Tuesday July 12th, 2022

The US$ extends its rally, oil prices fall, while equity markets and US yields are down as risk-on sentiment fades. Equity markets oil prices & metals fall, the US$ hits a fresh 20-year high while Euro tests parity amid the combination of earning concerns, recession fears, high inflation and fears of fresh China covid curbs. In China, investors are monitoring increasing mass covid testing’s and are concerned that fresh lockdowns may follow. Today the US economic docket and market focus remains squarely on the US inflation report on Wednesday for direction on the Fed’s next steps. In other news. US Treasury Secretary Yellen agrees with her Japanese counterpart that volatile exchange rates pose a risk as the JPY tested its weakest level since 1998. US Small business sentiments drops to 9 ½-year low in June NFIB. In the UK, Heathrow Airport asking airlines to stop selling summer tickets and imposes a daily passenger cap through to September. US warns Iran planning to provide drones to Russia for war in Ukraine. The currency markets. Euro tests parity, JPY tested a 24-year low, INR hits a fresh all time low, as the US$ index tests a fresh 20-year high as safe-haven flows dominate currency markets. Commodity currencies remain under pressure as recession fears and on Chinese covid lockdown concerns. CNY slips 0.1% while Asian currencies are down 0.15% on average vs US$. Trading currencies are mixed with MXN tumbles 0.8%, NOK falls 0.45%, CHF lower 0.2%, NZD down 0.1%, while AUD & ZAR are flat and outlier JPY strengthens 0.35% vs US$.

Oil prices slide on a combination of a stronger US$ and the prospect of weakening demand due to fresh covid curbs in China. C$ remains under pressure as oil prices weaken but is the best performing among G10 currencies vs the US$ as markets remain focused on the prospect of a 75bps rate hike by the BoC on Wednesday. Today with no US economic releases expect C$ to hold within currency ranges ahead of Wednesdays key US inflation number, CAD jobs report and the BoC rate decision. Support holds at 1.2950 resistance remains at 1.3080.

Euro struggles to hold above parity amid weak EU data and a strengthening US$. Euro struggles to rebound as it remains under pressure from all fronts and is likely to break through parity as soon as today. The combination of ongoing energy concerns, a flow to safe-have US$, the fear of further Chinese lockdowns and the increasing prospect of recession in Europe are all contributing to further Euro weakness. A break of 1.0000 is likely to increase further Euro selling pressure with the prospect of an extension towards .9900 next. Support resets to 1.0000, if breached .9950 (Nov 2002) while resistance lowers to 1.0085.

EURGBP bounces off lows but remains down 1.75% MTD. Support resets to .8435 (1.1855) while resistance lowers to .8600 (1.1628).

GBP retests 2-year lows amid a stronger US$ and UK political uncertainty. The pound has tumbled almost 200bps since Monday’s open amid increasing risk-off sentiment, a swing to the safe-haven US$, domestic political and economic uncertainty. A Bloomberg poll shows the risk of a UK Recession has risen with Economists split 50/50 that the UK will enter recession in the next 12-months. On the political front, PM Johnson sits as the lame-duck PM, conservatives set Sept 5th for the Tory leadership vote, while labour may table a motion of no confidence possibly as soon as today to oust PM Johnson. The BoE Governor will be speaking today and will give guidance on rate hikes which may add some support for the pound. Support resets to 1.1800 while resistance lowers to 1.1900.