The ebb and flow of the tide of risk appetite seems to be in the process of another turn as the risk aversions is coming back to the fore in recent days. This comes as we begin to gather more data on how the economic impact is hitting across the major economies for March. US retail sales and industrial production paint a grim picture for the US economy, whilst the IMF forecasts for a slump in global growth is also painting a very dark picture.
In this environment of slipping risk appetite, I see the US dollar regaining strength, even as Treasury yields fall back again.
The safe haven flows are key here and the dollar (along with the Japanese yen) remain the key performers when risk appetite ebbs away. The higher beta major currencies (the Aussie and Kiwi) are under pressure today, not helped by the dovish comments from RBNZ Governor Orr noting that negative rates are not being ruled out at this stage. Oil remains depressed by the grim outlook, whilst equity markets are increasingly testing their recovery trends and breakout supports. This has a feel of being a crucial crossroads for markets now. As we move into the European session today, there is a mild positive bias to equities, but the dollar is outperforming on major forex. We view rallies on risk with increased caution with this set-up.
Wall Street closed lower last night, with the S&P 500 -2.2% at 2783, although futures are holding up today as the E-mini S&P futures climbs back by +0.5%. In Asian there was a mixed picture, with the Nikkei -1.3% and Shanghai Composite +0.3%. European markets are edging positively higher, with FTSE futures +0.8% and DAX futures +1.0%.
In forex, there is a USD positive bias across major pairs, with the underperformance of AUD and NZD the standouts.
In commodities, gold and silver are holding ground this morning, whilst oil is also holding up around key support too.
For the economic calendar, the main focus once more is on US data later in the session. Every week, Thursday is becoming the day where the latest grim readings of the scale of COVID-19 impacting the US labor market is seen. US Weekly Jobless Claims are at 1330BST and are expected to show another 5.10m claims this week (after the record 6.61m claims last week). There is also some housing data for the month of March with the US Building Permits at 1330BST which are expected to drop to 1.30m (from 1.45m in February) whilst US Housing Starts are expected to fall to 1.30m (form 1.61m in February).Finally there is another regional Fed survey for April with the Philly Fed Business Index at 1330BST expected to plummet to -30.0 (from -12.7 in March).
When considering the outlook for risk appetite, the Aussie/Yen cross is a very good gauge. The Aussie is a higher beta/higher risk major currency, whilst the yen is the classic safe haven. So it is with great interest I see that the rally on Aussie/Yen has been hit by yesterday’s decisively negative candle and whether the recovery is now turning into reverse. The retreat from 69.25 means that the market is now breaking several of the technical factors that have been reasons to still be positive about the recovery. An uptrend from the crucial March low of 59.90 has been broken by this morning’s slip back.
The key will now be how the market reacts to the breakout of 67.62 which was the original March rebound high and is a basis of support. A closing breach today would add weight to the likely renewed selling pressure. The level 66.25 would be a target area. The hourly chart already shows corrective momentum building and a confirmed move below 67.50 would complete a six session top pattern, implying a further -175 pips of decline towards 65.75. The bulls need to decisively recover back above 68.20/68.50 overhead supply to regain some impetus.