Reflation trades reigned supreme Tuesday with a strong performance in Australian dollar despite US equities finishing modestly higher (S&P +0.2%, while NDX down 1.1%). AUD was leading the way, encapsulating a pure FX and commodity move as nominal US Treasury yields were only modestly lower. Possibly triggering the USD weakness was a move in real yields to cyclical lows. The USD complex fell sharply, led by AUD up more than 1.5% percent Tuesday after avoiding a fiscal cliff, and EUR finished up 0.7 percent following an initial minor correction after the EU summit deal. The EU deal means there is progress, despite being less ambitious, but the final deal maintains the original EUR750bn envelope but reduces the volume of grants to EUR390bn (from the initial EUR500bn proposal). It also allows northern countries to keep their budget rebates and includes a number of compromises with regard to the governance of the Recovery Plan "though mostly in line with what was expected." Having been cautiously bullish until a deal was confirmed for a Euro area recovery, and hence the EURUSD, it feels that EUR and EUR/Crosses will perform robustly going forward, as the EUR bull thesis ramps up. This is underpinned by effective virus control, positive data releases and supportive policy. The USD weakness and lower real yields was also reflected in gains in commodities, with silver up 7 percent, Gold up 1.3 percent, iron ore up 2.2 percent. The EU-UK Brexit negotiations continue this week, with no imminent breakthroughs expected, talks are likely to go down to the wire. Reports suggest there was minimal if any progress on Fishing Waters discussions Tuesday. Risky assets were very much in favor as the market pinned its hopes on further stimulus from Washington. Pelosi and Mnuchin comments were both constructive regarding further stimulus from congress however, there are some differences over payroll tax cuts. As a result we also saw the USD trade very heavily as President Trump warned that the coronavirus situation in the US would get worse before improving. The S&P continues to hold onto gains for 2020 whilst Chinese equities have rallied however, the rest of Asian markets remain cautious. Virus numbers and outbreaks are consolidating higher around the world are not really market concerns for now. The PboC sets USDCNY at 6.9718 (from 6.9862). USDJPY: As we were hoping for we finally saw a move lower in the pair as the DXY traded lower. We have traded towards our first support of 106.80 and for now have squared our shorts as it seems the DXY may have formed a small base around 95.05 however, we do still favor selling rallies again towards 107.30/50. The move lower has been a lot slower than the moves we have seen in EURUSD and cable as a result of the rise in JPY, which is another reason we have squared up for now. Should this USD move really unravel itself then we feel we can really see an acceleration lower towards 105.00. Support comes in at 106.80/70 and then at 106.30 whilst on the topside we already have our predefined levels. EURUSD: We were surprised to see this rally yesterday as we thought we would perhaps see some consolidation in the pair after the EU summit's agreement on the EU aid deal. So the story here is really about the weaker USD. As we have already mentioned the DXY appears to have found a base around 95.05 forming a double bottom on the daily chart but we are a very long way off the 96.03 zone which was proving to be very good resistance and still advocate selling USD rallies. Overnight we have hit a high of 1.1547 and did not quite manage to break the 1.1550 and this remains our topside resistance for the day followed by 1.1570 the early 2019 highs. On the downside 1.1470/80 remains good support this proved good resistance yesterday as we moved higher followed by 1.1450. We still advocate buying dips as feel that the weaker USD story that we have been talking about appears to be unraveling itself. GBPUSD: Cable was the front runner the other day when we saw a large EURGBP sell flow go through as we broke through the 1.2630 and 1.2680 zones and this rally continued yesterday as the USD weakened and we hit a high of 1.2775 which is a Fibonacci resistance level. EURGBP found a bid around 0.9000 and this caused cable to turnaround and overnight we have hit a low of 1.2709 so far. Brexit issues are still very much alive as a report in the Telegraph stated that UK ministers believe the UK and EU may fail to sign a post-Brexit trade deal. The Telegraph added that while it's possible a basic agreement can be reached if the EU makes concessions, the UK govt is working under a central assumption that "there won't be a deal" and trade with the EU will be on WTO terms once the transition period ends on Dec 31. UK businesses have been told to prepare for a no-deal scenario. If no breakthrough is made in the next 2 days, the situation gets bleaker as no more face-to-face talks are scheduled for next week and it then means that UK PM Johnson's soft deadline of end-Jul for an outline agreement will expire without any progress, and while this uncertainty persists cable will always have headwinds to contend with. Support comes in at 1.2680 followed by 1.2630 whilst on the topside 1.2775 and a break of this level would open way for 1.2830. FTSE 100: Retreated after hitting our resistance level at 6325, breaching below our support now resistance level at 6270, as excitement over new economic stimulus seems to be fading on concerns that fresh US stimulus may take longer than expected. EU-Brexit negotiations continue this week with no imminent breakthroughs expected as we look to retest our support at 6220 which coincides with the 200 period SMA. Dow Jones: Hit our long entry resistance target at 27000 while failing to print an hourly close above in a sign of fading bullish momentum, as stocks trade mixed amid the uncertainty over the timing of fresh US stimulus which may not come before August. An hourly close below our support level at 26785 favors further pullback with 26600 as the closest support target. DAX 30: Hit our long entry resistance target at 13270 after EU leaders agreed on a rescue deal and on the back of promising results from two clinical coronavirus vaccine trials, only to track US indices lower after a CDC report warned that COVID-19 cases might be much higher than reported. An hourly close below 13100 should open the door to lower prints with 13000 as the closest support target. GOLD: Nears record, printing around 1860 in early session today, after hitting both of our long entry resistance targets at 1835 and 1850, on expectation that more stimulus is needed for economic recovery. A report by the US Centre for Disease Control and Trump's comments that "the virus will get worse before getting better" boosted demand on the safe haven as we look towards 1870 and 1900 resistance targets. US OIL: WTI hit our resistance targets at 41.50 and 42.50 before retreating on the back of API industry data showing a bigger than expected build-up in inventories, coming in at 7.544Mb vs. a forecasted and previous drawdown of 1.9Mb and 8.322MB respectively. Further pullback towards 41 and 40.50 support levels is looking favorable as investors await EIA Government data today. — The writer is chief market analyst, Squared Financial
