Daily Market Outlook, May 08, 2020 

Equity markets have had another good night overnight (S&P500 futures +1%). The big news has been in the US rates market, where the market has, for the first time, started to price a negative Fed funds rate (-0.02% by the end of the year). The USD has fallen broadly amidst the fall in US rates. 

Futures contracts on the Fed funds effective rate moved into negative territory for the first time overnight. Futures pricing for the end of the year now stands at -0.02%, 7bps lower than the current level of the Fed funds effective rate (0.05%). Fed policymakers have previously sounded resistant to the concept of negative rates, with Chair Powell saying in March “we do not see negative policy rates as likely to be an appropriate policy response here in the United States”. But the market is, at face value, pricing in a chance the central bank might change its mind. 

There doesn’t appear to have been an obvious driver of the fall in US rate expectations and technical factors may have contributed to the move. Some have attributed the move, in part, to comments from high profile bond investor Jeffrey Gundlach who tweeted “the pressure to go negative on Fed Funds will build as short term borrowing explodes and dominates. Please, no. Rates < 0 = Fatal." 

The positive sentiment was reinforced by reports that US Trade Representative Lighthizer and Chinese Vice Premier Liu would speak as soon as next week on implementation of the Phase-One US-China trade deal. This provided some comfort to the market which had grown concerned about renewed tensions between the two countries over the origins of COVID-19 (Trump recently alluded to retaliation). 

The USD has experienced a broad-based fall over the past 24 hours amidst the increase in Fed rate cut expectations and more positive risk sentiment. The DXY is 0.5% lower, effectively reversing the move up this week. It remains stuck in a range for now. 

ECB President Lagarde said the central bank was “undeterred” by the recent German Constitutional Court ruling, which threatens to constrain the ECB’s bond buying programme. The German Constitutional Court has ordered the ECB to conduct a “proportionality assessment” of its bond buying programme and has threatened to stop the German central bank from participating. But Lagarde struck a defiant tone, saying “we are an independent institution, answerable to the European Parliament…we will continue to do whatever is needed, whatever is necessary, to deliver on that mandate.” The 10-year Italian bond yield fell 6bps overnight, to 1.91%. 

In economic data, US weekly jobless claims rose 3.17 million, although this was lower than last week’s count and it appears to be trending down. Nonfarm payrolls today, with the market looking for a staggering 21.7 million job losses in April. Elsewhere, China’s Caixin Services PMI rose by less than expected in April, remaining in contraction territory at a level of 44.4, well below the official services PMI (52.1). 

Today’s Options Expiries for 10AM New York Cut (notable size in bold)

  • EURUSD: 1.0825 (523M), 1.0840 (267M), 1.0850 (1.9BLN), 1.0885 (520M) 1.0900-05 (1.7BLN)
  • USDJPY: 05.00 (1.1BLN), 106.10-15 (450M), 106.50-60 (500M), 107.25 (300M) 107.85 (611M), 108.00 (1.1BLN)

Technical & Trade Views

EURUSD Bias: Neutral within 1.08/1.09 range

 From a technical and trading perspective, 1.09 remains pivotal for the achievement of the interim (1.1050) and primary (1.1240) upside objectives. As prices test the interim objective we could see profit taking pullback to retest support back to 1.09/1.0850 but as this area attracts bids we can see a base develop for another run towards 1.1240. A daily closing breach of 1.0850 would be detrimental to the bullis thesis opening 1.0730 again UPDATE DTCC data shows massive EUR 5-billion EUR/USD option expiries Thursday. They are evenly split between 1.0800-10, and 1.0875-1.0900 Expiry is 10-am NY cut Thursday. On Friday 1-bln 1.0850, 2-bln 1.0885-1.0910 Without a renewed catalyst - expiries can help define 1.08-1.09 range. UPDATE the defense of the ascending trendline opens a move to initially test range resistance at 1.0950 as discussed in yesterday’s live analysis session

GBPUSD Bias: Bullish above 1.2350 targeting 1.28)

GBPUSD From a technical and trading perspective,the bullish thesis is under pressure and a close today below 1.2440 would flip the daily chart bearish and open a deeper decline to retest the range base back at 1.2160. UPDATE Daily chart has flipped bearish price continues to rotate around the Daily VWAP, bulls need a move back through 1.25 to encourage the bullish bias continuation, failure to achieve this opens a deeper declining to test the range base back to 1.2350 before higher again UPDATE bids emerge at the range support as the trendline is defended bulls will for the 1.25> close to flip the daily chart bullish and open the move to the 1.28 target UPDATE bullish thesis highlighted in yesterday's chart of the day developing

USDJPY Bias: Bearish below 107.50 targeting 1.0465)

USDJPY From a technical and trading perspective, range contraction persists,albeit with a downside bias, a breach of 106.80 should inject downside momentum. A topside breach of 108 would delay donside objectives opening a retest of range resistance above 109 before lower again

AUDUSD Bias: Bullish above .6330 targeting .6700)

AUDUSD From a technical and trading perspective, the decline back though .6450 concerns the bullish bias, a breach of .6350 would suggest a more meaningful top is in place opening a deeper decline to test support back towards .6150 before another base attempt. On the day a close back through .6500 will be needed to re-engage bullish spirits UPDATE price testing pivotal .6450/70 area if sufficient supply is seen here look for another leg lower to test trend support back to .6330 UPDATE as .6520 contains upside attempts .6330 should be see before another attempt to base and make another run towards the .6700 primary upside objective

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