Welcome to our look back at the previous month and a look ahead to what we might expect to see throughout July and beyond.
We started the month with COVID optimism, in almost every asset class, but we are finishing the month with a tinge of pessimism. The new variant — COVID-19 Delta Plus — may have changed the rules in our fight against the pandemic.
COVID vaccine programs are still progressing but we finished the month with cities like Sydney, Australia going back into lockdown as we all discover the poor vaccination rate in that country.
The US Executive Branch and Congress will be debating and negotiating a massive infrastructure plan into the next few weeks and months, which will affect the USD as we move forward.
The issue of trade relations with China came back into play with many economies starting to work together to confront China about everything from Coronavirus to human rights to IP protection. Some countries have tried to take on China independently such as the Trump administration, some time ago, and the Australian government earlier this year.
Price action on both Brent Crude (UK Oil) and West Texas Intermediate (US Oil) has been climbing for many months now, based on higher demand optimism, OPEC production cuts, and diminishing stockpiles.
Vaccine optimism in the US and better news from Europe on vaccines, and potential recovering air travel, led to demand optimism for the crude oil market.
With increased business air travel the industry saw the price of WTI close at over $74 per barrel but finished the month with news of many country’s tightening their Tourist restrictions based on the new COVID-19 Delta Plus strain. As we have been experiencing since early 2020, the case rate and rate of vaccination will still affect the price action on Crude Oil.
However, decreasing inventories and OPEC maintaining its production cuts, should see the price of WTI and Brent Crude being supported through July and into August. Also, other accords between oil-producing nations like Saudi Arabia and Russia, negotiating production cuts or increased production, will affect price.
Last month we looked at the US Federal Reserve’s indecision regarding fiscal and monetary policy. This changed in June with clear statements on the possibility of Interest Rate rises coming earlier than expected and the Fed looking at tapering its bond-buying.
This news strengthened the USD against all other currencies and in some cases, price action has broken through technical key levels.
The US Infrastructure Bill, which is now being negotiated by the Biden White House and Congress, is expected to increase economic growth and cut the national debt. This, combined with the above factors, should continue to bolster the USD.
Last month we said, “With improving global economies, and the Biden US Infrastructure Plan, we see no reason why these increases will not continue. The only headwind might be in the form of tax or interest rate increases but these should be months away.”
The Fed’s stance that affected the price of Gold also had a big effect on equities with substantial falls in mid-June. These falls, in a market full of optimistic investors, provide opportunities to “Buy the Dip” which quickly drive share prices up again.
We see the S&P 500 at all-time highs so this might mean that the Dow Jones Industrial Average and the NASDAQ will follow the path upward.
Most European indices like the DAX, CAC40 and the STOXX50 are currently at all-time highs based on the better news on COVID cases, vaccines, and the potential for tourism in Europe this summer.
The IBEX35 is still well below its pre-COVID levels, was showing steady growth post-COVID, but fell off substantially at the end of June.
The FTSE 100 has yet to recover to pre-COVID levels in the 7600’s, had recovered this month to the mid 7100’s and, like all other global stock indices, it is progressing higher.
Levels are having difficulty getting past the key level which was support in 2019.
The UK was on the verge of reopening the economy but had to postpone it due to the new cases of the COVID Delta variant. Hopefully, this should change into July and we might see further gains on the UK100.
Also, this Index is usually inversely correlated to the value of GBP as most of its component companies earn their incomes from foreign sources. The Pound has dipped lately and this has had a positive effect on the FTSE 100.
One of the favourite correlations for traders is the inverse relationship between USDCAD and WTI. Basically, whenever the price of crude oil rises, USDCAD falls. Strangely, this month we saw the opposite with the strength of USD outweighing the benefit of higher Crude prices.
The Loonie was mixed against other major counterparts but the Paris-based Organisation for Economic Co-Operation and Development, has forecast a 6.1% growth in the Canadian economy in 2021.
Based on that and the price of Crude, we see a higher CAD into July and beyond.
Australian exporters and the respective government agencies spent most of May and June looking for new trading partners since China slapped huge tariffs on almost everything Australian. For example, a UK/Australia trade deal has been substantially agreed and time will tell how this affects both economies.
The Australians tried to take on the Chinese government on their own, without waiting for the rest of the world, and now they are paying the price.
For this reason, the Australian Dollar fell steadily all through June with a sudden bump near the end of the month, but price action has fallen back to monthly lows.
Despite great success with its vaccine program, the UK has had to postpone its grand opening of the economy due to a spike in cases from the Delta Plus COVID variant. Therefore, during the last week of June, we saw the Pound fall against its major counterparts, but we see price recovering into July.
As we generally trade Gold against the USD, as XAUUSD, any price action on the Greenback will affect the precious metal.
As you have read above, the current rise in the value of the USD has had a negative effect on Gold, especially at mid-month when the US Federal Reserve released its plans for the future. The Fed agrees with us in that the current spate of Inflation is temporary, which has, in turn, made Gold less attractive as a hedge against inflation.
Since then, however, XAUUSD has been stuck in a range in the high $1700s. Even a sharp drop on the last day of the month was counteracted by bargain hunters, probably central banks, which brought price back to $1777.
These two opposing forces (a strong USD and Central bank purchasing) should keep price action on Gold in its current range through July.
That’s all for now. Make sure you subscribe to the Valutrades blogs and videos and we will see you here at the end of July.
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