HYCM Market Insights & Trading Tips

FX Week Ahead 18.05.20
by Giles Coghlan, Chief Currency Analyst at HYCM

Federal Reserve’s Chair, Jerome Powell, delivered a sober verdict on Wednesday that the US economy faces an extended period of ‘weak growth’ and ‘stagnant in-come’. Jerome Powell, however, played down the prospect of negative interest rates for the US and this resulted in USD strength midweek. In contrast, the Reserve Bank of New Zealand expressed a willingness to use negative interest rates in the future and this resulted in investors selling the NZD. In other news concerns over a second outbreak of COVID19 also weighed on stocks as many nations begin to come out of their lock downs.

Key events from the past week

USD: Fed Powell’s Speech, Weds, May 13. Fed’s Chair Powell delivered a gloomy message that the US could expect ‘weak growth’ and ‘stagnant income’ for some time to come. He also downplayed the idea of the Fed using negative inter-est rates, which caused the Dollar Index to rally above 100 on Wednesday.
NZD: RBNZ Interest Rate Decision, Weds, May 13. The deputy Governor Geoff Bascand clarified that the RBNZ would like to be ‘ready for negative rates’ by the end of the year. It was this willingness for the RBNZ to allow negative interest rates that weakened the NZD midweek.
Coronavirus: Second wave fears weigh on stocks. With many countries now re-emerging from lockdown measures fears are growing around a second wave of COVID19 cases. Wuhan in China are now testing all 11 million residents in a bid to ensure that a second COVID19 outbreak does not return there.

Key events for the coming week

EUR: German Manufacturing PMI, Friday, May 22. Germany is the largest member and contributor to the eurozone, so domestic data heavily influences the euro. Any further surprise manufacturing weakness from Germany will likely weigh on EURUSD next week.
XAU/USD: Demand for gold grows. The World Gold Council reported gold Ex-change Traded Funds (ETF’s) saw large inflows of gold purchases from North America ($7.8bn) in April. XAU/USD was supported above $1700 this week, will gold buyers reach $1800 next week as fundamentals for gold improves further?
Coronavirus: Watch out for the latest virus news. The world has renewed fears about a second ‘wave’ of infections. Historically pandemics do return in ‘waves’, so this fear will remain until there is an effective treating or vaccine for COVID19.

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Gold bulls take charge
by Giles Coghlan, Chief Currency Analyst at HYCM

Gold breaks out

The gold’s appeal has been there for a few weeks now. Technically the coiling inside bar on the daily chart was a key giveaway that gold was getting ready to break out.

Now, it was unclear which way it was going to break, but the fundamentals for gold was strong. It was this one upside bias which was why I wrote on May 7 that one option was to buy gold at market and look for a break. With a wide enough stop the thinking was that a false (downwards) break of the coil would also likely find buyers. It was unclear which way the coil would break, but a break to either side should have found buyers. The other option was to join the hordes of investors buying gold ETFs:

You could buy a gold ETF. That saves the issue of leverage if you buy in real money. Another option would be to dip your toe in here with stops below $1636 and look for the break.

Please note that whenever you see these coils forming, price is getting ready for a strong breakout:



So, for those long gold, or wanting to go long, the case for gold bulls still remains firmly in place. Here are some key reasons why the bullish case for gold remains in place:

1. Central bank rate cuts. Firstly, major central banks are cutting interest rates and all are heading to zero or lower. The Swiss National Bank, the European Central Bank, and the Bank of Japan all currently all have negative interest rates. For many countries, where inflation levels are higher than interest rates levels money, in the bank will simply lose value year on year. Therefore, investors who have moved into cash will be looking to place their cash in a safe haven.

2. Gold is a recession hedge. In the last three recessions, gold has increased in value, so as a hedge for a recession gold does have strong appeal. Check out the chart below to see gold increasing in all of the last three recessions (black column).



3. Money is being devalued. With large scale quantitative easing (QE) programmes undertaken by central banks around the world and some analysts anxious about high stock valuations, gold offers a decent hedge against such devaluing risk. This is why many analysts would recommend a portion of your portfolio being in gold. History, may not be repeated, but the fundamental outlook for gold is currently very strong. Entry in the gold market can be done via spot gold, a gold ETF, or gold mining stock.

Expect gold buyers from $1740 and below on the XAUUSD chart.

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Triple woes weigh on the GBP
by Giles Coghlan, Chief Currency Analyst at HYCM

GBP under pressure

The GBP has three key pressures on it limiting its upside. They are its monetary policy, the number of COVID 19 cases, and finally the Brexit cliff edge negotiations. These three issues are all a drag on the GBP.

Issue number 1: Monetary Policy

In the last MPC vote, Haskell and Saunders split the vote as they were looking for an increase in Quantitative Easing to £100 billion. Furthermore, Bank of England’s Haldane has been talking on negative interest rates over the weekend when he said:

“On negative rates, BoE buying riskier assets – says these are something the Bank needs to look at, and are looking at, with somewhat greater immediacy.”

Any introduction of negative interest rates will cause the GBP to fall. Therefore, expect any growing mention of negative interest rates to really accelerate the downside for the GBP if the mentions increase.

Issue number 2: COVID19 cases

The total number of COVID19 cases in the UK is just about 250K and the number of deaths is currently around 35K. This is the third-highest death toll and the fourth-highest number of cases in the world. The UK’s slow response to the outbreak of the COVID19 outbreak has led to some of the world’s worst numbers. At present COVID19 cases are falling, but watch for any pick up in cases to weigh on the GBP.

Issue number 3: Brexit deadline looms

If the UK’s transition period ends without a deal that will be the worst-case scenario for GBP bulls. The UK is not prepared ay present to give any grounds for an extension. Therefore, the so-called ‘Hard Brexit’ looks increasingly likely. These high stakes, politically charged deals often get done on the ‘steps of the court’ delisted the hard rhetoric, but even so, this deal is tricky and hard to see how it can be done quickly.

All of the above means that the GBP’s medium-term outlook remains a ‘sell on the rallies’.

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China’s savvy property developers get creative
by Giles Coghlan, Chief Currency Analyst at HYCM

Rising pork prices gain attention

Some of China’s biggest real estate developers are branching out in a surprising direction. China’s property developers are renowned for being politically wise and taking fresh opportunities. The new venture at the moment being undertaken by China’s real estate companies is pig farming.

In fact, Vanke, one of the biggest property companies in the country, is sending out job adverts on its own website for a pig farming project. The website states that: ‘Vanke will aim to provide healthy food at affordable prices, and will join peers in the whole chain, from farm to table’ according to a report from the South China Morning Post.

Why are they starting to farm?

Firstly, it makes sense of the current market environment. China’s property prices are pressured while at the same time China’s live pig prices are high. Look a the chart below to see the recent rise in live pig prices:



In this environment, it makes sense to diversify the property business.

The second reason is that it is part of a wider government move to encourage rural investment. It is reported that China’s authorities would like to give a ‘jump start’ to rural investment in what could be described as a ‘public-private’ partnership.

Some of the thinking seems to be reported on the Dim sum blog (which discusses some of China’s economic policies): Investments are encouraged to follow a whole industry chain model that integrates and “pulls along” farmers, processors, and providers of services.

So, this is just one example of how creative industries are showing adaptability. In this post COVID-19 world it will be those fastest to adapt who will be able to take advantage of rising and falling markets.

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NZDUSD looks stretched to the upside
by Giles Coghlan, Chief Currency Analyst at HYCM

Recent NZD strength has been on two things. Firstly optimism surrounding Moderna’s positive COVID-19 vaccine trials. Secondly, when Governor Orr stated on Tuesday, May 19, that he does not see the RBNZ using negative rates ‘at this point’.

These two factors boosted the Kiwi as traders unwound some of the short term bets on negative interest rates from the RBNZ.

Some of these bets had come from the RBNZ’s last rate decision earlier this month where a Deputy Governor’s Bescand had told banks to be ready for negative interest rates by ‘year-end’. That was the FX response, but rates (bonds) traders have taken a different view.

The two-year swap fell on Wednesday and did not rally higher with the NZD. The swap rate is keeping a downward bias in place for the NZD. If you look at the chart below you can see the 2-year bond rate in white and the NZDUSD price in blue. Normally these two should move in tandem. The divergence tells you that something is amiss.



The Bloomberg piece has rates traders as the soberest traders (as is usually the case) given:

1. The present low policy rate of 0.25% and outlook for further downside (and potentially negative rates).
2. The RBNZ’s have a preference for a flat curve.

New Zealand’s economy heavy reliance on China for its trade prospects, so any souring in risk tone will bring the NZDUSD down.

An alternative view

One area that might call this into question could be the early start-up of New Zealand’s economy when they exited around the end of April. Therefore, the chances of NZD getting a headstart on the rest of the world are high. Furthermore, with the optimism around the COVID-19 vaccine from Moderna it may be that a ‘V’ type recovery does, in fact, play out. These two points would argue against bond trader positioning and favour more NZD upside. At any rate, these are the main factors to consider in mapping the path of the NZD.

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Why the Fed will want to avoid negative rates
by Giles Coghlan, Chief Currency Analyst at HYCM

Lessons from Europe and Japan

Negative rates are a controversial topic and the jury is very much out as to how effective they are. Recent commentary has been toying with the notion that the Fed could use negative rates, but a flurry of Fed speakers have recently denied that they are actively looking at the policy. In fact there are some sober lessons from Europe and Japan for the Fed to consider. Here are some of those lessons:

 

1. Limitation in hard times: The ECB and BOJ were forced to hold their rates during the COVID-19 panic. By contrast the Fed was able to ease financial conditions and cut rates by around 150bps in March.
2. Bond yields stuck: The 10year bond yields for Germany and Japan have been stuck while the US 10 year yields fell to 0.66% from a pretty decent 1.92% at the end of 2019.
3. Bank stocks suffer: The European Banks Index in the Stoxx has fallen over 60% since June 2014. This is when the ECB first introduced a negative deposit rate to help turn the eurozone economy around. This has impacted the long term profitability of banks and has caused them to retain focus on buying sovereign debt rather than lending to businesses and households.

Hard to justify

It is going to be hard for the Fed to justify negative rates and is not an attractive prospect. It is understandable why central banks are now calling for fiscal stimulus from Govt’s as central banks have just run out of easy options (like cutting rates) to help the economy.

What benefits when rates are negative

In a low-interest rate (and negative interest rate environment there are some winners. Firstly, Gold benefits as the dollar’s rates advantage of over no-interest gold become a disadvantage. Secondly, real estate with rental incomes stands out as a decent investment in a negative interest rate world. Thirdly, shares yielding high dividends will have more appeal than increasingly marginal rewarding bonds.

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FX Week Ahead 05.25.20
by Giles Coghlan, Chief Currency Analyst at HYCM

Positive initial vaccine trials from the company Moderna boosted risk sentiment this week as the market became optimistic that COVID-19 could be restrained more quickly than anticipated. This resulted in strength across the commodity currency block in AUD, NZD, CAD, and weakness in the USD midweek. The key aspect to remember about our present financial crisis is that it is primarily a medical crisis rather than a financial one. This means that a medical solution can be the answer that the market needs to put in a swift recovery. Expect Moderna’s vaccine to be closely followed for further data releases going forward.

Key events from the past week

1. EURO: Franco-German proposal, Europe, Tues, May 19. The euro extended gains midweek boosted by a Franco-German proposal for a common fund that in-crease hopes of a European fiscal union. USD weakness on risk positive flows further boosted EURUSD demand midweek.
2. US-China: Trade war tensions return, All week. Tensions have returned between the US and China after the US Senate passed a bill potentially causing some Chinese companies to de-list from the US Stock exchanges. This caused some risk-off flows going into Thursday which supports the DXY above 99.00
3. Moderna Vaccine: Will it work? Note that vaccine hopes were questioned on Tuesday. STAT news reported that Moderna’s COVID-19 vaccine did not produce critical data to properly assess the vaccine. However, this news was shaken off by Wednesday as the market focused on the optimism of a promising vaccine.

Key events for the coming week

1. US-China: Further trade disputes, May 25. In a light data slate next week there is unlikely to be many market-moving economic releases. However, of much greater concern will be if the negative US-China trade rhetoric turns into more action. If this happens then risk sentiment could easily become negative again.
2. XAU/USD: Short term demand for gold to fall? With vaccine hopes gold’s surge higher was halted at $1750. If the positive sentiment continues next week will gold head back down towards support at $1725 or be able to keep grinding higher to $1800?
3. Coronavirus: Watch out for the latest virus news. Positive vaccine news from Moderna will continue to support risk, but keep aware that any negative news concerning the vaccine will result in risk-off markets returning.

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European defensive stocks set to increase
by Giles Coghlan, Chief Currency Analyst at HYCM

US-China trade tensions have now moved from being a war of words into action. In recent days the US Senate bill that could potentially de-list some Chinese companies has changed the mood. We can now expect a range of ‘tit for tat’ responses as retaliation and counter-retaliation likely escalates. Sadly, antagonism and protectionism is going to be made worse, rather than better, by the COVID-19 induced slowdowns. The relationship between the US and China is under unnecessary strain, but these two countries account for 40% of the world’s GDP, so the whole world will be impacted.

How will different stock sectors perform?

Sectors like travel, leisure, banks, and insurance should underperform in the present environment with lockdown impacting their bottom line. Banks will also be hit by the low interest rate environment. The UK sector is one area to watch as Bank of England’s Governor Bailey has been inching closer to the idea of negative interest rates in recent days.

Eurostoxx in focus

For Eurostoxx the worst May performers in terms of metric points have been HSBC, Compass (catering), and L’Oreal (cosmetics). The best performers have been ASML, Nestle, and Roche. Looking at the European indexes the more defensive benchmarks of the DAX and the FTSE are likely to keep gains ahead of France’s CAC, Spain’s IBEX and Italy’s FTSE.

Events to watch

The Euro saw some relief last week on the German – Franco proposal of a €500 billion relief fund. However, remember that the proposal still needs all 27 member states to agree, so it remains to be seen if the economic stimulus is accepted. Most analysts project that 2Q earnings will be worse than Q1 earnings and present 2021 estimates may still not reflect the reality as the lockdown continues. The current consensus is for EPS to be 6% below 2019 profits, so it is reasonable to expect defensive sectors like tech and healthcare to continue to perform well.

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S&P500, 200DMA and the 3000 level
by Giles Coghlan, Chief Currency Analyst at HYCM

The Daily 200 moving average on the S&P500 is in keen focus right now. The reason is that it offers a technical crossroads in price. Stay above and it is bullish (buyers in control), fall below and it is bearish (sellers in control). Historically, the level has been significant as during the last two recessions of 2000 and 2008 it acted as a ‘barrier’ to any attempt at a bullish recovery. It is the place that bull rallies went to die

Therefore, the level remains in even keener focus in 2020 as it also coincides with the big round number of 3000. It should also be a key area to look at to confirm the so-called ‘V’ shaped recovery hopes. A ‘V’ shaped recovery is one where prices recover swiftly.

The place where bull rallies fade

See the chart below for the 2008 and 2001 recessions and see how the 200DMA on the S&P 500 contained price.



Therefore, going forward we should expect a battle over this level. A clean break and rise above will be great news for the bulls. For traders still short the S&P500 from lower levels and in a losing position this might be the region where they would consider closing their short positions. A break of the 200DMA and close above the level on the daily chart could be a technically sensible place to exit shorts. On the other hand, for those traders looking to short the S&P500, the 200DMA is a low-risk high reward place to initiate shorts. (with stops riding above the 200DMA). Either way, expect this area to be in focus over the next few days as the bulls and bears battle it out.

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A US-China playbook to trade by?
by Giles Coghlan, Chief Currency Analyst at HYCM

Fade the US-China rhetoric?

A recent piece on Bloomberg suggests an approach to play the so-called ‘new cold war’ between the US and China. The suggestion was to fade the initial market reaction. There is a key difference between rhetoric and action however, so the approach was to fade the rhetoric but buy gold on the action. This is because the war of words is just that, words. However, it is the actual actions that the market will react to. We have seen that dynamic play out recently after the US-Senate bill was passed. This bill means that some Chinese companies could have to de-list from US-exchanges. That action harmed sentiment in a way that words didn’t. After all, we all know now that US President Trump is often engaging in a war of words with many different individuals, groups, companies, and countries. As a result, it is unsurprising the market is getting tired of moving on them.

Fading the war of words

One argument for fading the war of words is that much bad news is already priced in.

1. Looking at now vs the start of the trade war (May 2018) the major commodities are cheap (oil, soybeans, copper). The USD is up, bond yields are down, and various positive sectors that have moved US markets higher like tech, healthcare, and consumer staples are less sensitive to trade frictions, so there is less impact from further tensions.
2. One area that is supposed to be hit by a US-China trade conflict is supply chains. We heard a lot about that at the end of 2019. However, supply chains are already being hit by COVID-19. So, if some companies are already moving some of their supply chains back home, how bad would a renewed trade war be? The impact could be limited.
3. Some assets most susceptible to disruptions in the supply chain are already deeply discounted. So, prices should only move lower on some extraordinary action by the US or China. Elections are 6 months away, so President Trump seems unlikely to take that kind of risk.

So, if this is the case, fade the moves on any US-China rhetoric/minor action.

If words turn to actions buy gold

However, if the war on words turns to more serious actions like China selling US Treasuries or strong action from the US, then buying gold seems to be a good initial move.

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Trouble brewing down under?
by Giles Coghlan, Chief Currency Analyst at HYCM

AUD to feel the pressure?

The medium-term outlook for the AUD is only going to weaken if the US-China trade dispute grows. The reason for this is because Australia is the most China dependent major developed economy. Tensions have not only been growing between China and the US with President Trump to hold a press conference on China later this afternoon, but tensions have been mounting between Australia and China after Australia announced it would like an investigation into the origin of the outbreak of COVID-19.

The country of China is the largest export market for Australian barley. In China, it is used to make beer, feed livestock, and in the last financial year, China imported 2.5m tonnes of barley from Australia. If Chinese tariffs are continued on Australia they are likely to bring significant pain to the industry. According to the Australian grain industry, they issued a statement that the new tariffs could cost the industry $A500m per year.

This tariff move from China is in addition to import bans on Australia's beef shipments and looks set to weigh on the AUD going forward. Furthermore, the increasingly aggressive posturing from China and the US means further trade disputes seem almost inevitable now. Any action by either party would weaken the AUD as Australia has around 30% of its GDP from its trade with China.

Positive vaccine news nearly priced in?

20+ companies are now working on vaccines or treatments for COVID-19, so the good news of a vaccine is increasingly becoming 'priced in' and this will make the market more sensitive to negative US-China/China-Australia trade news. Remember how the US-China trade narrative was the dominant driver through markets in 2019. So, looking at the AUDJPY pair it is rejecting its 200DEMA and that would be a near term place to limit risk as it is also a key pivot point on the daily chart.
However, be aware that if President Trump's promised actions against China, due to be announced today, are seen as gentle or only rhetorical then AUD can still rise on the global growth recovery hopes. The 200DEMA on the daily chart provides a near term crossroads and place to limit risk.

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FX Week Ahead 01.06.20
by Giles Coghlan, Chief Currency Analyst at HYCM

It was a positive start to the week as optimism rose in the hopes of a vaccine for COVID-19. Moderna, Novavax, and GlaxoSmithKline, as well as a number of other companies, are all making promising progress towards a successful, effective vaccine. This boosted stocks and the S&P500 moved above its 200DMA midweek. However, the market traded mixed due to US-China trade tensions, Brexit woes, and the reduced chances of getting the EU Commission’s new recovery Fund Proposal agreed by all 27 member states.

Key events from the past week

 

1. EURO: European Recovery Fund, Europe, Wednesday, May 27. The euro extended gains midweek after the European Commission mobilised €750bln for the European Recovery Fund, increasing it from €500bln. However, euro gains were capped when it became clear how hard it will be to get all 27 member states to agree on it.
2. US-China: Trade war tensions return, All week. On Wednesday China’s Global Times said that China could exert financial pain on the US by dumping its US dollar-denominated assets. At the time of writing President Trump is due to announce measures against China.
3. Vaccine optimism: Cure hopes rise. Successful vaccine hopes boosted global stocks at the start of the week and multiple countries are now showing positive trials to treat COVID-19. Even negative news from one company’s trials will likely be ignored by the market as positive hopes are getting priced in.

Key events for the coming week

 

1. AUD: RBA interest rate decision, June 02. Even though OIS markets have priced in a 53% probability of a further 25bps rate cut by the RBA the contract prices remain steady over a 12 month period, so a further rate cut is unlikely for Tuesday’s meeting.
2. CAD: BoC interest rate decision, June 04. OIS projections for the next year suggest further cuts are more likely than hikes for the Bank of Canada. The 12month contract implies only a 20% chance of a cut, so no change is most likely.
3. Coronavirus Vaccine: Good news being priced in. With 20+ companies working on vaccines or treatments for COVID-19 at what point does the good news of a vaccine become ‘priced in’ and fail to move the markets?

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Key FX risk events for June
by Giles Coghlan, Chief Currency Analyst at HYCM

Below are some key event risks to be looking out for in June.

 

1. ECB rate meeting this week on June 04. The expectations are that there will be an expansion of the Pandemic Emergency Purchase Program (PEPP). According to Pictet’s Frederik Ducrozet research note, the Governing Council will increase the PEPP by €500 to EU1.2trillion and further extend the program out until September 2021. There is potential for volatility and a surprise here, so watch out for euro volatility on Thursday.
2. EU summit meeting June 19. The euro has extended gains from last week after the European Commission mobilised €750bln for the European Recovery Fund, increasing it from €500bln. However, the euro gains have been due to the difficulty to get all 27 member states to agree to the German-Franco proposal. The recovery fund will be discussed at the summit and Merkel has said that she doesn’t expect leaders endorsement at the summit and recognises that negotiations won’t be easy. The so-called ‘frugal four’ (Austria, Denmark, Netherlands, and Sweden) will be hard to swing around as they are opposed to the idea of grants to member states. They would prefer low-interest loans. However, any consensus here and the EUR will benefit.
3. Brexit – Another deadline looms as the dark clouds approach! The end of June is the deadline for any extensions to the transition agreement and the general backdrop is that both sides are settling in for a hard Brexit. Expect more GBP volatility if no trade deal or extension can be agreed upon.
4. US Presidential campaign. Although the elections are still around 5 months away campaigns are starting to get underway. Arguably they already have with President Trump increasing tensions with China and targeting social media platforms with an executive order, but avoiding an all-out conflict.

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Stay at home stock theme to remain?
by Giles Coghlan, Chief Currency Analyst at HYCM

Buy Netflix and chill?

The outbreak of COVID-19 has understandably limited what people can do. However, some activities have dominated most people’s lives. Watching TV, buying food, going for some exercise, communicating via zoom and a spot of DIY have all been the main themes for many people. These behaviour changes have resulted in the rise of the so-called ‘stay at home’ stocks. These stay at home stocks, chosen by SocGen strategists, are in the new ‘home, work, and play’ categories such as online entertainment, food delivery, electronic and online communication as well as household products.

The stay at home portfolio looks for a positive year

This so-called ‘stay at home’ portfolio has currently risen by around 26% from its March 12 low. This is compared to only a 19% rise in the Stoxx 600 as a whole. In fact, as of yesterday and according to Bloomberg, the ‘stay at home’ portfolio was merely 1 percentage point away from breaking into positive territory for the year even though the broader market is still down around 16%.

Will this behaviour last?

It seems that investors are not expecting a huge behaviour change even as lockdown measures begin to ease across Europe. Yesterday the lifting of more restrictions was announced from the Netherlands the UK as well as Greece allowing visitors to form more nations to visit the country from June 15. However, it seems that the stay at home portfolio looks set to gain further as consumer behaviour gradually changes rather than an instant return to post COVID-19 normality.

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Sell, store, or dump! What companies will do with surplus stock
by Giles Coghlan, Chief Currency Analyst at HYCM

The problem of surplus stocks for companies

Piles of surplus stock have built up over COVID-19 shutdowns. So it is with interest that I came across an interesting piece on Reuters about what companies are going to do faced with this problem. The lockdowns are now lifting and retailers will be deciding what to do with all the surplus stock.

The options

The key options are keeping it in storage, holding a sale, or selling goods to discounted retailers that will sell branded goods at heavy discounts. Excess stock is a large issue as in the UK the real estate company Knight Frank had taken inquiries for excess stock totaling over 6 million square feet of short-term let warehouse space in the UK since COVID-19 broke out.

The risks

The aging inventory problem. Unlike wine, one of the issues for retailers with storing items of, say clothing, is that inventory gets worse with age. So UK high street retailer Next and German sportswear brand Adidas have stored away basic ‘evergreen’ items that they will offer to shoppers next year.

The return to the shops? A big bounce back?

So, although retailers hope that people will head back to the shops post COVID-19 lockdowns, this is not guaranteed. Some habits may change and stay different. Many people are increasingly concerned about a ‘throw-away’ clothing culture and may be slower to buy than anticipated. Will pent up demand be unleashed into the stores?

Disposing of stock?

In the UK the Parker Lane Group, which helps companies manage excess stock, is dealing with around double its usual volume of up to 1.5 million items of apparel per month, according to its founder Raffy Kassardjian. He said: “Some of our customers are waiting for retail to open up to gauge their performance before they make a commitment on how much stock they want to write off” referring to both selling at discount in-store and offloading to off-price. So, there is going to be a scrabble to shift this inventory and is a story to watch going forward for retailers and Q2 data.

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AUD correction due?
by Giles Coghlan, Chief Currency Analyst at HYCM

The AUD has been very strong recently but is there time now for a correction. Anyone observing the AUD’s recent strength will be aware of that possibility as markets do not move in straight lines for very long. A recent Bloomberg piece made a case for an AUD correction at 0.7184 or before.

The reasons for the AUD’s strength have been the optimism surrounding the global recovery post COVID-19 Economies are opening up and vaccines are on the way. The US has selected Moderna, AstraZeneca, Johnson and Johnson, Merck, and Pfizer as vaccine candidate finalists. Risk-on assets have been strong in the last few days. ADP jobs data yesterday showed a fall in 2.7 million jobs. However, it was not as bad as the 9 million job losses expected. This further helped risk rally on as the expectations for a V-shaped recovery increase. One note of caution is that there are a number of risks still in the market: Brexit, US-China trade tensions, China-Australia tensions, ECB decision later today, headwinds from the frugal four concerning the European relief fund, and that is not to mention the second wave infection risk from COVID-19. Yet, the risk-on rally continues and pulls AUD higher along with it. The chart below shows the relationship between the AUDJPY and the S&P500. Notice how the AUDJPY (risk on pair) tracks the S&p500.



Recession coming for Australia?

Australia’s Treasurer, Josh Frydenburg, admitted the economy may be heading into a recession after the GDP print for Q1 which came in negative. If the AUD keeps rising the RBA may be concerned about having to raise interest rates given the economy may be heading into a recession.

Tensions from China could weigh on AUD

US-China and China-Australia tensions will also weigh on the AUD. Around 30% of all of Australia’s GDP comes from China. So this means that any tensions with the yuan weigh on the AUD too. This is why the AUD is often traded as a proxy for the yuan. Asset managers as a group are also net short on the AUD, so watch out for any significant increase in bearishness in the COT report.



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Is Gold sunny no matter what the weather is?
By Giles Coghlan, Chief Currency Analyst at HYCM

The recent weather in the UK has been unseasonably good. In fact, it has been very ‘un-British’ weather with days of unbroken sunshine and temperatures of 25C+. However, over the last couple of days, the rain has returned, so everything is back to normal! Perhaps the UK has had its summer early? It usually lasts about two weeks, so that would make sense. However, is gold the ‘sunshine’ place to be over the coming months no matter what the weather?



Rising yields problematic for gold

The main problem for gold is that it has no interest rates. This means that there is no reward for holding gold. If you hold a stock that rewards a dividend or a bond that gives a yield. So, with bond yields rising this proves a disincentive to invest in gold. Midweek gold fell through the $1700 level as the ADP data showed a better than expected losses of 2.7million jobs. There had been 9 million job losses expected, so this bodes well for NFP later today. A strong NFP report will put further pressure on gold in the short term. This ADP report midweek, alongside the ISM PMI, stoked hopes of a V-shaped recovery, and bond yields broke higher. All of this was a drag for zero interest gold. However, is all now lost for gold bulls?

Gold as a hedge against inflation

A piece on Bloomberg’s Markets Live Blog is making a case for gold as a hedge against potentially coming inflation. The reasoning is as follows:

 

1. The Fed won’t change it’s monetary policy until the job market returns to post COVID-19 levels. So, more reason to watch the NFP alongside continuing jobless claims.
2. The Fed is considering yield curve control.
3. Longer-term risk if the Fed responds to a rebounding US economy by ending QE and preparing for rate hikes. This seems harmful for gold but could take place in an inflation positive environment.
4. Fed’s balance sheet is expected to climb to $12 trillion and exceed 50% of GDP by year-end. Combine that with ECB and BOJ balance sheets the threat of price spikes becomes real.

The verdict?

How likely is runaway inflation? We should really have been seeing rising inflation since around 2009, but it hasn’t come. It has been warned about but never arrives. Are markets just being too complacent on inflation? According to the Financial Times, US investors are pricing in an average of 1.75% over the next 10 years. That is not much inflation at all and any deviation from these expectations will have folks scrabbling for commodities like gold. The future for gold is in the balance. In the near term, price is at a daily trend line. Stay above and bulls are in control, get below and the bears have the upper hand again.

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FX Week Ahead 08.06.20
By Giles Coghlan, Chief Currency Analyst at HYCM

Positivity abounds! Optimism reigns this week regarding economies re-opening which age a strong boost to risk assets. Stocks, copper, oil, and bond yields all moved higher as hopes reign that a COVID-19 vaccine will be available by year-end. Even sad events, prompting US civil unrest this week, did not stop the risk-on mood. US ADP job data on Wednesday was also positive with a better than expected job loss print. The big question is, will this be the hoped for V-shaped recovery, or will risk markets pull back from recent highs in the coming days?

Key events from the past week

 

1. CAD: Interest Rate Statement, Wednesday, June 03. The Bank of Canada kept rates unchanged at 0.25% as expected on Wednesday, but the BoC was more optimistic than expected and this helped support CAD and the positive risk tone.
2. US-China: Trade war tensions fade, All week. On Monday there was relief that President Trump hadn’t escalated US-China trade tensions over the weekend. This relief was the foundation for the optimism regarding economies opening up post COVID-19 lockdown, though underlying tensions remain.
3. EUR: ECB interest rate decision, June 04. The ECB kept rates unchanged but increased its Pandemic Emergency Purchase Program by 600bln euros to a total of 1350bln. This extra stimulus provides a solid stimulus boost to the eurozone.

Key events for the coming week

 

1. OPEC: Meeting moved, June, TBC. Saudi Arabia has proposed moving the OPEC+ meeting to the middle of June according to delegates. This is due to members haggling over oil quota cheating. Delays should weigh on oil prices.
2. USD: FED interest rate decision, June 10. No interest rate change expected. OIS projections for the next year point to rates remaining unchanged. This chimes with recent Fed talk showing an unwillingness to take US rates negative.
3. Multiple risks: Medium Term Risk Abound! These are from Brexit, from US-China trade tensions, China-Australia tensions, headwinds from the ‘frugal four’ on the European relief fund, and that is not to even mention the second wave infection risk from COVID-19.

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Market Mood GBPNZD 09.06.20
By Giles Coghlan, Chief Currency Analyst at HYCM



Weak GBP, Strong NZD

The outlook for the GBP remains bearish. The UK has until the end of June to agree on an EU-UK extension. If the UK fails to agree to an extension that makes a ‘hard’ Brexit more likely. This outcome would result in the GBP weakening.

The outlook for the NZD is strong as New Zealand officials said on the weekend that no-one in the country has an active coronavirus case. If the country can’t find a case in the next week they will declare that COVID-19 is locally eradicated on June 15. This is great news for the NZD and will likely result in strength as New Zealand can focus on opening up its economy.

Therefore, expect GBPNZD sellers on pullbacks.

We expect this outlook to play out over the next 2-4 weeks as long as the reasons for the trade remain.

Main Trade Risks

The main trade risk is if the UK and the EU agree a trade deal or an extension is granted before the end of June.

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What’s impact does US civil unrest have on the markets?
By Giles Coghlan, Chief Currency Analyst at HYCM

With a number of protests taking place across the world some of the legitimate protests have been taken over by a small minority who have committed public order offenses. You may be wondering what impact these offenses and civil disorder may have on the financial markets. So, to what extent do the markets respond to issues of social justice, and is there a risk that these recent pockets of unrest spill over into the currency, commodity, and equity space?

History tells us, it’s unlikely

A recent article on CNBC looked at the impact of US civil unrest on stock markets from a historical perspective. Here are the key points that we have taken out:

1. Tina Fordham, head of global political strategy at Avonhurst, told CNBC on Tuesday that historically, political unrest in developed markets hasn’t had much impact on equity markets.
2. Investors expect that, although this violence is alarming, that it will blow over and that the U.S. is a law and order country and things won’t get further out of control.
3. Jim Cramer said on Monday that the reason the stock market had rallied after a weekend of protests was because it was blind to social justice.

So, bear in mind that the elements of unrest are not going to seriously derail the markets. Law and order will largely be maintained and that should leave room for the peaceful protests to continue as they put their message across to a watching world.

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