Markets are in mild risk-off mode today but losses are so far limited so far. Dollar attempts for a rebound but upside is so far limited. The greenback is somewhat outshone by Sterling, which is regaining so strength, in particular against Euro and Yen. Australian Dollar is currently the worst performing one as its second largest city Melbourne is back in coronavirus lockdown. Yen is the second weakest, suggesting that overall sentiments aren’t too bad yet.

Technically, GBP/JPY is extending the rebound from 131.68 and is heading to 136.34 resistance. Firm break there will bring retest of 139.73 high. EUR/GBP is eyeing 0.9001 support against and break will indicate near term bearish reversal for 0.8864 support first. GBP/USD is also eyeing 1.2542 resistance and break will bring retest of 1.2813 high.

In Europe, currently, FTSE is down -1.55%. DAX is down -1.33%. CAC is down -1.16%. Germany 10-year yield is up 0.014 at -0.419. Earlier in Asia, Nikkei dropped -0.44%. Hong Kong HSI dropped -1.38%. China Shanghai SSE rose 0.37%. Singapore Strait Times dropped -1.05%. Japan 10-year JGB yield dropped -0.0058 to 0.039.

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EU forecasts deeper contraction of -8.7% this year, on slow lockdown easing

In the Summer Economic Forecasts released today, European Commission projects a deeper recession in Eurozone and EU in 2020, due to coronavirus pandemic. Because “lifting of lockdown measures is proceeding at a more gradual pace than assumed” in the Spring forecast, impact on the economy will be “more significant than anticipated.

Some highlights:

  • Eurozone GDP to contract -8.7% in 2020 (down from Spring forecast of -7.7%).
  • Eurozone GDP to grow 6.1% in 2021 (down from 6.3%).
  • EU GDP to contract -8.3% in 2020 (down from -7.4%).
  • EU GDP to grow 5.8% in 2021 (down form 6.1%).
  • Germany GDP to contract -6.3% in 2020 (down form -6.5%).
  • Germany GDP to grow 5.3% in 2021 (down from 5.9%).
  • France GDP to contract -10.6% in 2020 (down from -8.2%).
  • France GDP to grow 7.6% in 2021 (up from 7.4%).

Valdis Dombrovskis, Executive Vice-President for an Economy that works for People, said: “The economic impact of the lockdown is more severe than we initially expected… If anything, this forecast is a powerful illustration of why we need a deal on our ambitious recovery package, NextGenerationEU, to help the economy.”

Paolo Gentiloni, Commissioner for the Economy, said: “The policy response across Europe has helped to cushion the blow for our citizens, yet this remains a story of increasing divergence, inequality and insecurity. This is why it is so important to reach a swift agreement on the recovery plan proposed by the Commission – to inject both new confidence and new financing into our economies at this critical time.”

Released from Europe, Germany industrial production rose 7.8% mom in May, missed expectation of 10.0% mom. France trade deficit widened to EUR -7.1B in May, larger than expectation of EUR -4.5B. Italy retail sales rose 24.3% mom in May, above expectation of 15.0% mom. Swiss foreign currency reserves rose to CHF 850B in June.

Japan labor cash earnings dropped -2.1%, household depending dropped record -16.2%

Japan labor cash earnings dropped -2.1% yoy in May, well below expectation of -1.1% yoy. That’s also the steepest decline since the -2.8% fall recorded back in June 2015. A labor ministry official was quoted by Reuters saying that “the impact from the coronavirus led to a reduction in overtime pay which caused real wages to fall a lot.”

Household spending dropped -16.2% yoy, also much worse than expectation of -12.2% yoy. That’s a record decline since comparable data first became available in January 2001. It also followed a prior record of -11.1% yoy decline reported a month ago in April. Leading indicator rose to 79.2 in May, up from 77.7, missed expectation of 79.5.

RBA stands pat and pledged not to raise interest rate until progress is made

RBA kept monetary policy unchanged as widely expected. The cash rate is held at 0.25% and target of 3-year AGS yield at 0.25% too. The central bank also pledged to maintain the accommodative approach for “as long as it is required”. Also, “the Board will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band.”

RBA also said the employment conditions have “stabilised” recently and the economic downturn has been “less severe than earlier expected”. However, the “nature and speed” of economic recovery remains “highly uncertain”. Uncertainty is also ‘affecting consumption and investment plans”. The pandemic is prompting many firms to “reconsider their business models”.

Suggested readings on RBA:

Australia AiG services dropped back slightly to 31.5, employment shrank further

Australia AiG Performance of Services Index dropped -0.1 to 31.5 in June. The reading indicates “another serious contraction in activity” at a pace similar to May. That’s also the second lowest record reading next to April’s. Looking at some details, all indicates remains firmly below series average despite lockdown easing. In particular, employment dropped a further -4.3 pts to 30.9.

New Zealand NZIER business confidence improved, but stays low on pre-election and pandemic uncertainty

NZIER Quarterly Survey of Business Opinion showed a net 37% of businesses reported decline in activity during Q2. That’s the worst level since March 2009 due to tight trading restrictions under Alert Level 4 lockdown. Also, a net 25% of businesses expect weaker demand in Q3.

There was a slight improvement in headline business confidence, from -70 to -63. But the reading suggests that businesses remain pessimistic over the coming months, and they could be holding off on major spending decisions. Pre-election uncertainty is compounded by how the coronavirus pandemic will play out.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.2464; (P) 1.2492; (R1) 1.2519; More….

Intraday bias in GBP/USD stays neutral with focus on 1.2542 resistance. Decisive break there will argue that whole decline from 1.2813 has completed. Intraday bias will be turned back to the upside for 1.2813 high. On the downside, break of 1.2437 minor support will suggest rejection by 1.2542. Intraday bias will be turned back to the downside for 1.2251 support.

In the bigger picture, while the rebound from 1.1409 is strong, there is not enough evidence for trend reversal yet. Down trend from 2.1161 (2007 high) should still resume sooner or later. However, decisive break of 1.3514 should at least confirm medium term bottoming and turn outlook bullish for 1.4376 resistance first.

Economic Indicators Update

GMT Ccy Events Actual Forecast Previous Revised
22:30 AUD AiG Performance of Services Index Jun 31.5 31.6
23:30 JPY Labor Cash Earnings Y/Y May -2.10% -1.10% -0.70%
23:30 JPY Overall Household Spending Y/Y May -16.20% -12.20% -11.10%
4:30 AUD RBA Rate Decision 0.25% 0.25% 0.25%
4:30 AUD RBA Rate Statement
5:00 JPY Leading Economic Index May P 79.2 79.5 77.7
6:00 EUR Germany Industrial Production M/M May 7.80% 10.00% -17.90% -17.50%
6:45 EUR France Trade Balance (EUR) May -7.1B -4.5B -5.0B -5.1B
7:00 CHF Foreign Currency Reserves (CHF) Jun 850B 816B
8:00 Italy Italy Retail Sales M/M May 24.30% 15.00% -10.50% -10.70%
15:00 CAD Ivey PMI Jun 50.2 39.1


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