The Week Ahead – Growth And Zero Rate Make Markets Go Wild

July 2, 2021

SPX 500 grinds higher as optimism prevails

Stock markets climb unhindered, as investors embrace the US economy in full swing.

The shock from reflation fear may have faded as the market looks forward to comparing apples to apples, that is data without the reopening effect. As for now, the S&P’s high valuation reflects a growing economy in a low-interest environment, the best of both worlds.

In the meantime, the Delta variant seems to be less of a concern as markets expect governments’ touch-and-go policy (alternating between partial lockdowns and reopenings) to have limited economic impact.

The uptrend is heading towards 4500 with 4140 as support.

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USDCAD rises as recovery gains traction

The US dollar rebounds as jobs data show improvement, despite choppiness. While this would increase price pressure, most job additions come from the leisure, retail, and hospitality industries.

This is a catch-up rather than growth, and once the labor market reaches the pre-covid balance, inflation would recede. In fact, experts expect the US Fed to play this card throughout the summer.

Moreover, this week’s FOMC minutes may shed some light on their resolve. The central bank’s dovish tone may cap the greenback’s advance at 1.2650. 1.2280 is the immediate support if the pair starts to turn south.

AUDUSD falls as RBA likely to be passive

The Australian dollar struggles amid new lockdowns across the country due to the Delta variant.

The outbreaks seem to be much milder compared to previous waves and may have a limited impact on the economy. Price action reflects traders’ concerns that the RBA may sit on their hands despite better underlying data.

If buoyant housing market, jobs growth, and record trade surplus cannot make policymakers budge, what else can?

Unless the RBA hints at bringing forward rate hikes, a cautious tone this week may push the Aussie towards 0.7300. 0.7700 remains a major hurdle on the upside.

UKOIL rallies on tight supply

Brent crude inches higher as OPEC+ production talks falter.

The cartel has plans to carefully increase output to meet rising demand but has so far met resistance from the UAE. Moreover, as US inventories keep shrinking, and if producers fail to strike a deal to ease cuts, oil markets could face a serious deficit.

There are already talks of $100 a barrel on the street if the current reduction policy stays put. This wild assumption may not be that far from reality if demand shoots up with the lifting of travel bans.

The bulls are aiming at the psychological level of 80.00. 72.30 along the 30-day moving average is the closest support.

By Orbex