CFD Markets News and Forecasts — 21-06-2021

• Recovery is gathering pace, we need to ensure support well into recovery
• The outlook for the euro area economy is indeed brightening
• Spread of virus mutations continues to pose a risk
• As recovery is gathering pace, we need to remain vigilant and ensure that policy support continues to provide bridge over the pandemic and well into recovery
• Brighter prospects for global demand and faster-than-anticipated increase in consumer spending could result in even stronger recovery
• Upward effect of underlying inflation pressures on headline inflation will be roughly counterbalanced by expected decline in energy prices
• Effects on euro area HICP inflation from U.S. inflation are expected to be moderate

• Says he sees 2022 core PCE inflation at 2.5%
• We need to be ready for upside risks to inflation
• We need to be ready to react on both side of that and stay nimble
• The anecdotal evidence is overwhelming that this is very tight labor market
• We're going to give plenty of leeway for the labor market to improve
• There doesn't seem to be much doubt about inflation being above target in 2021; question is how quickly will that dissipate
• The debate is where does the monetary policy have to be to get the gentle glide back to 2% inflation
• Part of the debate is the question of what it means to have inflation above 2% for some time
• The low-rate and low inflation era is not ending any time soon
• On hike in reverse repos, this was largely a technical move to keep rates within our band
• The tapering debate is open
• This is not an environment where tapering could be put on automatic pilot
• Fed will need to be ready to make adjustments to tapering

• Says he expects unemployment rate to decline to about 4-4.5%
• Dallas Fed still expects GDP growth of about 6.5% in 2021
• We've seen more vaccines and fiscal spending than we had anticipated
• Accelerated vaccinations, substantial fiscal policy is leading to greater mobility
• Dallas Fed forecast is for headline inflation PCE to be 2.4% with risks to the upside
• Spending on energy transition is likely to be a persistent inflation boost
• Issue coming out of financial crisis was a lack of demand; the issue now is supply constraints
• We still haven't returned to as much in-person work as we may have by the fall
• Business travel still lags behind, demand for workers could firm further
• Some of the demand-supply imbalances in the labor market are structural, including retirements
• Wage issues could be more persistent
• It would be wise not to rely on the dollar remaining the world's reserve currency indefinitely
• In favor of taking the foot off the accelerator sooner rather than later

• UK told EU last week they’re open and they will want to discuss extending deadline in relation to processed meats from the end of June into September
• That is now being considered by European Commission and will be given careful consideration

FXStreet notes that the Norwegian krone has weakened markedly against both the euro and the US dollar as hawkish Fed surprised markets, shattering reflation trades such as being long NOK. NOK is likely in store for summertime sadness, but economists at Nordea remain optimistic on behalf of NOK towards year-end.

“Over the summer, the risk is for a somewhat weaker NOK – especially against the USD – if US figures come in better than expected and inflation surprises yet again on the upside. Key to watch will be Nonfarm Payrolls and inflation prints. If these surprise positively, markets will start betting that the Fed will become even more hawkish. This will likely be good news for US rates and USD, but bad news for stock markets and thereby NOK.”

“Yet, we remain positive on NOK towards year-end. We expect NOK to start performing again when NIBOR rises as we come nearer to Norges Bank’s September hike. The reason behind the lower NIBOR is much better structural liquidity in the NOK market, but this will change after the summer. Lower liquidity should push NIBOR higher towards year-end. Moreover, Norges Bank’s September hike will push NIBOR even higher, thereby supporting NOK. This means that the current headwind for NOK from a lower NIBOR will turn to tailwinds in a couple of months’ time.”

“Higher rates in Norway is why we hold our view that EUR/NOK will come down below 10 by year-end. But the same cannot be said for USD/NOK, we still believe USD/NOK will trade relatively sideways towards year-end.”

U.S. stock-index futures rose on Monday, driven by gains in financials and energy stocks, as the equity market attempted to rebound after hawkish-sounding remarks from the Federal Reserve last week led Dow and S&P 500 to their biggest weekly declines in months.

Global Stocks:

FXStreet reports that the Credit Suisse analyst team notes that the S&P 500 Index has broken support from its uptrend from last October and price support at 4170/68, clearing the way for a test of the 63-day average at 4142.

“S&P 500 is coming under increasing pressure following the failure to clear our next flagged resistance at 4260 and not only have we seen a sharp downturn in momentum and OnBalanceVolume but also now a move below the uptrend from last October and also key price support from the early June low at 4170/68. This sees a top complete to clear the way for a deeper setback to test the 63-day average, currently seen at 4142. Our bias would then be to look for signs of stabilization here.” 

“A clear and closing break below 4142 would warn of a more concerted and lengthier corrective phase.”

(company / ticker / price / change ($/%) / volume)

The Chicago Federal Reserve announced on Monday the Chicago Fed national activity index (CFNAI), a weighted average of 85 different economic indicators, came in at 0.29 in May, up from a revised -0.09 in April (originally 0.24), pointing to a pickup in economic expansion in the previous month.

At the same time, the index’s three-month moving average increased to +0.81 in May from +0.17 in April.

According to the report, three of the four broad categories of indicators used to construct the index made positive contributions in May, and three categories improved from April. Production-related indicators made a positive contribution of +0.29 to the CFNAI in May, up from -0.05 in April. Employment-related indicators contributed +0.16to the CFNAI in May, up from +0.06 in the previous month. The contribution of the sales, orders, and inventories category to the CFNAI improved to +0.02 in May from -0.06 in April. Meanwhile, the contribution of the personal consumption and housing category to the CFNAI worsened to -0.18 in May from -0.04 in April.

• All analyses in Eurozone the U.S. and other jurisdictions indicate that phenomena associated with inflation are of temporary nature
• Inflation in Europe could be explained by changes to tax framework in some countries in the region

• Government made commitment not to increase rates of income tax

USD fell against its major counterparts in the European session on Monday, pulling back after last week’s surge that was triggered by some hawkish-sounding Fed comments.

The U.S. Dollar Index (DXY), measuring the U.S. currency's value relative to a basket of foreign currencies, dropped 0.13% to 92.10 after a jump of 1.8% in the previous week, the most since March last year.

St. Louis Fed President James Bullard told CNBC on Friday that the U.S. central bank had already begun talks on the tapering of its $120 billion a month bond-buying program and revealed that he was one of the seven FOMC’s members on Wednesday that projected an interest rate hike in late 2022. Bullard was previously viewed as one of the more dovish Fed officials. 

Bullard’s hawkish comments followed the Fed's updated “dot plot”, which revealed that the FOMC’s members are now predicting at least two interest rate hikes in 2023, a year earlier than projected in March.

The Fed’s hawkish pivot encouraged investors to price in sooner-than-previously-expected increases in interest rate, providing support to USD.

Market participants are now looking for remarks from ten FOMC’s members this week, with Fed’s Chair Jerome  Powell, who is considered a super dove, scheduled to testify before the U.S. Congress on Tuesday.

FXStreet notes that EUR/JPY weakness has accelerated further following the completion of a top. Analysts at Credit Suisse stay biased lower for a test of a cluster of what we see as more important supports at 129.59/36.

“We stay biased lower for a test of what we see as a more important cluster of supports at 129.59/36 - the 23.6% retracement of the entire 2020/2021 bull trend, 38.2% retracement of the rally from last October and the key April lows. Our bias remains to look for a floor here. 

“A direct break on a closing basis below 129.59/36 can see weakness extend further to the late March low at 128.29, potentially the 200-day average, now at 127.66.”

“Above 130.94 is needed to ease the immediate downside bias for a recovery back to 131.38/48, but with a fresh cap expected here for now."

• Cases of coronavirus' delta variant is still going up
• But the data is looking good for lifting curbs on July 19
• This will be difficult year for travel
• The emphasis will be on protecting the country from the virus getting in

FXStreet reports that gold fell a sixth consecutive session on Friday, closing at $1764.16 to lose 6.0% on the week, and strategists at OCBC Bank believe that the bearish pressure could take a breather this week and give some respite to the yellow metal. 

“Bearish pressure may ebb this week - not because we favour the precious metal, but our valuation model suggests gold is currently trading in the middle of its fair-value range after last week’s sharp selloff. Regardless, our bearish call from two weeks ago has played out nicely.” 

“Global assets now look like they are beginning to move in tandem - the decline in Treasury breakeven yields and gold price reinforce the ‘transitory’ inflation idea, while prospects of rate normalization have dampened riskier assets like equities and commodities.” 

FXStreet notes that following the FOMC shock this week, all G10 currencies have weakened sharply but EUR selling has been less than most other G10 currencies – the 2.0% drop was the third smallest decline. So the question now is with dollar sentiment more positive will market participants return to running large EUR shorts? In the view of economists at MUFG Bank, reasons to sell the euro are not evident.

“The US and the EU announced a 5yr tariff truce related to the dispute over subsidies to the airline sector. What’s more, the GDP slowdown in 2018-19 was notable - the annual rate slowed from 3.1% in Q4 2017 to 1.2% in Q4 2018. A period of stronger growth lies ahead now. Yes, this is expected and will be global but it will limit the appetite for EUR selling.” 

“The signs of a pick-up in vaccinations in April helped fuel EUR41.6 bn worth of equity buying, the largest since December last year. After a prolonged period of underperformance, we see scope for equities in Europe to outperform. Corporate earnings positive surprises relative to negative hit a record earlier this year. Bond inflows remained muted with modest selling worth EUR1.4 bn. Over time as EU Recovery Fund debt expands and becomes more liquid, foreign investor appetite is likely to pick up given the approx. 25bp pick-up over Bunds.” 

“We believe the outlook in Europe is not consistent with a renewed large build-up of EUR short positions in the market with portfolio flows also set to support EUR.”

FXStreet reports that economists at Credit Suisse note that NZD/USD maintains its break below the 200-day average at 0.7042. The kiwi is now oscillating around 0.6945 - below which would mark an important change of trend.

“The break below the 200-day average at 0.7042 raises the prospect of a broader trend change, with the market now oscillating around its prior year-to-date lows at 0.6945. The ‘measured top objective’ projects a move beyond here towards 0.6913. Along with the break of the 200-day average, a weekly close below 0.6945 would mark a major medium-term breakdown, opening up 0.6875/61 next and eventually beyond.” 

“Near-term resistance moves to 0.7000/01. Thereafter, the market should now ideally remain capped below the 200-day average at 0.7035/42 to maintain the downward pressure.”

FXStreet reports that economists at HSBC discuss EUR/USD prospects.

“We believe a key headwind to extended EUR/USD gains beyond 2018 highs is that the personality of the FX market is set to change in the coming months, once the Fed moves more stridently towards its taper later this year and relative interest rates increase their influence relative to risk appetite. It is a transition that is likely to cap much of the USD-driven upside for EUR/USD that has been such a big part of the rally over the past year. However, we are not convinced that this transition point has been reached in full and a still-patient Fed may frustrate the more hawkish elements of the market. All this should leave the door open to some modest USD weakness over the near-term.”

“For the EUR, domestic positives do exist, including the accelerating vaccine roll out, the economic reopening and associated upswing, and the ground-breaking EU recovery fund. But they will only be able to elicit a modest degree of EUR strength.”

Bloomberg reports that Canada’s border chief said the U.S. border is unlikely to be completely reopened until 75% of Canadians are fully vaccinated.

The world’s longest undefended border has been closed to most travel since March 2020. On Friday, Canada extended the restrictions until at least July 21, though it’s expected to announce the easing of some rules Monday for fully vaccinated citizens.

“We haven’t reached the finish line, and the finish line is when a significant majority of Canadians, approximately 75%, are fully vaccinated,” Public Safety Minister Bill Blair told. At present, less than a fifth of Canadians have received two shots, according to data compiled by CTV News.

Airlines, tour operators and other businesses on both sides of the border have been pleading for a reopening, with the vital summer season about to begin, and Canada’s go-slow approach is causing frustration. Blair’s announcement Friday that Canada would extend the border restrictions was met with some unusually blunt language from Brian Higgins, a New York Democrat who represents a border district.

Canada prioritized giving first doses to as many people as possible before moving on to second doses amid a shortage in vaccine supplies. As a result, some 66% of Canadians have received one shot, but only 18% have had two, according to data compiled by CTV News. In contrast, about 45% of Americans have had two doses, according to the Bloomberg Vaccine Tracker.

CNBC reports that according to Jian Chang, chief China economist at Barclays Asia Pacific, consumer spending in China has largely lagged the country’s overall economic recovery from the pandemic and that sluggishness stems from slower household income growth.

Data showed China’s retail sales once again missed analyst expectations. Official data reported retail sales rose 12.4% in May from a year ago, less than the 13.6% increase forecast by analysts.

Barclays economists said they do not see growth in China’s consumption and services returning to pre-Covid levels this year.

“A fundamental issue, I think, that has been holding back the Chinese consumer spending is really the … slower household income growth, and particularly for lower income group,” Chang told.

“To improve household consumption share in the GDP you really need to improve household income share in the GDP,” Chang said.

“That means you really need to improve income distribution … which we know that is quite difficult, especially after the global financial crisis and after the pandemic. We really see globally, you know, there is the widening of income gap and the widening of wealth gap,” she said.

FXStreet reports that strategists at Danske Bank said that OPEC+ has started normalising its oil output, which will ease the upside potential for oil prices from the sound demand backdrop.

“Vaccine roll out, albeit with some bumps on the road, reopening of economies, strong support from monetary and fiscal policy and a relatively weak dollar all creates a sound backdrop for global oil demand. World oil consumption remains somewhat below the pre-pandemic level, but we are confident consumption will fully recover over the coming 1-2 year. We expect OPEC+ to balance the normalisation of output with the ongoing recovery in demand. We expect Brent to average $70bbl in Q3 and Q4 and $72.5bbl in 2022.”

Reuters reports that an industry body overseeing rates said that China’s reforms to the way banks calculate deposit rates will have only a limited impact on financial institutions and depositors, and banks do not need to sharply adjust deposit rates.

The body said the previous practice of multiplying the benchmark rate helped push up long-term rates and led to competition among banks to lure deposits by raising rates or unveiling innovative products.

From Monday, June 21, China will allow banks to set ceilings on deposit rates by adding basis points to the benchmark rate, a shift from the previous practice of multiplying the benchmark rate, the Self-Disciplinary Mechanism for the Pricing of Market-Oriented Interest Rates said.

Ceilings on banks’ deposit rates with maturities of more than one year have declined following the reforms, while ceilings on banks’ time deposit rates with maturities of six months or less have risen, according to the body, which is supervised by the People’s Bank of China (PBOC).

Bloomberg reports that treasury 30-year yields fell below 2% for the first time since February and those on 10-year securities slid under 1.40% as a selloff in equities fueled demand for haven assets.

Stocks dropped across Asia with Japan’s Nikkei 225 Stock Average sliding 4%, while the yen strengthened against all its major counterparts.

“It is primarily the Asian equity selloff, which is also weighing on U.S. equity futures, that is weighing on the 10-year yield,” said Alvin T. Tan, head of Asia currency strategy at Royal Bank of Canada. “It’s more a classic risk-off move as we’re seeing that too in yen strength this morning.”

Traders have adjusted positions as traders unwound reflation trades in the wake of the Federal Reserve’s hawkish pivot last week, sending the spread between five- and 30-year Treasuries to the narrowest this year. 

The Fed’s rate outlook has pushed short-end rates higher while longer-end ones fall as traders calculate there’s now little risk that U.S. inflation will remain above target for long. St. Louis Fed President James Bullard added fuel to the debate on Friday, saying inflation risks may necessitate a rate hike next year.

FXStreet reports that economists at Danske Bank discuss USD/CNY prospects.

“The shift in Fed rhetoric in our view marks the turning point for the USD and we see the turnaround in USD/CNY materializing over the next 6-12 months. We have lifted the 1M and 3M forecast slightly to 6.45 (from 6.40) and 6.50 (from 6.45) but still see the cross at 6.60 and 6.70 on 6M and 12M, respectively. We look for EUR/CNY to stay around 7.70 on 12M but with some downside risk.”

According to the report from IHS Markit, despite the extension of some lockdown measures across the UK, household finances showed continued signs of improvement in the second quarter of 2021. There were improved trends for savings and a more positive outlook towards the longer term, as the easing of lockdown restrictions in Q2 helped firm up household balance sheets. Sentiment around job security and income picked up, as workers from many shutdown sectors returned from furlough.

The headline seasonally adjusted index – which measures households’ overall perceptions of financial wellbeing – rose from 42.0 in Q1 to 44.7 in Q2, signalling the weakest deterioration in UK household finances since the Covid-19 pandemic began. Monthly data pointed to a strengthening performance over the course of the quarter, with June's reading the highest seen since last February. The reduced financial strain in the second quarter also fed through to a strong rebound in sentiment towards household finances over the next 12 months. For the first time since Q1 2016, UK households expect their financial wellbeing to improve over the coming year, with 18–34-year-olds particularly upbeat about their financial outlook

During today's Asian trading, the US dollar fell against the Japanese yen, and was almost unchanged against the pound and the euro.

The head of the Federal Reserve Bank of St. Louis, James Bullard, said on Friday that the Fed could raise its key rate at the end of 2022.Bullard noted that the bias in the "hawkish" rhetoric at the last meeting of the Fed is "natural", given the recent high inflation figures.

The Fed kept the interest rate on federal funds in the range of 0% to 0.25% at the end of the June meeting. The Fed also said it will continue to buy back $120 billion worth of assets each month " until significant progress is made towards the goals of maximum employment and price stability." These decisions coincided with the forecasts of economists and market participants.

At the same time, Fed Chairman Jerome Powell said at a press conference that Fed officials at the June meeting began discussing a possible reduction in the asset purchase program.

The ICE index, which tracks the dollar's performance against six currencies (euro, swiss franc, yen, canadian dollar, pound sterling and swedish krona), fell 0.03%. The dollar index is near 10-week highs, having shown last week the strongest growth since March 2020 against the background of the "hawkish" tone of the Fed.

FXStreet reports that economists at Credit Suisse believe the downside for US 10yr Bond Yields from current levels is limited. 

“Our expectation is still that the downside in yields is likely to be limited and our medium-term bias is still in favor of higher yields. Going forwards then, a break above the next key support at 1.635/645% would now be sufficient to confirm a new bearish continuation pattern and take the market up to 1.775/82% and eventually beyond. The completion of a bearish continuation pattern would also sharply raise the risk of a longer-term yield base.”

“The now confirmed uptrend at 1.455/445% and particularly the channel bottom at 1.425% should now floor the market to avoid a deeper corrective setback. US 10yr Bond Yields are increasingly threatening a long-term 2-year basing structure, which would eventually be confirmed above 1.82%. Thereafter, we look for a move to our prior medium-term objective at 1.965/2.00% and eventually on a 6-12 month horizon, the cluster of retracement resistances at 2.16/18%.”

And, unlike the sharp drops over the past several years, Zandi anticipates a quick recovery won’t be in the cards particularly because the market is richly valued. He estimates it could take a year to return to break even.

“The headwinds are building for the equity market,” Zandi told. “The Fed has got to switch gears here because the economy is so strong.”

He suggests the correction may already be underway because investors are starting to get spooked.

Despite his market warning, Zandi believes the economy will avert a recession because the downturn is more about risk asset prices getting overextended than a serious fundamental issue.

“The economy is going to be rip-roaring,” he said. “Unemployment is going to be low. Wage growth is going to be strong.”

Reuters reports that Britain's top central bank officials look set to remain divided this week over whether to pull the plug on their government bond purchase programme, after inflation hit its highest in nearly two years.

Bank of England chief economist Andy Haldane was alone in May when he voted to halt the quantitative easing (QE) bond purchases in August once they reached 825 billion pounds.

Economists expect Haldane to retain this stance when the BoE announces its latest policy decision on Thursday and are looking to see if others on the Monetary Policy Committee join him.

May's consumer price inflation came in above the BoE's and other economists' forecasts at 2.1%, the first time it had surpassed the BoE's 2% target since July 2019. Some economists now see inflation exceeding 3% later this year versus BoE forecasts of 2.5% for the end of 2021.

"Stronger growth, labour market and inflation data, thus far, should tilt policy statement in a slightly more hawkish direction," Deutsche Bank economist Sanjay Raja said.

Although British inflation is below the 5% last recorded in the United States, and its post-COVID recovery is less advanced, financial markets expect the BoE to begin raising rates before the U.S. Federal Reserve - a historically rare sequence.

EUR/USD

Resistance levels (open interest**, contracts)

$1.2026 (390)

$1.1991 (876)

$1.1963 (550)

Price at time of writing this review: $1.1871

Support levels (open interest**, contracts):

$1.1829 (1824)

$1.1801 (586)

$1.1767 (639)

Comments:

- Overall open interest on the CALL options and PUT options with the expiration date June, 18 is 52580 contracts (according to data from July, 9) with the maximum number of contracts with strike price $1,2200 (5961);

GBP/USD

$1.4026 (141)

$1.3955 (218)

$1.3925 (135)

Price at time of writing this review: $1.3809

Support levels (open interest**, contracts):

$1.3765 (755)

$1.3745 (1327)

$1.3720 (861)

Comments:

- Overall open interest on the CALL options with the expiration date July, 9 is 13453 contracts, with the maximum number of contracts with strike price $1,4500 (3572);

- Overall open interest on the PUT options with the expiration date July, 9 is 15290 contracts, with the maximum number of contracts with strike price $1,4000 (2927);

- The ratio of PUT/CALL was 1.14 versus 1.14 from the previous trading day according to data from June, 18

* - 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.

RTTNews reports that China kept its benchmark lending rates unchanged, as widely expected.

The one-year loan prime rate was maintained at 3.85 percent and the five-year loan prime rate was retained at 4.65 percent.

The one-year and five-year loan prime rates were last lowered in April 2020. The one-year loan prime rate was cut by 20 basis points and five-year rate by 10 basis points in April 2020.

The loan prime rate is fixed monthly based on the submission of 18 banks, though Beijing has influence over the rate-setting. This lending rate replaced the central bank's traditional benchmark lending rate in August 2019.

The PBoC has now fully reversed last year's credit acceleration using quantitative controls, Sheana Yue and Mark Williams, economists at Capital Economics, said. Accordingly, policy rate hikes that could prompt LPR increases are unlikely in the near future.