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Market Wrap – June 2020

   

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Another month and another increase in the number of coronavirus cases all around the world as different countries are starting to adopt different approaches to handling the pandemic.  What is certain is that coronavirus pandemic is not going away any time soon, as it continues to wreak havoc across the world.  Generally speaking, the volatility financial markets experienced throughout the early period of the pandemic has all but disappeared as the world is becoming more accepting of the new reality in 2020.  Economies of all sizes around the world are feeling the wrath of the COVID-19 pandemic as central banks have taken emergency action to cut rates (some repeatedly) and increase stimulus measures.  Many countries are now starting to ease restrictions and allowing much more normal freedom of movement for people.  However, as the Chairman of the U.S. Federal Reserve, Jerome Powell said while addressing the specific situation within the United States, “A full recovery is unlikely until people are confident that it is safe to reengage in a broad range of activities.”   This will likely be the experience in many countries which will severely impact economies all around the world for some time yet. 

EURUSD

During the month of June, the EURUSD has spent most of its time trading in a narrow range in between two popular levels of 1.12 and 1.13.  Earlier in the month, it moved strongly to its highest level in three months above 1.14, which it surged to over the previous three weeks moving through many key levels on its way.   It has since eased back to 1.12 and received solid support from this level.  Many of these key levels have previously played a role in the EURUSD’s price action, including the 1.10 level which had been offering stiff resistance on several occasions throughout April and May.  The 1.13 continues to provide some resistance, as will the 1.14 level should this be visited again any time soon.  It will be interesting to see which way the EURUSD breaks from this current narrow range.  

EURUSDDaily (8)

In the latest monetary policy decision from the European Central Bank (ECB) to help support the severe economic impacts of the coronavirus, many banks have been quick to take up an offer to borrow a combined 1.3 trillion euros, at negative interest rates.  Introducing a tiered rate system, the central bank is the first to offer multiyear loans to banks at an interest rate below its main deposit rate.  More than 700 banks across 19 countries have applied to borrow money from the ECB under this finance program, which will allow banks to borrow at rates as low as minus one percent up to three years.  Under the negative rates, the ECB is actually paying the banks to borrow the money.  Alongside this unprecedented borrowing arrangement, the central bank is already undertaking its pandemic bond purchase program, which is pouring 1.35 trillion euros in new money into the economy.

GBPUSD

During June, the GBPUSD has simply moved up to a three-month high above 1.28 and returned to the key level of 1.23.  In the last three weeks it has fallen sharply from the three-month high back down below the key 1.25 level, a level which has provided some support before being broken again.  It has since offered some resistance as the GBPUSD attempted to rally and return higher.  In doing so, it has returned to a range where it has spent the best part of the last three months – between 1.23 and 1.2650.  On its way higher, the GBPUSD surged higher to 1.25 before breaking through to around 1.2650 which has resisted prices on several occasions in the last two months, before pushing through to the three-month high.  The 1.2650 level didn’t offer any support as the GBPUSD fell from the high and now it may provide some resistance again should it rally.  

GBPUSDDaily (8)

The Bank of England (BOE) left its main lending rate steady at 0.1%, as it resisted the urge to push into negative rates territory.  In May the BOE Governor Andrew Bailey told a parliamentary committee that the possibility of taking Britain into negative rate territory was under “active review.”  Investors were watching closely to see if the central bank did make that move, and now they will wait for the minutes from the Monetary Policy Committee (MPC) meeting to gauge the BOE’s thinking on the topic of negative rates.  However, they did add another £100 billion to its quantitative easing program in a further bid to assist the U.K. economy from the coronavirus crisis.  The latest addition pushes the bond buying up to £745 billion.  The U.K. economy is attempting to recover from a historic 25% contraction in March and April as government instituted lockdowns to combat the coronavirus pandemic brought economic activity to a near standstill.  At the start of the pandemic, the central bank cut rates twice from 0.75% to 0.1%.

AUDUSD

Unlike the EURUSD and GBPUSD, the AUDUSD has experienced a more subdued June pushing higher to its highest level for 2020 before easing a little and consolidating right around the key level of 0.6850.  Starting towards the end of May, the AUDUSD had spent several weeks pushing higher to reach that level above 0.7050 however it ran into a wall of resistance at this key level which has previously offered stiff resistance to the AUDUSD last year.  The 0.6850 level has propped it up again, and should support at 0.6850 fail, then the 0.6750 level is also likely to step and offer some support having been a significant level earlier in the year.  For several weeks in May, the AUDUSD consolidated in a narrow range roughly between 0.64 and 0.65, meeting some resistance around 0.6550 during that time which kept a lid on prices and stopping any rallies from continuing higher to challenge the 0.6750 level.  If the 0.6750 level fails to provide some support, the 0.6550 level may also step in and prop up prices.

AUDUSDDaily (8)

Reserve Bank of Australia (RBA) Governor Philip Lowe has commented on how well the Australian dollar has recovered due to the nation’s handling of the coronavirus, however believes Australia needs major economic reform.  In fact, Dr Lowe believes Australia will "meander along with mediocre growth" unless it does so.  Commenting on the possibility of interest rate moves affecting the currency, Dr Lowe was quick to squash that opinion.  "I think it's likely we're going to see interest rates at their current level for years," he said.  "Once we build the bridge and we get to the other side and the recovery is taking place, I think we do face a world where there'll be a shadow from the virus for quite a few years, people will be risk-averse, they won't want to borrow, in Australia we're going to have lower population dynamics," he predicted.  "So, unless we change something, we're going to have a world of slower growth in Australia and, if that's the world we're in, we can't resolve that problem by just continuing to borrow,” he added.

US30

The story of the US30 index for June is receiving solid support from the key 25000 level while moving to a four-month high and back.  For the last few weeks of the month, the US30 index traded around the key 26000 level after bouncing strongly off support at 25000.  This was after the index fell strongly for the week before after having moved strongly higher through the key resistance level at 25000 and 26000 on its way to a three-month high above 27000.  In the last two months the 25000 level had turned away the index on several occasions, reinforcing how significant the 25000 level had become in this period, and it has been able to provide some strong support to the index in the last four weeks.  Should the index decline further, the 25000 level will be expected to continue to offer support.  The 27000 level continues to loom above having placed downward pressure on the index recently and earlier in the year.

US30Daily (5)

There remains significant concern over the United States’ ability to recover from the devasting impact of the coronavirus pandemic.  Boston Federal Reserve (Fed) Bank President Eric Rosengren believes that due to the ongoing community spread of COVID-19, the U.S. economy is expected to grow more slowly than people had hoped.  "Some of the better economic data we've been getting has reflected the fact that those places are opening up, but they may not be opening up as safely as they need to," said Mr Rosengren.  "If the result is that they (officials) have to impose new restrictions later in the year, that actually is going to slow down the economic recovery," he said, mentioning that the coronavirus pandemic and economy are "very closely intertwined."   "That is actually my baseline forecast, (which) is that unfortunately we're unlikely to stop the community spread, and we'll be in a situation where the economy is growing more slowly than we might have hoped a few months ago," he added.

Gold

Gold spent the best part of June moving steadily higher to its highest level in eight years around $1770.  Throughout the middle of the month, XAUUSD traded in a very narrow range around $1730 after having recently bounced off the solid support at $1675.  In the few weeks prior, gold had eased a little from its then eight year high around $1765 back towards the key $1675 level which has propped up gold well in the last two months.  For the last two months or so, gold has enjoyed solid support from $1675, and it has rallied off this level on a few occasions keeping gold near the multi-year highs.  This is the most significant level presently and is highly likely to provide more support should gold continue to decline.  If the support at $1675 fails, it will return to a range where it has spent the best part of this year trading in.  It spent around two weeks consolidating around $1600 after the first solid rally from near $1450 before pushing higher again.

XAUUSDDaily (8)

When the coronavirus pandemic started, the International Monetary Fund (IMF) warned that the world’s economy would suffer the worst since the Great Depression of the 1930s.  Even though countries are starting to lift restrictions and economies are starting up again, the IMF has warned that the deterioration could now be even worse.  “For the first time since the Great Depression, both advanced and emerging market economies will be in recession in 2020. The forthcoming June World Economic Outlook Update is likely to show negative growth rates even worse than previously estimated,” Gita Gopinath, the IMF’s chief economist, wrote.  The IMF also stated that the current coronavirus crisis is “unlike anything the world has seen before.”  Equity markets have enjoyed a solid resurgence in the last three months despite the world still grappling with the scope of the crisis.  “With few exceptions, the rise in sovereign spreads and the depreciation of emerging market currencies are smaller than what we saw during the global financial crisis. This is notable considering the larger scale of the shock to emerging markets during the Great Lockdown,” she added.  

UK Oil

UK Oil has enjoyed a relatively quiet June meeting some resistance around $43 and trading in a narrow range around $40.  Two weeks ago, UK Oil made another solid run towards a three-month high above $43 having previously fallen away from the three-month high reached earlier in the month.  In the last two months or so, UK Oil has slowly but surely moved higher to that three-month high, before consolidating in the range below the key $43 level.  Its recent surge higher is a vastly different picture to mid-April, as UK Oil sank to its lowest level in many years below $20.  Interestingly UK Oil is close to closing the significant gap down in early March, by returning to above $45.  In early May, UK Oil settled right around the key $30 level after rallying well off the multi-year lows below $16, and it also consolidated well several weeks ago around $35.  After a significant gap down from $45 to $35 in early March, it initially received solid support from another key level of $25 which had supported it well for several weeks, which was so desperately needed, so it was telling when its largest fall was breaking through the $25 level mid-April.

UKOilDaily (5)

As the coronavirus pandemic rocked the world over the last three months, demand for oil seemingly disappeared, including a lack of air travel as businesses slowdown and people are simply not travelling by air, and combined with oversupply and a lack of storage.  Countries all around the world instituted lockdowns and implemented travel bans to stem the spread of the virus, which brought the global economy to a halt.  Over the last month, slowly but surely, governments have been easing restrictions allowing more movement which is increasing the demand for oil.  It isn’t near pre-coronavirus levels; however it has moved from its deepest lows.  Some countries are starting to report a ‘second wave’ of infections, most notably in the United States and South Korea, which is keeping a lid of oil prices for the time being.   On the weekend, the World Health Organization reported a record rise in global cases, with the biggest gains from North and South America.  Global Research from the Bank of America has raised its oil price forecast for this year and 2021 as demand recovers.

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