12/06/2023

General Comment

While market volatility was not particularly low last week, it is clear that investors ‘ thoughts are dominated by central bank decisions to be announced this week. The decisions concern central bank interest rates as well as monetary policy and will therefore affect the course of the world’s main economies in the coming period.

The Fed opens this chain next Wednesday, with the FedWatch tool giving a 70% chance of interest rates remaining unchanged and a 30% rise of 0.25%. It follows the European Central Bank on Thursday, with markets expecting an increase of 0.25% over the current price. The Bank of Japan’s decision on Friday will also be interesting, even though markets estimate there will be no increase from the negative interest rate of -0.1%.

Regarding the past week, the unexpected increase in interest rates by the Bank of Canada by 0.25% caused an impression, that put the investment community thinking mainly due to correlations with a possible corresponding reaction of the United States. Significant was the announcement of inflation in China which was at very low levels last month as we will see in detail below in the section of the Australian dollar. The announcement of GDP in the Eurozone, which was in a negative area in the first quarter of 2023, also caused a sensation, raising concerns about further recession.

The stock indices had mixed signs following the markets ‘ anticipation of central bank decisions, while we saw further losses for the U.S. dollar due to beliefs that interest rates in the U.S. will remain unchanged. In contrast, higher-risk currencies such as the euro and sterling were strengthened. The picture was also mixed in the commodity market with gold strengthening while oil unexpectedly suffered losses although OPEC’s recent decision to cut production again. Bond yields moved slightly upward with the U.S. 10-year closing the week near 3.74%. Finally, the losses for Bitcoin for most and the currency continued in the wake of the US SEC’s interventions in cryptos and exchanges.

In addition to the central bank decisions, we saw above, of paramount importance is the announcement of inflation in the United States on Tuesday with markets even expecting a rise over the previous month. There is also an inflation announcement in the Eurozone on Friday but also important are the announcements of retail sales in the US and China.

SP500

With bullish trends, the US SP500 index closed last week, at 4,299 points and profits of 0.40%. It was the fourth consecutive bullish week for the index so it confirmed a recovery that has started from the beginning of the year, against the fear scenarios. During the last week, the perception of the markets regarding the decision of the Fed on June, 14th, changed and currently, the prevailing scenario is no interest rates increase. Earlier, the negative performance of the services PMI had created a negative sentiment that became more intense after the negative results of the initial jobless claims. The markets though, assessed these results as a reason for the Fed not to act too aggressively as the economy is getting pressed due to the monetary tightening. This positive mood continues at the beginning of the current week as the futures of SP500 opened higher compared to the last week’s close price. Although it’s going to be a volatile week due to the inflation announcement and FOMC, we’re keen to try long positions.

DAX30

The German DAX40 index was bearish last week, closing at 15,950 points, with losses of a bit more than 0.60%. The European indices could not follow the American markets and performed negatively. According to the majority of the analysts and based on ECB’s officials, there will be two more interest rate hikes in Eurozone, most likely starting this week. It means that the European economy could suffer more from the monetary tightening and the high rates. Some concerns about a possible energy crisis next winter as the Ukrainian war is still on, also start to raise. Germany had some economic announcements last week with contrarian results. The trade balance in May had a good performance but PMIs were below estimations. Factory orders turned negative but industrial production seems to recover. A negative fact for DAX40 is that closed below the critical 16,000 points price. A positive fact though is that the futures opened in the current week with strong bullish trends. We may try long positions.

FTSE100

The British FTSE100 index moved downward last week, closing at 7,562 points, dropping about 0.60%. As the UK did not have any important economic announcements last week, the equity markets were dominated by global investing sentiment and speculation regarding the future actions of the Bank of England. Since inflation persists at very high rates, markets consider that new interest rate hikes cannot be ruled out. Also, the central banks’ decisions this week (Fed, ECB, and BoJ) may affect the global markets. An indication of the UK economy will be the unemployment rate which will be announced on Tuesday. The FTSE100 is in a sharp downtrend during the last 1.5 months. It was close to 8,000 points and now it struggles not to drop below 7,500 points. Maybe the FTSE100 will be able to follow the rest of the major indices so maybe we should try long positions this week.

Gold

The previous week was bullish for gold, with the next month’s futures closing at $1,975 and profits close to 0.60%. The most important reason for that is the weakening of the US dollar. The volatility is relatively low during the last three weeks as the markets wait for the inflation announcement and the Fed’s decision on the interest rates in the USA. Since the bond markets are also in a low volatility mode, gold does not have a serious competitor with big movements and it remains silent. The most likely scenario for the Fed on Wednesday is to leave the interest rates unchanged but in the following press conference Jerome Powell will speak about future actions and if he gives hints for new hikes, gold will be greatly affected. A strengthening of the US dollar this week may test the important support at $1,936 which is also the lowest price of the last 3 months so we may try short positions.

US Oil

Last week was bearish for oil with the next month’s futures closing at $70.30, with losses approaching 2.20%. The week had opened with a big bullish gap above $74 after OPEC’s decision last Sunday to further cut oil production. This gap was filled very quickly though (within the same day) as the concerns regarding the demand returned. Weak Chinese data (imports, exports, and trade balance) was a negative indication of the demand. Another factor was the uncertainty that dominates the markets regarding a deal between USA and Iran for the nuclear program. By the end of the week, the very low inflation announced in China (0.2% in May) caused new fears for a demand decline as it may imply a slowing in Chinese economic growth. In any case, this week started with more bearish pressures ahead of the US inflation announcement on Tuesday and FOMC on Wednesday. If the signal from Fed is no new rate hikes, we may see a recovery for oil so we’d prefer long positions this week.

EURUSD (Euro vs US Dollar)
Last week was bullish for EURUSD as it opened at 1.0719 and closed at 1.0749. The U.S. dollar weakened in the week on markets ‘ perception that the Fed will not raise interest rates further on Wednesday as was likely a few days earlier. Improved investment sentiment also favored higher-risk currencies such as the euro. The exchange rate recorded its biggest increase on Thursday, even though the results for GDP in the Eurozone were far from positive. In the first quarter of the year GDP fell by 0.1% and so the Eurozone went into recession. However, the unexpected increase in initial jobless claims in the United States sank the dollar and thus the EURUSD moved sharply upward. The decisions of the Fed and the European Central Bank will dominate the week, while the announcements of inflation in the US and the Eurozone on Tuesday and Friday respectively are also very important. If the dollar strengthens again, we may see a correction for the pair so we may try sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Bullish was the last week for GBPUSD, which opened at 1.2447 and closed at 1.2580. Sterling was able to take greater advantage of the weakness of the dollar and thus the exchange rate rose for a second week in a row. The only notable economic announcements for the UK had to do with PMI indicators, which had a positive result and were above market expectations. The most important role in the course of the exchange rate is the beliefs of the markets in relation to central banks. The Fed is likely to leave interest rates unchanged and, given high inflation in the UK, the Bank of England is likely to raise them further. In addition to the announcement on interest rates in the United States, the inflation to be announced on Tuesday will certainly affect the exchange rate. Buy position is our selection for the current week.

USDJPY (US Dollar – Japanese Yen)

USDJPY moved downward last week, opening at 139.95 and closing at 139.35. The slight rise in bond yields did not seem to have affected the exchange rate, which moved lower mainly due to the weak US dollar and the strengthening of the Japanese currency. The most important news for Japan’s economy was the announcement of GDP for the first quarter of the year which increased significantly by 0.7% from the previous quarter showing that at least a very loose monetary policy and negative interest rates in the country are bearing fruit. The current week is particularly critical as both the Fed and the Bank of Japan announce their interest rate decisions. It is possible that both central banks will leave interest rates unchanged, but it is not ruled out that exchange rate volatility will increase, nonetheless. We may try buy positions this week.

EURJPY (Euro – Japanese Yen)
Slightly bearish was last week for EURJPY which opened at 149.88 and closed at 149.73. Although investment sentiment was generally positive, the euro could not benefit to a large extent mainly due to the negative macroeconomic results (GDP) in the Eurozone area. In contrast, Japan’s GDP performed very well, and the yen strengthened. But given that this week the European Central Bank will probably raise interest rates while the Bank of Japan will leave them unchanged, it is not ruled out that the picture will be reversed and so we will prefer buy positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bearish for EURGBP, as it opened at 0.8590 and closed at 0.8544. It is clear that the exchange rate has been on a downward trend since February, which has been more intense in the last two months. Markets believe the Bank of England will now move more decisively compared to the European Central Bank concerning interest rates and monetary policy. The UK also has a broadly better macroeconomic picture than the Eurozone, especially after the negative GDP announced for the first quarter of the year. The pair is very close to the major support of 0.8545 but in any case, we’re keen to try sell positions this week.

USDCAD (US Dollar – Canadian Dollar)

Bearish was the last week for USDCAD, which opened at 1.3421 and closed at 1.3340. The exchange rate continued bearishly for the second week in a row after the weakening of the U.S. dollar contributed to it and the unexpected increase in interest rates by the Bank of Canada by 0.25% last Wednesday. This increase was able to withstand even the pressure that oil prices were under, an event that usually when it happens presses the Canadian dollar. Another negative event for Canada’s economy was the announcement of new jobs which had a negative balance of 18,000 positions resulting in a marginal increase in the unemployment rate to 5.2% in May compared with 5% in April. The price zone of 1.33 is a major support for the USDCAD so we’d prefer buy positions this week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had a downward course last week as the opening price was at 0.9080 and the closing price was at 0.9032.  It was the first bearish reaction for the exchange rate after four consecutive upward weeks, mainly due to the weakening of the U.S. dollar. Switzerland’s economy had major announcements last week which were rather neutral and did not greatly affect the USDCHF. Inflation in Switzerland was announced for May at 2.2%, well below April’s 2.6% and marginally above the 2.1% predicted by markets. The unemployment rate also remained unchanged in the same month, at 1.9%. In the current week, we may see a bullish reaction to the dollar so we may try buy positions.

AUDUSD (Australian Dollar – US Dollar)

Bullish was the last week for AUDUSD, which opened at 0.6602 and closed at 0.6743. The rise was sharp for the exchange rate after in addition to the weak US dollar, the Australian dollar strengthened on the basis of a 0.25% rise in interest rates made by the Reserve Bank of Australia last Tuesday. This increase was unexpected but was justified by the announcement of the bank’s minutes because inflation remains too high, and it must be fought. AUDUSD was able to stay high even when negative news was announced from China. Imports, exports, and the trade balance were reported well below market expectations, while low inflation was announced in May at 0.2%. Such a low inflation to some extent suggests slowing growth. The uptrend seems strong so we’re keen to try buy positions for one more week.

Bitcoin

Last week, Bitcoin was bearish and closed at $25,941 with losses close to 4.40%. On Monday, the SEC called on Binance, the world’s largest cryptocurrency exchange, for circumventing regulations by dropping 13 charges against Binance and its CEO Changpeng Zhao (CZ), claiming they transferred user funds to a European company controlled by Zhao. The lawsuit against Binance says Zhao’s goal was to allow wealthy U.S. investors and clients to continue trading on Binance’s unregulated international exchange without obeying SEC rules. Binance announced that halts dollar deposits after that. It was a new strike in the crypto world after what had happened some months ago with FTX and other events. Moreover, crypto.com (another big cryptocurrency exchange company based in Singapore) announced the closure of its institutional service for clients in the United States. The decision, which starts on June 21, is attributed to the limited demand from American institutions in the current market landscape. Finally, Robinhood (online brokerage form) announced the removal of three cryptocurrency tokens from its platform on June 27: Solana, Cardano, and Polygon. After all these, it is obvious that the crypto markets don’t have the best time. The price zone of $25,350 is the lowest price of the last 3 months so a bearish breakout may cause a downtrend acceleration. We may try short positions this week.

IMPORTANT DISCLAIMER

The information in this report is of a general nature only. It is not a piece of personal financial advice. It does not take into account your objectives, financial situation, and personal needs.

a-Quant is not responsible for your actions and recommends you contact a licensed financial advisor before acting on any information contained in this general information report.