Market Brief
The fact that Standards & Poor’s downgraded the UK's credit rating from AAA to AA with a negative outlook was not exactly a surprise especially after Moody’s reviewed UK’s credit rating outlook to negative on Friday. Usually, a lower credit rating implies higher borrowing costs. Ironically, this is not what we are seeing on the market right now as UK yields have dropped massively amid the Brexit vote. 2-Year yields fell to 0.15%, down 37bps, while 10-Year yields are down 44bps to 0.935%. Indeed, risk-shy investors are reluctant to hold risky assets, preferring to buy bonds instead, and since the price of bonds has an inverse relation to interest rates, rates are moving lower. The UK credit rating downgrade has not had any effect on GBP/USD as the information was already priced in. Furthermore, AA is still a very good investment grade given the overall situation. After hitting a 31-year low on Monday, the pound sterling recovered slightly during the Asian session and retuned to 1.3380, up 0.46% on the session. The one-week 25 delta risk reversal on GBP/USD continued to recover on Monday, reaching -3.27% compared to almost -14% last Thursday. However, the figure is still well below the neutral threshold, suggesting that investors are not ruling out further sterling weakness.
Yesterday in the US, Markit PMIs painted a mixed picture of the US economy. The June services gauge missed median forecasts, printing at 51.3 versus an expected 52 but stable compared to the previous read, while the Composite PMI climbed to 51.2 from 50.9 in May. The Dallas Fed manufacturing activity index came in at -18.3 in June, up from -20.8 in May but below consensus of -15. Overall, the latest batch of economic data suggests that the world’s largest economy is struggling to gear up. And with the rising level of uncertainty, thanks to Brexit, the greenback will likely remain under solid buying pressure as investors take shelter from the Brexit turmoil, which is definitely not helping the US economy to accelerate. EUR/USD recovered in Tokyo on Tuesday reaching 1.1075, up 0.30% on the session.
Commodity currencies recovered strongly overnight with the NZD, AUD and NOK up 1.03%, 0.93% and 0.62% respectively against the USD. The solid recovery in crude oil prices helping to boost the commodity currency complex. Futures on the West Texas Intermediate rose 1.47%, while those on the Brent crude surged 1.25%. Natural gas was also up 0.81%, while copper rose more than 2%. NZD/USD completely erased yesterday’s gains and returned to 0.7075. Should risk sentiment continue to improve further, the pair will continue to strengthen. The next resistance can be found at 0.7159 (high from June 24th).
Currency Tech
EUR/USD
R 2: 1.1479
R 1: 1.1428
CURRENT: 1.1069
S 1: 1.0913
S 2: 1.0822
GBP/USD
R 2: 1.5018
R 1: 1.3981
CURRENT: 1.3316
S 1: 1.3121
S 2: 1.3045
USD/JPY
R 2: 111.91
R 1: 106.84
CURRENT: 102.06
S 1: 99.02
S 2: 96.57
USD/CHF
R 2: 0.9956
R 1: 0.9819
CURRENT: 0.9772
S 1: 0.9522
S 2: 0.9444