Spectrum FX Weekly Market Update
No news is good news for the euro
Last week had little in the way of new critical information on either the world economy, fiscal or monetary policy, or pandemic data.
It is perhaps significant that the euro rallied in this environment, as it may indicate that the path of least resistance for the common currency is up. Not even the lack of a final agreement on the structure and conditions of the EU recovery fund in the Eurozone was enough to dent the common currency, which opened in Asia on Monday morning still trading near the highest levels since 2018.
Trading this week should be driven by a combination of politics, pandemic information and economic news. The expected announcement of a new fiscal stimulus package from the US Federal government and the fallout from the EU meeting will focus market attention, in addition to the evolution of contagion and death numbers in the US. The week ends with the release of the key PMIs of business activity in the Eurozone for July, where we continue to expect positive surprises.
GBP
Sterling was the worst performer out of all the G10 currencies last week, as Gilt yields continue to evaporate on weaker than expected economic news and no signs of progress are seen in the Brexit negotiations.
The weak GDP data released last week is from May and therefore not terribly meaningful. This week, the flash PMI indices of business activity for July should provide a much more timely indication of the strength of the rebound from the April troughs. Retail sales data for June, also out on Friday, should also give us a much better indication as to how well the economy is rebounding now that lockdown measures are being unwound. We expect the PMIs at least to surprise to the upside, and are starting to think that the recent pound sell-off has gone too far.
EUR
The ECB July meeting last week proved a non-event, as we and most of the market had been expecting. The central bank considers (reasonably) that the massive programmes put in place in previous months are enough for now, and can afford to take a wait-and-see attitude. Focus shifts to the political front. EU leaders were unable to strike an agreement over the proposed 750 billion euro stimulus package at the weekend, with talks set to continue today. We still expect agreement to be reached here, if not today, at a second meeting not long into the future.
The PMIs for July should continue to surprise to the upside, particularly since there has been so far no reinstatement of lockdown measures on a large scale, unlike in the US. These numbers should be enough to keep the common currency well supported, in our view.
USD
There is no let up in the surge of new COVID cases in the US. However, this bad news is tempered by the lack (so far) of a similar increase in the number of deaths, and by the fact that the US is conducting more tests per capita than any other major country. So far, the impact of the COVID news has been offset by optimism over the prospects for a vaccine and economic data, including last week’s US retail sales figures that showed another healthy month-on-month expansion in June.
The end of the $600 a week additional unemployment benefits in July now looms, and the pressure on Congress and Trump to put out a fourth fiscal stimulus package is increasing. We expect to see an agreement this week, and markets will be looking very closely at its size. A disappointment here would spell trouble for risk assets worldwide, though the dollar reaction would be hard to predict.
CHF
The Swiss franc depreciated against the euro last week. The EUR/CHF pair broke out of its tight range, reaching its highest level since early-June. We believe that it can, in large part, be attributed to the euro’s own strength rather than a shift in sentiment driving down the safe-havens.
In his lecture for the IMF last week, SNB President Thomas Jordan explained the reasoning behind the central bank’s monetary policy stance, praising FX intervention that has become the staple of its policy in recent years. They were described as ‘the most direct and thus the most effective instrument besides the negative interest rate’. While he mentioned that the SNB has 'scope for further interest rate cuts’, his rhetoric doesn’t seem to suggest that those cuts are anything more than an unlikely possibility which, in our view, would be utilised only in the event of a significant worsening of the global economic outlook.
AUD
The Australian dollar was able to eke out some modest gains last week, its fourth consecutive week of advances versus the US dollar. There wasn’t too much newsflow out of Australia last week, other than the monthly labour report for June, which beat expectations. The Australian economy created 210,000 net jobs last month, almost double the amount that economists had pencilled in. This was almost enough to make up all the jobs that were lost a month prior, as an easing in lockdown measures allows many industries to re-open. An issue for the data is that it covers the period prior to the re-introduction of lockdown in parts of Victoria, making it slightly outdated. The reaction in the FX market was therefore limited.
Focus this week will be on Thursday’s mini-budget announcement, with the government set to announce the next steps in its fiscal response to the pandemic. The RBA’s meeting minutes on Tuesday will also be worth looking out for, as will June retail sales (Wednesday) and July PMI data (Thursday).
CAD
CAD ended trading last week more-or-less unchanged versus the US dollar. There wasn’t too much to report last week. The Bank of Canada kept interest rates unchanged as expected during its policy meeting, noting that it may not start hiking rates until 2023. Growth forecasts were revised significantly lower, although Governor Macklem noted that a second wave of infection and further lockdown measures could throw off these forecasts. All in all, a rather dovish set of communications from the BoC, although CAD actually ended the announcement stronger - we think due to the promise of a highly accommodative policy for the foreseeable future.
This week is a busy one in terms of economic data out of Canada. First up will be Tuesday’s retail sales figures, although this will be for May so could be overlooked due to its datedness. Probably of more significance will be Wednesday’s inflation data for June.
CNY
CNY spent the entirety of last week stuck in a narrow range around the psychological 7 level to the US dollar. Economic news out of China last week was generally positive. Exports and imports both rose unexpectedly in June, a sign that demand had begun to pick-up post-lockdown both domestically and abroad. Thursday’s second quarter GDP data also beat expectations, with the Chinese economy expanding by 11.5% quarter-on-quarter (9.6% expected) and 3.2% year-on-year (versus 2.1% expected). Investors, however, focused more on the details, notably the relatively weak levels of consumer spending activity apparent in the data. This was also evident in the June retail sales numbers, given extra weight by currency traders due to its timeliness. Sales in China fell unexpectedly by 1.8% last month, perhaps a result of the reintroduction of some of the virus containment measures, notably in Beijing.
Meanwhile, Chinese stock fell sharply, down by the most since February on Friday amid ongoing uncertainty surrounding US-China trade relations. This was, however, not materially reflected in the yuan, a mark of the currency’s resilience and stability in the face of what on the surface would generally be deemed as a negative development for the currency. This morning’s PBoC meeting also didn’t have too much of an impact on CNY either - rates were kept unchanged for the third successive month.