Market Overview

30 April 2020

The Greenback Weakens as Stock Futures Extend Gains

A broad-based currency basket led by the Aussie and the Kiwi, but also even including the South African Rand and the Chinese Yuan, continues to advance in price in a smooth manner as the American Nasdaq and S&P500 stock futures updated their highs again last night and moved higher in early Asia trading.

Technically, NZD/USD has broken through its previous April resistance level at 0.6130 and gained 12% compared to its March lows. But it still has enough space to potentially reach the next price zone of 0.6250-0.6450, from where it began its fall eight weeks before on the wave of the US Dollar sharp appreciation as investors had an urgent need for cash and relocated their money to "safe-haven" US Treasury bonds. Meanwhile, AUD/USD is developing an upward movement in the framework of the flag model on charts for the last several days. The Aussie has almost reached its similar before-the-crash levels, but surprisingly does not seem to be slowing down.

The ten-year US Treasury note yields rose to 0.6350% immediately after the Federal Reserve's (FED) decision yesterday evening while the yields were at 0.6060% just two hours before. That might reflect a decline in demand for safe assets as US stocks extended gains after the Fed's Chairman Powell's speech. US bond yields returned to moderate levels around 0.615% during the European morning on Thursday.

Mr Powell said, "health crisis poses considerable risks to economic outlook over the medium term", but the Fed is "committed to using its full range of tools to support the U.S. economy". The US monetary policymaker will continue to support the markets by offering large-scale overnight and term repo operations and it "will continue buying Treasury, agency residential and commercial mortgage-backed securities in amounts needed to support market functioning and effective monetary policy transmission". The Fed kept target interest rate unchanged at 0-0.25% as was expected and "will stay there until economy has weathered recent events and on track to achieve employment and inflation goals". Jay Powell and Co also kept the interest on excess reserves rate at 0.10%. Fed's Chairman especially emphasised that they "will continue to use tools to ensure when recovery starts it is as robust as possible, and preserving flow of credit essential to setting stage for recovery", so the Fed will "take forceful action to that end".

This was, it seems, the rare case when the head of the Fed said all the proper words at the right moment mentioning both the vision of a gradual recovery of the US and world economy and the willingness to extend all necessary measures during the recovery phase, when the time comes. All this does not have to cause any investment boom, of course, and no word was even said about the theoretical possibility of buying shares by the Fed. But at least the Fed stance now created the "greenhouse" conditions not to hinder the growth of at least those assets that are currently able to grow further by themselves.

"We're at the zero bound and we'll be there for the foreseeable future. What the market really likes from Powell is his suggestion that there's more the Fed can do both in terms of the size and scope of its tools to aid the economy and markets. This implies that the Fed is not out of ammunition," said Michael Antonelly, Market Strategist at Baird in Milwaukee.

"They're certainly not wanting to upset the apple cart. They went out of their way to say they're going to continue to do what they're doing. They didn't change anything in the statement in terms of 'you know what we've been doing in the market and we're going to continue that way. The QE, or the bond-buying, seems interesting in that they phrased it from the perspective of continuing to ensure the functioning of the market as well as the transmition mechanism, so it gives them a little bit of an open mandate to continue to taper as they see fit. But they're not saying to what amount on concern that might spook the market a little bit," Marvin Loh, Senior Global Macro Strategist at State Street Global Markets commented.

"The Fed is not going to even entertain raising interest rates until the unemployment rate is back to at least 4%," that was an essential remark by Tom Garretson, Senior Portfolio and Fixed-Income Strategist at RBC Wealth Management, Minneapolis. It seems that such thoughts express now almost unanimous expectations of the future extremely generous policy of the American regulator.

There is hope that the market positive expectations will not be blown by the meeting of the European Central Bank (ECB) scheduled for today.

ECB's financial resources are more limited since Europe still cannot afford to use the rest of the world as its own pocket. Negative interest rates have become an overly common tool for Europe that has lost some of its effectiveness. And given more determination to the US authorities to return to economic normality after the quarantine, however many in the market are still cautious about forecasts and deals on European currencies preferring to work with other direct "competitors" of the Greenback like the Aussie, the Kiwi or even the Loonie.

Earlier the Bank of Japan removed a limit on the volume of securities' purchases so the Japanese Yen would behave much more cautiously although it also tries to strengthen. Gold futures are still treading the water, having knocked over the last couple of days thoroughly the nearest support levels from $1,690 to $1,700 per troy ounce, but they are in no hurry to move up essentially yet.

It is very clear that any further positive movements in the stock market would depend on both the reaction to individual corporate reports and on the actual resolution of fundamental market's doubts about the current high levels of indices. The most active Forex pairs could move in strong conjunction with stock indexes: the higher and the longer the US S&P500 and Nasdaq may move on the recovery path the weaker are the reasons for the market's runaway to the US Dollar could be. But the whole situation may quickly reverse if the market indulges in downward corrections in the course of time.


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Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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