According to the CFTC Friday report, speculative sentiment on major currencies did not change much last week. The total dollar short fell slightly, mainly due to the commodity currencies CAD, AUD and NZD increased the net short, which, together with a fairly noticeable increase in the short on oil, increases the chances of a resumption of sales and another wave of flight from risk.
In favor of strengthening the dollar, there is also a reduction in the net long for gold, which, as a rule, indicates the development of a wave of strengthening of the USD. The approach of US elections is forcing candidates to look for steps that can enhance electoral support, and in this wave, Trump's anti-Chinese argument will inevitably increase. There are sufficient reasons – for example, an unrealized trade deal concluded before the pandemic. It is simply impossible to increase purchases of agricultural products by 32 billion due to low prices for raw materials; a number of banks expect USD / CNY growth in this regard and, as a result, pressure on commodity currencies will increase.
A number of banks (in particular, Nordea and Scotiabank) suggest that pressure on China creates serious prerequisites for the development of deflationary trends, as China exported disinflationary momentum both during the trade confrontation and during the pandemic. In particular, the Nordea model assumes a decline in inflation in the United States to 0.5%, which, in turn, puts the Fed ahead of the need to look for additional measures to maintain demand. How to implement this task is completely incomprehensible.
The vast majority of banks (DanskeBank, Mizuho and NAB can be added to the above) agree that rapidly lifting quarantine measures will not lead to a recovery of national economies, and the crisis will drag on for a much longer period than the market sees. Hence the conclusion - pressure on risky assets will continue in the long term.
EUR/USD
Despite the fact that the net long on the euro recovered slightly (by 257 million according to the CFTC report) after three weeks of sales, the overall situation on the euro continues to deteriorate. This is noticeable in other components of the estimated fair price - the yields of the 10-year-old Bundes have fallen over the past 4 weeks, while the US treasures have been holding above 0.6%, providing, albeit a minimal, increase in the yield spread in favor of the dollar.
The main reason for the gradual reversal of sentiment in the euro is that the period of a panic exit from risky assets ends, which automatically reduces the demand for the euro as the main funding currency. Another reason is geopolitical. While the US Federal Reserve and Donald Trump are debating in public space, the German court takes a legally significant step, casting doubt on the legitimacy of a number of ECB decisions. Despite the fact that the ECB does not intend to execute court decisions, a fair amount of uncertainty has been added to investor sentiment, as the Bundesbank uses this decision to strengthen its position.
On Tuesday, ZEW will present the May indicator of economic sentiment. Given that there is a 87% correlation between ZEW and GDP, it can be assumed that markets will receive a fairly accurate forecast of GDP growth. EUR/USD is still holding above support 1.0775, but the probability of breaking through down remains high, which will automatically lead to testing the support of 1.0726.
GBP/USD
The pound has no reason to expect a recovery on Monday morning. The net short position on the CME increased to 1.049 billion, this is not a very high advantage, but the trend is negative and it is confirmed by a number of other indicators.
The failure of trade negotiations between the EU and the UK increases pressure on the pound, as investors return to the Brexit topic again. In any case, the transition period will be completed before the end of the year, and amid the global crisis, both parties, the EU and Great Britain, are desperately fighting for more favorable terms of trade.
A report on the labor market will be released on Tuesday, but it will turn out to be uninformative, since it will include data for March and will not give a general picture of the decline in the labor market in April. On Wednesday, a report on inflation and prices in the manufacturing sector will be released, from which surprises are likely since there is no exact data on the depth of the economy's decline. In any case, an increase in anti-risk sentiment is not in favor of the pound.
The GBP/USD pair went below the support level of 1.2160, the trend remains negative, and even the chances of a correction to 1.2230/50 look low. The current impulse has not yet been worked out, the decline to support at 1.1950/60 is justified, and it is clearly too early to look for a basis for purchases.
