Eurogroup chief Mario Centeno said plans by Germany and France to set up a 500 billion euro ($545 billion) recovery fund to cope with the coronavirus pandemic would be a step towards a fiscal union of the bloc. "This initiative is a brave step in the right direction to overcome this crisis," Centeno told German weekly Welt am Sonntag. "The German-Franco proposal would be a great step towards a fiscal union and a properly functioning currency union, even if the recovery fund is only temporary," said Centeno, who is also Portugal's finance minister.
Geopolitics will be a key driver in the week. Brexit and the Pound and a collapse in the U.S – China relations will be a test riskier assets.
The dollar rose against a basket of currencies on Friday, helped by safe-haven demand as a move by Beijing to impose a new security law on Hong Kong further strained fast-deteriorating U.S.-China ties. China on Friday unveiled details of its plan to impose a national security law in Hong Kong that could see mainland intelligence agencies set up bases in the global financial hub, raising the prospect of more unrest there after last year's pro-democracy protests. Reports of the law on Thursday drew fire from U.S. President Donald Trump, sapping investors' appetite for riskier assets and driving the euro, offshore yuan and commodity currencies lower on Friday.
Based on Friday’s price action, the direction of June Comex gold over the near-term is likely to be determined by trader reaction to $1727.50.
Gold markets initially tried to rally during the week but gave back quite a bit of the gains to turn around and reach towards the $1710 region.
In the five years since the British parliament passed a law calling for a referendum on whether the UK should remain in the European Union or leave, there have been many intervening moments affecting the global economy, including the Brexit vote itself in 2016 and now the coronavirus pandemic.During this time, one element has remained constant: the British pound (GBP) rallies when the UK moves toward deeper integration with Europe, and falls when the UK moves towards a no-deal Brexit decision. Investors were reminded of this once again in early May as the UK and EU negotiations hit an impasse, with both sides citing a lack of progress on issues ranging from fishing rights to business-competition regulations. Since the negotiations stalled, the pound has slid 3% versus the euro (EUR) and 4.5% versus the US dollar (USD).This is the latest installment in a longstanding theme: * Between the time the UK Parliament called the referendum on June 9, 2015, until the referendum itself on June 23, 2016, GBP slid 4% versus EUR and 3% versus USD. * In the months after the referendum, GBP plunged 17% versus EUR and 21% versus USD. * Since the referendum, GBP has tended to rally when it looked like a deal was close (+21% versus USD into early 2018 as then Prime Minister Theresa May held negotiations) and tended to sell off when Brexit appears to be headed towards the "no-deal" scenario (-16% when May's deal was repeatedly defeated) (Figure 1).Figure 1: GBP rallies on hopes for more integration with Europe, sells off with less integration Negotiators will meet once more in early June 2020 to decide if it's worth continuing the discussions. The UK government's EU Exit Operations (XO) committee -- also commonly known as the "no-deal planning unit" is meeting more regularly. The UK government denies that it will extend UK membership in the Common Market beyond December 31, 2020, however, it is possible the economic damage from the pandemic could nudge them to seek some sort of delay, particularly if no acceptable deal is in place.Going into this next round of negotiations, GBP options markets are more skewed to the downside than usual with out-of-the-money (OTM) put options substantially more expensive than usual compared to OTM calls. By May 19, the options skew (also called risk reversal) was more negative than it had been 92% of the time during the previous two years. Options traders have, at times, proved prescient with respect to future moves in the pound: options skew was extremely negative in the lead up to the 2016 referendum and, indeed, GBP collapsed after the result became apparent (Figure 2). Skewness isn't as negative this time, but pound options are considerably more expensive than those on EUR when seen from a USD perspective (Figure 3). Moreover, most of the recent spikes in both implied volatility and risk reversal have been motivated by concerns over the progress of Brexit negotiations. The one exception occurred during an incipient dollar-funding crisis in mid-March. After the US Federal Reserve stepped in, that issued was resolved quickly. Figure 2: GBP 1M and 1Y options are more negatively skewed than usual Figure 3: GBP option implied volatility, typically similar to EUR pre-referendum, is now higher UK interest rate markets have shown less reaction to Brexit-related events than the currency market. The Bank of England (BoE) is focused on containing the economic damage from the pandemic and interest rate traders are debating whether the BOE will follow the European Central Bank and the Swiss National Bank down the path to negative interest rates (Figure 4). If the BoE does go negative, it might have unexpected consequences for exchange rates. Of the four central banks which went to negative rates during the past decade, two of them quickly saw their currencies strengthen. The other two had more mixed results, yet were still consistent with the concept that negative rates do not work as intended. Sweden has already exited negative-rate territory. Coming soon, our report on "What FX Markets Say About Negative Rates.Figure 4: SONIA futures price a possibility of negative rates in the UK Normally a stronger currency is a sign of a relatively tighter monetary policy. While negative rates are meant to loosen monetary policy and support economic recovery, they instead can act as a tax on the banking system and may interfere with the process of credit creation. An inadvertent and undesired tightening of monetary policy that stems from negative rates may explain, in part, why currencies subject to negative deposit rates have tended to strengthen rather than weaken as is commonly the case when central banks ease monetary policy.While its uncertain if the BoE will decide to push rates below zero, if the central bank were to pursue negative rates, it might strengthen the pound. A stronger currency could, in turn, slow the recovery from both the pandemic as well as making it more difficult to absorb any additional shocks from a possible no-deal Brexit.Finally, when it comes to the pandemic, other than obliging the BoE to quickly return to near-zero rates and implying a vast expansion of the UK's budget deficit, the pandemic appears to have had a limited impact upon the pound beyond the transitory dollar-funding issues in mid-March. For the moment, the UK's economic and fiscal situation in the face of the pandemic very much resembles that of its neighbors across the Channel and across the Atlantic.One question for the pound post-Brexit is whether it will begin to trade more like the Australian (AUD) or Canadian dollar (CAD)? We think that this is unlikely. Even post-Brexit, GBP could probably remain in EUR's orbit for a number of reasons, not least of all because over 40% of Britain's exports go to the European Union. Even if that number drops a bit under a no-deal Brexit scenario, UK's trade with Europe is likely to far exceed its trade with any other country. Secondly, the UK ceased to be a net exporter of oil over a decade ago and with North Sea reserves dwindling and the UK having no other substantial domestic commodity production, there is little reason to think that GBP will begin to trade like AUD, CAD or other resource-dependent currencies. Bottom Line * GBPUSD and GBPEUR depend on post-Brexit trade deal negotiations * GBP options remain skewed to the downside * SONIA futures price a possibility that the BoE will pursue negative rates * GBP typically rallies when the UK moves towards deeper integration with EuropeTo learn more about futures and options, go to Benzinga's futures and options education resource.See more from Benzinga * Norway's Krone Tracks Commodity Exports * What Can We Learn From Gold's Relationship To Other Assets? * Fed Ramps Up Asset Purchases(C) 2020 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
USD/CAD rebounded above 1.4000 as the U.S. dollar gains ground on increased demand for safe haven assets.
U.S. gold futures for June settled up $13.60, or 0.8%, at $1,735.50 per ounce after China's ruling Communist Party set in motion a controversial national security law for Hong Kong that could be a major blow to the city's freedoms. For the week, gold futures were down almost $21, or 1.2%, while bullion dipped about $10, or 0.5%. “Gold futures have, once again, showed strength over the past week, pushing just short of the contract high of $1,789 back in March, only to fall back toward $1,735,” wrote Joshua Graves, strategist at RJO Futures in Chicago.
The dollar climbed against a basket of currencies for a second straight day on Friday helped by safe-haven demand as Beijing moved to impose a new security law on Hong Kong after last year's pro-democracy unrest, further straining fast-deteriorating U.S.-China ties. China on Friday unveiled details about its plan to impose a national security law in Hong Kong that could see mainland intelligence agencies set up bases in the global financial hub, raising fears of more pro-democracy protests. Reports of the law on Thursday drew fire from President Donald Trump, sapping investors' appetite for riskier assets and drove the euro, offshore yuan and commodity currencies lower on Friday.
Gold markets rallied just a bit during the trading session on Friday, as we continue to see the overall buying opportunities present themselves underneath.
The focus for investors in Brazil is now on the staying power of the nation’s respected economy minister after two health ministers resigned in a little over a month while its president could face an impeachment battle as the country struggles to contain the spread of COVID-19.
The US dollar has gone back and forth during the week against the Japanese yen, ending the week on a somewhat positive note, but it a tight range overall.
This pair initially tried to rally during the week but has given back quite a bit of the gains in order to form a bit of an inverted hammer on the weekly chart.
The British pound rallied a bit during the week against the Japanese yen, reaching towards the ¥132 level before pulling back.
The Euro has reached towards the 1.10 level, and then pulled back significantly, so the market looks as if it is still stuck in this range.
The Australian dollar has rallied during the week, reaching towards the 0.66 level, an area that has continued to cause some issues.
Silver tries to recover from a sell-off that pushed it below $17.00.
The Canadian dollar weakened against its U.S. counterpart on Friday as rising U.S.-China tensions weighed on investor sentiment and domestic data showed a record decline in retail sales, with the loonie giving back some of the week's rally. "Risk sentiment – expressed via equity gains or losses – remains the key driving force behind the CAD," strategists at Scotiabank, including Shaun Osborne, said in a note. "While the CAD is trading closely with equity market sentiment, the rebound in crude oil prices and improvement in relative terms of trade warrant attention," the strategists said.
Gold is 0.3% higher today, as it fluctuates following yesterday’s relatively large decline.
The US dollar has gone back and forth during the session on Friday against the Japanese yen as we are dancing around the 50 day EMA.
At this point, the market looks as if it is ready to accelerate to the downside.
The British pound initially tried to bounce a bit to kick off the trading session on Friday, but then rolled over a bit to reach below the ¥131 level.