where our policy rate forecasts are more dovish than the path currently priced. We see further room for downside in AUD/NZD, and reiterate our forecast of 1.01 in 6 months.”

EUR/USD

Resistance levels (open interest**, contracts)

$1.1843 (1115)

$1.1815 (263)

$1.1793 (129)

Price at time of writing this review: $1.1735

Support levels (open interest**, contracts):

$1.1684 (2280)

$1.1656 (4854)

$1.1622 (1500)

Comments:

- Overall open interest on the CALL options and PUT options with the expiration date September, 3 is 81628 contracts (according to data from August, 9) with the maximum number of contracts with strike price $1,2000 (8708);

GBP/USD

$1.3997 (1631)

$1.3967 (392)

$1.3920 (214)

Price at time of writing this review: $1.3845

Support levels (open interest**, contracts):

$1.3764 (441)

$1.3735 (1104)

$1.3703 (897)

Comments:

- Overall open interest on the CALL options with the expiration date September, 3 is 14101 contracts, with the maximum number of contracts with strike price $1,4300 (2189);

- Overall open interest on the PUT options with the expiration date September, 3 is 11286 contracts, with the maximum number of contracts with strike price $1,3800 (1104);

- The ratio of PUT/CALL was 0.80 versus 0.79 from the previous trading day according to data from August, 9

* - The Chicago Mercantile Exchange bulletin (CME) is used for the calculation.

** - Open interest takes into account the total number of option contracts that are open at the moment.

Reuters reports that the U.S. Senate has set a Tuesday vote on passage of a $1 trillion bipartisan infrastructure bill.

Senate Majority Leader Chuck Schumer announced that a week-long debate on the bipartisan bill will conclude at 15:00 GMT Tuesday when a vote is held on passage, which is expected.

The Senate is then expected to vote to begin debate of the larger bill here - a budget blueprint that is a key goal for progressive Democrats.

Documents showed that it would set the stage for legislation later this year providing tax incentives for “clean” manufacturing, making community college free for two years and providing a pathway to citizenship for millions of immigrant workers.

The budget plan also envisions new federal aid for social programs, including home healthcare for the elderly.

The first bill here sits atop Biden's domestic agenda and includes $550 billion in new spending on roads, bridges and internet access.

The $1 trillion infrastructure bill is popular among many lawmakers in both parties because of the federal dollars it would deliver to their home states. Polls also show that Americans at large are supportive of it.