Heffx Update: FX Outlook

• USD steady in quiet trading with US and UK markets closed.
• CAD leads G10 but remains firmly range-bound.
• EUR trades around 1.09 ahead of EU relief fund proposal.
• GBP unchanged despite Brexit and political tensions.
• JPY modestly lower as stocks gain.
• AUD little change in low 0.65s on limited price action.
• MXN leads majors to highest mark since mid-March.

Heffx Market Update

The major currencies are narrowly mixed against the USD in quiet trade as holidays in Singapore, The United Kingdom and The United States dampen activity. Commodity currencies are slightly more supported, reflecting demand for risk assets at the same time the JPY and CHF (along with the NOK) are modest underperformers.

G10 movement is, on the whole, very limited however the MXN has created a decent move overnight to increase recent gains and push the USD below key technical support at 23.84 to reach its strongest since mid-March. US equity futures are up on the day so far and most European stock markets are in the green.

Energy costs are up modestly while major bond markets are slightly unchanged. The HKD 12m forward outright rate eased modestly despite weekend protests over China’s new security law proposal. The CNH remains soft, trading close to recent lows against the USD around 7.15; the PBoC set the yuan fixing a little below market forecasts today, however, suggesting it may be opposed to additional softness. China’s National People Congress meeting continues, meanwhile; China’s leadership warned that the USA is pushing the countries towards a new “cold war”.

There are no major data reports out today and key developments within the United States are back-loaded into the latter part of the week (Thursday sees weekly claims, durable goods, the second estimate of Q1 GDP etc., while Fed Chairman Powell speaks on Friday).

Beyond the economic data, markets may, of course, continue to track developments concerning the coronavirus outbreak, including measures taken to ease restrictions and their impact on activity (and renewed infections) as well progress on Coronavirus treatments.

Canadian Dollar: USD/CAD (CAD=X)

USDCAD is drifting slightly lower to trade near session lows as our session gets off to a slow beginning.

Pro-risk appetite is lifting the CAD slightly and while we expect the broader risk mood will remain a crucial driver of the CAD tone for now, we tend to also feel that relatively firm crude prices, which have extended a clear boost to Canadian terms of trade (which had weakened through March and April), warrant attention and support modest gains in the CAD at least, we feel, even if those gains are perhaps focused more against the CAD’s commodity peers.

In the near term, our view for USDCAD to continue its recent range trade but we think risks are tipped towards a push to the lower end of that range (1.3850/1.3900) in the close to term.

USDCAD short-term technicals: Neutral/bearish—Short term price action through to the end of last week suggests USDCAD set a short term peak/reversal around the Friday high near 1.4050. We think spot should edge modestly lower in the near term. We spot intraday support at 1.3940/50. Key support remains 1.3850/70. Resistance is 1.4040/50.

Euro: USD/EUR (EUR=X)

The EUR is mostly unchanged to begin the week after rebounding to around the 1.09 mark following a slight early morning decline as it tracks the market’s route in relation to the greenback while getting a lift from better-than expected IFO survey figures. The EUR will probably remain on precarious footing until mid-week when EU Commission president von der Leyen presents a proposal to tackle COVID-19’s economic harm.

The EU’s proposal will likely be a watered down version of the Franco-German pitch for a €500bn shared debt package—and hence have a negative impact on the EUR through late-week—with a smaller amount in grants—i.e. more loans—and with stricter conditions to make the deal more amenable to fiscal hawks in the EU. With The United States and United Kingdom markets closed for the day, the EUR will probably stay range-bound close to the 1.09 level.

British Pound: USD/GBP (GBP=X)

The British pound, meanwhile, was stable however stressed from the prospect of the Bank of England cutting official interest rates below zero at its next policy meeting in June.

“GBP is not looking good with a perpetual underlying double deficit and a very clear risk of negative carry ahead,” Shayne Heffernan, CEO of Heffx mentioned in a note today.

The Sterling index fell 2.2% last week and is beginning the week near a two-month low, while GBP/USD was at $1.2171, effectively unchanged from Friday.

Japanese Yen: USD/JPY (JPY=X)

The US greenback has done truly very little against the Japanese Yen throughout the trading session on Monday, as a number of the largest countries in the world had the holiday session, resulting in a lack of liquidity. with that in mind, I look at the ¥108 level as an area that offers important resistance.

If we were to break above, there then we have to concentrate on the 200 day EMA which is just above. After that, then the ¥109 level is the next target. In other words, it’s terribly tight all the way up to that level.

Australian Dollar: USD/AUD (AUD=X)

In the context of recent volatility, the Australian dollar remained relatively range bound through trade on Monday, bouncing between support at 0.6520 and resistance at 0.6550. Markets remained for the most part muted to start the week as both the U.S.A. and Great Britain enjoyed extended weekends, while headline newsflows were, in the whole, absent. The AUD appeared vulnerable following the increase of protests in Hong Kong through the end of last week and as protests continuing through the weekend, investors prepared risk off moves ahead of updates from China’s Foreign Ministry Commissioner in Hong Kong. Xie Feng declared the changing security laws won’t interfere with the one country, two systems policy, confirming Hong Kong will maintain its legal and judicial powers. while there are still loads of unanswered questions the statement was enough to assuage investor fears.

The Australian dollar has enjoyed a sustained run above 0.65 US cents, buoyed by improving optimism and the opening of the world economy. Having briefly pushed through 0.66 on Thursday last week the currency has slipped back below resistance at 0.655/0.6570. Risk continues to dominate direction as the prospect of a second wave in Coronavirus infections still looms large. With economies starting to build momentum a second shut down would all but extinguish hopes of a H2 recovery.

Watch resistance on moves approaching 0.66 with short to medium term forecasts biased to the downside.

Mexican Peso: USD/MXN (MXN)

The Mexican peso is rising for the sixth day on Monday and it trades at the highest since mid-March versus the United States dollar supported by an improvement in market sentiment. USD/MXN decreased to test 22.50 and it remains close to the lows, under pressure.

Among the most liquid currencies, the Mexican peso is the leading performer on Monday and also considering the last five trading days. The rebound in crude oil prices and in equity prices boosted the currency that so far in may, has one of the best months in history against the US dollar.

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