Berkshire FX Blog

US finishes 2023 strongly as pressure for rate cuts mounts.

Mon, 01 Jan 2024 15:00:38 GMT

Which central bank will blink first and cut rates?

The ‘Santa Claus’ rally did not disappoint traders and investors as global indices climbed higher to end 2023.

Most notable were the ‘DOW Jones’ (up over 13% for the year) & ‘S&P 500’ (up over 23% for the year) as the US continued to outperform the rest of the world; with the former hitting all-time highs and the latter not far behind achieving the same goal. Latin American and European markets were also up, however, the somewhat surprising exception was Asian markets, which continued to weaken into the back-end of the year. Expectations were high at the beginning of the year as China put an end to their zero-covid restrictions and economists forecasted a resurgence in economic activity which never quite transpired.

The US was the clear winner in 2023 and as such the term ‘goldilocks’ continues to be bandied about casually when describing the temperature of its economy, not too cold, not too hot, but ‘just right’. With the trifecta of slowing inflation, rising growth and strong labour participation, the US is cruising smoothly towards a ‘soft landing’ following the fastest pace of interest rate hikes the country has embarked upon in its history.

Many economists still remain befuddled in relation to the ‘immaculate disinflation’ and strength displayed by the American economy and insist a recession will soon follow due to the pressure of high interest rates, whilst on the flip side, policy makers in Washington seem unmoved by such arguments, as they continue to push the narrative that rates will remain elevated for an extended period of time until the 2% inflation target has been achieved.

Back in the UK, policy makers seem to be singing from the same hymn sheet as their American counterparts, insisting that rate cuts are not on the table anytime soon despite mounting pressure from business owners and mortgage payers who are amongst the loudest voices calling for cuts as they have been worst affected. To further compound the pressure on the Bank of England (BoE), CPI data continues to reflect a steady downward trend in inflation and many market participants are already pricing in the first cuts in early 2024.

As it stands, we are of the view that the US and the UK will remain strong in 2024 and any recession will be mild and brief.

The story in the Eurozone is slightly different however as the bloc has been slower to pick up activity as interest rates have weighed heavy on the economies of its member states. Economists are now banking on the ECB breaking ranks first in relation to cutting rates in order to generate growth and see this happening as soon the end of Q1 – beginning of Q2 2024.

In terms of the impact on currency markets last year, the Pound was the main beneficiary, finishing up over 2% & 5% verses the Euro and the Dollar respectively. The Euro also outperformed the Dollar, closing out the year up over 3% verses the greenback.

Heading into 2024 we are minded that the Euro may suffer initially as bets are ramped up for the ECB to start cutting rates, closely followed by the Fed and then the BoE. Ultimately we would expect to see a resilient Pound for at least the first half of 2024.

Blow-out NFP data increases likelihood of further FED rate hikes.

Sun, 08 Oct 2023 19:11:17 GMT

Bond yields and Non-Farm Payrolls dominate market moves

There were two key narratives driving FX markets last week; at the beginning of the week the main focus was a spike in US government bond yields whilst the end of the week was dominated by the blow-out Non-Farm Payrolls jobs data.

A recent sell-off of US government bonds has led to yields hitting multi-year highs. As investors dump bonds, supply and demand forces dictate that yields increase to entice new investors, however, this comes at the expense of making government borrowing more expensive and ultimately increases the risk of a government default at some stage in the future. There are several potential reasons for the sell-off, most notably; asset managers may be overweight in bonds and need to rebalance their portfolios; there is an oversupply of bonds in the market; rising oil prices or simply the fact that investors are starting to come to terms with the idea that central banks will maintain high rates for a long time.

In terms of Friday’s job data; markets were surprised by a significant increase in job creation which rose by 336K vs the estimated 170K. Whilst this signals that the US economy remains resilient, it also indicates that inflation may remain stickier for longer due to an increase in consumer spending and opens the door for further rate hikes in the coming months. The one positive that came out of the jobs data was that average month-on-month earnings seemed to be plateauing as they came in, in-line with the previous reading of 0.2%. Average earnings year-on-year also surprised as they only rose 4.2% in September, down from the 4.3% reading in August.

Ultimately, allocations into USD denominated government bonds and heightened expectations of further interest rate hikes will likely lead to a continuation of the recent dollar strength and upward trend we have seen in previous months.

The key news to look out for this week will come from the US in terms of the release of FOMC minutes on Wednesday and CPI data out on Thursday. Investors will also be closely monitoring the UK GDP data release on Thursday for any signs of growth in the economy.

Technicals

GBP/USD: Daily Chart

Sterling managed to break the recent trend of depreciation last week with a solid 3-day rally to end the week.

The Pound initially took a nose dive on Monday but eased up on Tuesday before reversing on Wednesday and continued higher until Friday. The reversal was quite timely as price was approaching the 1.20 support level and buyers managed to defend this area. As it stands, price currently sits around the 1.22 level but has been muted in early trading thus far today.

Whilst last week’s reversal was a positive sign for Sterling strength, it is by no means a definitive indication of a shift in sentiment.

USD buyers should probably take advantage of the recent spike up in case price plummets once more this week to get a better test of 1.20. As for USD sellers, any move back below 1.22 would represent a good opportunity to get active with a further target down at 1.20.

GBP/EUR: Daily Chart

The key psychological 1.15 level continued to prop the Pound up last week as price failed to break below despite an early test.

Last Tuesday started with a move down towards 1.15, however, buyers stepped in to defend the key level and reversed all of the day’s losses. The remainder of the week was subsequently followed by a decent 3-day rally which saw price edge back up towards the 1.16 level. A break back above 1.16 this week would be a meaningful sign of strength for the Pound and likely lead to further appreciation. EUR buyers may want to target a test of 1.16 as price ascends, with a worst case rate of 1.1550 should sentiment shift downwards. For EUR sellers, any intraday reversal would be worth getting active as price is still at the lower end of a 4 month range between 1.1750 & 1.15.

GBP/JPY: Daily Chart

Despite what looked like a capitulation early on last week, Sterling managed to recover strongly and reverse all losses by Friday.

Monday set the tone with a sharp drop which was followed up on Tuesday with an impressive decline from around 181 down to 178. Whilst the Pound did manage to pare back more than half of its losses on Tuesday, the day still ended down close to the 180 level. Sterling completely shifted gears on Wednesday with an unexpected, yet modest, rally which pushed price towards the underside of 181. The real momentum, however came into the market on Friday after a muted session on Thursday with price surging back up to 183. Anything above 181 seems good value for JPY buyers at the moment. For JPY sellers, a move below 181 would be a good trigger to get active.

Economic Calendar (BST)

Wednesday

15:00 – US PPI MoM (Sep)

19:00 – US FOMC Minutes

Thursday

07:00 – UK GDP YoY & 3-Month Avg (Aug)

12:30 – EU ECB Monetary Policy Meeting Accounts

13:30 – US Inflation Rate & Core Inflation Rate YoY (Sep)

Friday

02:00 – CHN Inflation Rate MoM & YoY (Sep)

15:00 – US Michigan Consumer Sentiment Prel (Oct)

Sterling falters as Dollar strength persists despite ECB rate hike - 18/09/23

Sun, 17 Sep 2023 23:39:07 GMT

Sterling continued to suffer verses its major peers last week following weaker than expected GDP data.

Sterling continued to suffer verses its major peers last week following weaker than expected GDP data. UK GDP growth contracted by -0.5% MoM in July which was a downside surprise compared with the forecasted -0.2%. Whilst low growth may help the case for a drop in inflation, it likely unsettled investors and traders who decided to steer clear of long Pound positions. We may see further flight from Sterling this week should Wednesday’s CPI data surprise to the downside as this may influence Thursday’s BoE interest rate decision. A pause/failure to hike would likely be perceived as dovish by market participants and indicate the central bank is near its terminal rate.

Dollar strength persisted to cap off a ninth straight week of gains as headline inflation came in slightly higher at 3.7% last Wednesday verses the expected 3.6%. The slight uptick fuelled bets that the Fed will need to hold interest rates high for longer or even push ahead with further hikes should inflation remain stickier than expected. Further pressure was piled on to the Fed on Thursday as both PPI and Retail Sales surprised to the upside.

The anticipated China data early on Friday morning came in better than anticipated and no doubt helped to temper the recent runaway dollar strength. Looking ahead to this week’s Fed interest rate decision on Thursday, there is little expectation for another hike so commentary from fed official before and after the decision will likely be closely monitored by market participants for cues.

The ECB last week reasserted their conviction to fight inflation with a 25 basis point rate hike, raising the eurozone interest rate from 4.25% to 4.5%.

ECB President Christine Lagarde during the press conference following the rate hike made it clear that the door is still open for further hikes when she said, “We are not saying we are now at peak.” Whilst the comments were unambiguously hawkish, this failed to translate into Euro strength verses the Dollar but did manage to reverse the weekly gains made by the Pound. This Friday’s Manufacturing and Services PMI data will now likely take on greater significance due to ongoing concerns around growth in the eurozone and could be the potential reason investors are avoiding the Euro at present. It’s also clear from Lagarde’s comments that growth is still very much in focus for the council – “Growth could be slower if the effects of monetary policy are more forceful than expected or if the world economy weakens, for instance owing to a further slowdown in China.”

China woes fuel flight to safe haven Dollar - 11/09/23

Mon, 11 Sep 2023 08:02:45 GMT

Asia's largest economy showing signs of weakness.

The US dollar has been on an 8-week winning streak as investors and traders re-allocate funds into the safe-haven currency amid on-going concerns of a slowdown in China. The greenback rose to a 6-month high verses its major peers recently, following a collapse in China Services PMI to its lowest level since the end of zero-covid restrictions.

Investors will be closely watching the slew of Chinese data releases on Friday morning for further clues into the health of Asia’s largest economy.

Disappointing results will almost certainly accelerate the flight from riskier assets and fuel further appreciation in the US Dollar.

The Pound has also suffered recently off the back of dovish comments from MPC members.

The growing consensus among market participants seems to be that the BoE is nearing its terminal rate for interest rates.

Whilst one more 0.25% hike at the central banks September meeting is strongly priced-in by markets, there are fears that this may be the last and thus some investors have started to shy away from the Pound in search of higher yielding alternatives.

The Euro too has underperformed of late due to comments from ECB members which insinuate a greater concern over growth within the Eurozone as opposed to remaining steadfast with the battle to bring inflation under control. These mixed messages have unsettled markets somewhat so Thursday’s rate decision and press conference should hopefully give greater clarity on where the ECB’s priorities lie.

Economic Calendar (BST)

Monday

09:00 – BoE Pill Speech

Tuesday

07:00 – UK Unemployment Rate (Jun)

07:00 – UK Average Earnings incl. Bonus (3Mo/Yr) (Jul)

10:00 – Euro Area ZEW Economic Sentiment Index (Sep)

Wednesday

07:00 – UK GDP 3-Month Avg (Jul) & YoY (Jul)

10:00 – Euro Area Industrial Production YoY (Jul)

13:30 – US Headline & Core Inflation Rate YoY (Aug)

Thursday

13:15 – ECB Interest Rate Decision

13:30 – US PPI MoM (Aug)

13:30 – US Retail Sales MoM (Aug)

13:45 – ECB Press Conference

Friday

03:00 – CHN Industrial Production YoY (Aug)

03:00 – CHN Retail Sales YoY (Aug)

03:00 – CHN Unemployment Rate YoY (Aug)

10:45 – ECB President Lagarde Speech

14:15 – US Industrial Production MoM & YoY (Aug)

15:00 – US Michigan Consumer Sentiment Prel (Sep)

Sterling tumbles as Dollar strengthens and Covid delta variant cases rise - 21/06/21

Mon, 21 Jun 2021 09:16:28 GMT

Pound takes a dip lower as UK faces headwinds

Sterling

Rising Covid-19 case numbers, a stronger Dollar, Brexit back in the headlines and a bi-election loss for the government are all weakening Sterling this morning with little sign of an immediate recovery before Thursday’s Bank of England meeting.

Market expectations for the path of interest rates in the United Kingdom suggest a rate rise in August of next year, well ahead of the Federal Reserve and European Central Bank. Confirmation of those thoughts will help Sterling in the short term but there remains a risk that the Pound finds itself below the 1.37 mark against the USD over the course of this week given Brexit headlines and the rise in the delta variant.

Euro

As noted on Friday, the European Central Bank will be more than happy with the path of EUR/USD over the past 4 days. ECB President Lagarde speaks this afternoon at 15.15 BST to the European Parliament and is expected to continue making the difference clear between the US and European economies clear.

A push to the 1.17s in EUR/USD this week is not out of the question.

US Dollar

The USD has continued to strengthen over the weekend following further comments from Fed officials that the discussion on tapering stimulus was now formally open. We are now in an uncertain period of whether the Fed really wants to run the economy hot or has already given itself a scare with inflation pressures rising.

In this circumstance it seems pretty obvious that comments from Fed members will be closely watched with two making comments on the state of the US economy at 14.45 BST this afternoon.

Fed Chair Powell speaks to Congress tomorrow and would represent the first opportunity for him to clarify his comments should the market reaction be predicated on false hope.

Elsewhere

The safe havens of the Yen, Swiss Franc, Dollar and the Euro to a certain extent are all higher this morning thanks to sell-offs in Asian markets overnight and without much guidance from the US given it’s a public holiday.

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Disappointing payrolls data dampens Dollar rally

Mon, 07 Jun 2021 11:37:49 GMT

Dollar rebound cut short by US payrolls report

The Dollar rallied late in the week against its G10 peers, only to give up most of those gains after a mildly disappointing payrolls report on Friday.

The jobs data is still hard to interpret, but other measures of world growth continue to show signs of strength and inflationary pressures are not letting up. Most emerging market currencies managed to end the week higher, as commodity prices continue to rise. The Brazilian Real was the undisputed winner among the majors, with the New Zealand Dollar the worst performer.

Two events will dominate traders attention this week, both on Thursday, starting with the June meeting of the ECB. While no change in monetary policy settings is expected by us or the market, there is the potential for a slightly less dovish set of communications than the market is expecting, which could provide a boost to the common currency. As the meeting happens, we will receive the May inflation report from the US, so Thursday afternoon promises to be a volatile time for trading.

GBP

The strength in the PMIs of business activity for May and recent less-than-dovish comments from Bank of England policymakers raise the prospects that the UK may actually lead both the Federal Reserve and the ECB in hiking rates. We think this possibility is behind much of the recent strength in the Pound, and recent economic data continues to support that thesis, particularly last week’s services PMI that rose to its highest level on record.

There are no market-moving releases this week that will add much information to the current picture, so expect Sterling to trade off events elsewhere, notably the ECB meeting on Thursday.

EUR

The May flash inflation report out of the Eurozone made it clear that it is not exempt from the inflationary pressures that are building up worldwide. The headline rate finally broke above the 2% level for the first time since 2018. The core rate rose more modestly to 0.9% and is still below the ECB’s target. We think there is plenty of room for upside surprises here in the coming months.

The key to the ECB meeting this week will be whether the "significantly" higher rate of bond purchases announced in May is scaled back in view of the strengthening economy. We think the ECB is not quite ready to take that step, though the staff forecasts will certainly reflect a more optimistic outlook. Overall, we expect the Euro to drift higher, though more as a result of general Dollar weakness than specific Euro strength.

USD

The US payrolls data for May provided further confirmation that supply constraints are becoming the bottleneck to US growth, and that excess demand will continue to put upward pressure on prices. The headline number of 559k jobs looked healthy enough, but it fell short of consensus, and the labour force participation rate stagnated. Wages rose more-than-expected, in another sign that employers are competing harder to fill positions.

We think that generous unemployment benefits, closed schools and worker relocation during the pandemic will continue to constrain hiring and thus booming demand will result in increased inflationary pressures over the next year at least. If the Federal Reserve fails to respond, as seems likely, we do not think this will be positive for the Dollar.

CHF

The Swiss Franc ended last week around the middle of the pack of G10 currencies in the performance tracker, while the EUR/CHF rate edged down closer to the 1.09 level. The Franc appears to have been boosted by a decline in US yields in the second half of the week. Last week’s economic data from Switzerland was mixed, but overall continues to point to a recovering economy. Particularly welcome was a decline in unemployment, which should make room for a rebound in internal demand as the country eases COVID-19 restrictions.

This week’s calendar for Switzerland is quite light. The key inflation data print is already behind us, with consumer price growth surprising slightly to the upside, which fits into the picture of inflation rebounds elsewhere in Europe and across the pond.

AUD

Last week was a very volatile one for the Australian Dollar, although this was driven almost entirely by outside forces. The currency fell sharply versus the broadly stronger USD on Thursday morning, breaking out of its recent range that it has occupied since mid-May, before rallying after the US payrolls report to end the week only modestly lower. Aside from last Tuesday’s RBA statement, which delivered another dovish assessment on rates, there wasn’t too much news to write home about. The Q1 GDP data was modestly stronger-than-expected. Growth of 1.1% quarter-on-quarter returned in the first three months of the year (above the 0.6% estimate), although the considerable lag in the data meant that it was largely overlooked.

The more timely trade data for April was, however, encouraging with exports increasing by 3% month-on-month. An upgrading of Australia’s rating outlook to ‘stable’ from ‘negative’ by S&P on Friday is also a welcome development, although again we’ve not seen too much reaction to the news from investors. With few data releases scheduled for Australia this week, we think that AUD could once again be driven by external developments.

CAD

CAD ended trading last week around the middle of the G10 performance tracker, edging modestly lower versus the US Dollar. Friday’s Canadian labour report was a disappointment, partly offsetting some of the upside from a similarly underwhelming jobs report in the US. A net 68,000 jobs were shed in Canada in May as the COVID-19 lockdowns dragged on for yet another month. The jobless rate also ticked higher to 8.2%, although this would have been considerably higher (almost 11%) had it included those discouraged workers that dropped out of the labour force. Yet, with vaccinations now taking place at a very swift pace in Canada, we are hopeful that this trend will be reversed in the coming months.

The Bank of Canada will take centre stage on Wednesday when the latest policy decision is announced. We expect no change this week, although think that the BoC could tee up an additional unwinding in stimulus measures in the third quarter, which may provide some upside for CAD in the second half of the week.

CNY

A surprise to the downside in this morning’s trade data has not had too much of an impact on the Yuan, which edged lower last week to around the 6.40 level versus the Dollar. Export and import growth fell short of expectations, although still grew handsomely on this time last year. Total exports grew by 27.9% year-on-year in May, well short of the 41.6% pencilled in by the market. This suggests that global demand may not be holding up quite as well as hoped and provides a slight cause for concern for market participants.

Chinese inflation data for Wednesday will be closely watched by the market. We expect to see ongoing signs that prices globally are increasing at a steady clip and a surprise to the upside in this week’s data cannot be ruled out.

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Commodities bounce back and EM currencies rally - 01/06/21

Tue, 01 Jun 2021 11:17:01 GMT

Commodity-sensitive emerging market currencies take the lead

The key financial market themes of the last six months were replayed last week.

Commodities bounced back strongly, inflation data out of the US surprised to the upside, and risk assets rallied, with commodity-sensitive emerging market currencies taking the lead. Rates in G10 countries are still in a holding pattern, but we think it is only a matter of time before they resume their march higher amid stronger than expected economic recoveries elsewhere and relentless pressure on supply chains and ultimately prices. In keeping with these themes, the Brazilian Real, the Chilean Peso and the New Zealand Dollar were the winners last week, and the safe-haven Japanese Yen was unsurprisingly the worst performer.

This trading week is shortened by the London and New York Monday holidays, but will nevertheless be rich in data. Inflation data in the Eurozone for May comes out Tuesday, and will show the extent to which inflationary pressures there follow the US upward path with a lag. Later on Tuesday, the US ISM index will be released, and there will be special focus on the prices paid component. Finally, Friday we will get the latest read on the state of the US jobs market via the payrolls report for May, where booming demand is expected to run into labour market frictions leaving the numbers subject to an unusual amount of uncertainty.

GBP

A booming recovery led by the manufacturing sector, as reflected by the PMI indices of activity, and hawkish noises from the Bank of England propelled Sterling to second place in last week’s G10 FX performance tracker.

While we think that the Pound rally may take a short-term breather, especially given the lack of market-moving news this week, we think the Bank of England may lead the Federal Reserve and the European Central Bank in the process of withdrawing monetary stimulus from the economy, which can only be a positive for the currency. The shortened UK trading week is relatively light on economic data, aside from revised PMI numbers. Investors will, however, have comments to digest from Bank of England governor Andrew Bailey on Thursday.

EUR

Some dovish comments from ECB council members have stopped the Euro rally, for now. While markets remain focused on the ECB meeting on 10th June, we think this week's preliminary inflation data for May will receive more than the usual amount of attention.

An increase to precisely the ECB target of just below 2% in the headline number is already priced in, as is a more modest jump in the core subindex that excludes volatile food and energy components, to a level still below target in the latter. However, strategists have recently lagged in adjusting upwards their estimates of inflation worldwide, so we think there is room for a positive surprise that would buoy the common currency.

USD

Another week, another upward surprise in inflation data out of the US. Last week it was both the first quarter GDP deflator and the more timely personal consumption expenditures (PCE) deflator, which is the preferred inflation metric of the Federal Reserve. The latter jumped #to 3.6% year-on-year, its highest level since September 2008. Bond markets are taking this in stride for now, and the 10 year Treasury yield ended the week not far from where it had begun.

CHF

The Swiss Franc was one of the worst performers in G10 and ended last week somewhat lower against the euro, despite a decline in US yields. Recent changes in sight deposits indicate continuing interventions from the SNB, but their intensity appears to wane. CFTC positioning data continues to point out to a slightly bearish attitude of speculators towards the franc. We think there’s plenty of room for it to turn more negative in the coming quarters, which should put some pressure on the Franc.

Nevertheless, most recent Covid and forward-looking economic data from Switzerland is mostly positive, which has helped the Franc to outperform its Japanese counterpart. The KOF leading indicator, which serves as a barometer for future economic growth, jumped to 143.2 in May, a record high.

AUD

The Reserve Bank of Australia struck another dovish tone during its monetary policy assessment overnight. As expected, rates were kept unchanged at historic low levels. Governor Lowe noted that the recovery in the economy had been faster than expected, highlighting an improvement in the housing market and an increase in borrowing. Unlike its New Zealand counterpart, which hinted at hikes in the second half of next year, the RBA reiterated again that rate hikes were unlikely until at least 2024, despite the improvement in economic conditions. It also warned over the risk of increased rates of virus contagion, such as that currently gripping the state of Victoria.

Investors largely took today’s RBA announcement in its stride. We could, however, see heightened volatility during the rest of the week, with a host of data releases on the docket. We will be paying close attention to tomorrow’s GDP and Thursday’s retail sales data.

CAD

With little to no economic news out of Canada last week, the USD/CAD cross was stuck in a relatively narrow range around the 1.20-1.21 mark, just shy of the currency’s strongest position in six years. The Canadian Dollar has been well supported by the rally in commodity prices and, more lately, the much better progress being made on the vaccination front. Canada has now administered at least one vaccine dose to more than 56% of the population, more than the US and just behind the UK as the most out of any major nation. The pace of daily vaccinations in Canada has been quite extraordinary in recent weeks, with the country now administered vaccines at more than double the pace of the US (0.92 doses per 100 vs. 0.39).

Volatility in CAD is expected to pick up in the coming days, with a number of macroeconomic data releases on tap. Q1 GDP data out later today is expected to show solid growth of 6.7% annualised. Investors may, however, pay closer attention to Friday’s more timely labour report for May.

CNY

The Yuan has continued to go from strength to strength in recent weeks and is now trading around its highest position versus the dollar in over three years - just below the 6.38 level at the time of writing. Sentiment towards CNY, and risk assets in general, has been elevated of late, so much so that investors appeared unflustered by the decision of the People’s Bank of China to raise the FX reserve requirement ratio for financial institutions on Monday. The ratio was increased for the first time in 14 years from 5% to 7% in what appears to be an attempt to lessen appreciating pressure on the Yuan. The move was, however, widely expected, and we’ve not seen too much movement in the exchange rate as a result.

This Thursday’s services PMI from Caixin will be closely watched by currency traders. If last week’s non-manufacturing PMI from NBS is anything to go by, we could be in for another upside surprise, which may provide further support for CNY in the back end of this week.

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Quarles comments strengthen Dollar ahead of US inflation data - 28/05/21

Fri, 28 May 2021 09:25:00 GMT

Dollar fortunes reverse on talk of ending emergency stimulus support

This week has been a rather bizarre one in the FX market, particularly when it comes to movements in the US Dollar.

The greenback had been on the back foot for the first three days of the week and looked certain to end it lower after a number of Federal Reserve policymakers suggested that a tightening in monetary policy in the US looked a long way off. However, the Dollar has seen its fortunes reverse in the past couple of trading sessions, primarily following comments from FOMC member Randal Quarles. Speaking at an event late on Wednesday, Quarles said that he thought it was time that the Federal Reserve begin discussions on ending the bank’s emergency stimulus support in light of rising inflation.

A combination of an unleashing of pent-up demand and mounting supply shortages has sent inflation higher across the board in recent weeks, particularly in the US. The real question on inventors minds is now centered around whether this uptrend in prices will persist, and how central banks around the world will respond. We tend to agree that upward pressure on prices will abate once supply catches up with booming demand. We do, however, also contest that Fed policymakers are perhaps slightly too calm and relaxed about the situation and are taking a backward looking approach, rather than a forward facing one that takes into consideration the massive shift in macroeconomic conditions.

Indeed, a number of other major and emerging market central banks have already either indicated that a tightening in policy is on the cards, or already removed some of their accommodative policies in light of rising prices. The Bank of Canada, for instance, became the first G10 central bank to announce a tapering of its QE programme in April. The Reserve Bank of New Zealand also struck a hawkish tone during its May meeting, saying that it expects to hike rates in the second half of 2022, much sooner than previously anticipated. Wednesday’s comments from Quarles is the first real sign that the Fed may perhaps be close to following in similar footsteps.

Sterling jumps after BoE’s Vlieghe talks up 2022 rate hike

Data out on Friday is expected to provide further evidence of the surge in prices currently being experienced in the US. The Fed’s preferred measure of inflation, the core PCE index, is expected to rise to almost 3% year-on-year in April. Durable goods orders and initial jobless claims beat expectations yesterday, the latter falling to 406k in the week to 21st May - its lowest level in fourteen months. Meanwhile, the Q1 growth number was revised lower, although only modestly from 6.5% annualised to 6.4% and investors largely overlooked it.

There has been very little macroeconomic news of note out of either the UK or Euro Area in the past few days. Probably the main talking point in the UK in the past few trading sessions has been comments from Bank of England ratesetter Vlieghe on Thursday. Vlieghe said that he did not expect the BoE to raise interest rates until deep into next year, although a rate hike could come sooner if the economy were to rebound quicker than expected. Sterling reacted to the latter, jumping by around half a percent versus the US Dollar to trade around the 1.42 level this morning.

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Investors calm bets on imminent interest rate hikes - 25/05/21

Tue, 25 May 2021 09:55:33 GMT

Fed members talk down importance of US inflation spike

The Dollar sold-off against its peers on Monday, and then again this morning, as investors continued to calm bets that the Federal Reserve would raise interest rates any time soon.

Last month’s much higher-than-expected inflation print got the market questioning whether the Fed would be forced into tightening monetary policy quicker than they had outlined in their latest interest rate projections. Since then, however, FOMC members have continued to strike a dovish tone and insist that the bank would look past a spike in US inflation when making its upcoming policy decisions. Fed policymaker Bullard was the latest such member to calm rate hike expectations on Monday. He noted his view that the increase in US inflation would be mostly temporary and that now was not the time to consider changing monetary policy, so long as the country is still in the midst of a global pandemic.

The next few months of data will prove crucial in the timing of the Fed’s next policy move - we expect heightened volatility surrounding upcoming nonfarm payrolls and inflation reports in particular. This afternoon’s US housing and consumer confidence data will not have quite the same impact, but will be closely monitored by investors nonetheless.

EUR/USD rises to highest level since January

The Pound briefly rallied back above the 1.42 level this morning, although failed to hold onto its gains. Similarly to the US, inflation in the UK is beginning to pick up speed and market participants are looking to the central bank to ascertain whether or not action will be taken to rein in rising prices. Bank of England governor Andrew Bailey appeared unflustered about the prospect of higher prices in his comments on Monday. He stated that he didn’t see any long-term implications from a pick-up in UK inflation and that he’s confident the current policy settings are appropriate.

Unlike Sterling, the Euro has managed to hold onto its gains so far this morning and is currently trading around its strongest position since the start of the year. Economic data out of the bloc has turned positive of late, and there is real optimism that a strong rebound is on the cards now that restrictions are beginning to be unwound. IFO sentiment data out this morning was resoundingly strong. The expectations index, for instance, jumped to 102.9 this month from a revised 99.2, its highest level in around two years. There’s no major data out of the Eurozone in the next 24 hours or so, but a speech by ECB member Lane could shift the Euro this afternoon.

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UK retail sales boosted as high street shops reopen - 21/05/21

Fri, 21 May 2021 09:46:08 GMT

UK retail sales surge past expectations

UK retail sales surged past expectations this morning, although currency traders largely took the data surprise in their stride.

As we thought might be the case, sales came in much hotter than expected in April, the first time period that covers the reopening of high street retail outlets. The headline retail sales growth number jumped to 9.2% month-on-month (more than double the 4.5% consensus), with sales also 42.4% higher on a year previous, when the UK was plunged into the first national lockdown. Excluding the volatile fuel component, sales also rose by 9% MoM, the third highest increase on record. Sales of clothing saw a particularly astonishing boom, jumping by 70% on a month previous.

Sterling briefly rallied on the back of the news, although the move proved short-lived. We think this largely has to do with investors viewing the consensus of economists’ as a very conservative one that, similarly to the March number, massively underestimated the impact of an easing in lockdown measures on consumer spending. All signs suggest that the UK economy is rebounding very well from the downturn at the beginning of the year and that a strong recovery is on the cards in Q2. This morning’s UK PMI data provided further evidence of just that. The services index fell modestly short of expectations, although still rose to a near 8-year high 61.8, while manufacturing activity boomed to a record 66.1, well above the 60 consensus. With most nations still lagging behind the UK in easing virus restrictions, we see room for further upside in the Pound, particularly should upcoming data continue to point to such a solid rebound in activity.

Euro Area PMI data points to solid rebound in Q2

The Dollar was broadly weaker against most of its peers on Thursday as investors continue to look past last week’s strong US inflation numbers. EUR/USD rose back above the 1.22 level, although the pair has found gains hard to come by so far this morning, despite a strong set of Euro Area PMI numbers. Both the services and manufacturing indices beat expectations, pushing the composite index up to 56.9 in May, its highest level since February 2018. With fears over a third wave subsided and the EU’s vaccination programme now in full swing, investors are similarly optimistic that the Euro Area economy is on course to bounce back well in Q2 following its contraction in Q1. The most important barometer for EUR/USD will be whether we begin to see a closing in the gap in economic performance between the US and Eurozone as the latter begins a more material unwinding in lockdown restrictions. This afternoon’s US PMI data will be a major test of this hypothesis.

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US inflation shocks markets and leads to increased volatility - 17/05/21

Mon, 17 May 2021 09:37:56 GMT

US Dollar outperforms emerging market currencies after inflation rise

Risk assets worldwide are hanging on near all-time highs, but are looking wobblier after a week that saw the inflation surprise in the US we had been warning about for some time.

Considering the scale of the surprise, it’s somewhat surprising that US 10-year Treasury rates only rose by 0.04%. Nevertheless, this move was enough to upend commodity markets and sent some ripples through emerging market currencies, which ended the week mostly if not uniformly down against the US Dollar.

This week, the minutes of the Federal Reserve meeting will be published on Wednesday. We expect the market to largely ignore them as the inflation surprise means they are somewhat out-of-date. The preliminary PMIs of economic activity for the US, Eurozone and the UK all come out Friday, in what we expect to be the main event of the week for markets. Beyond data and policy, the market seems to still be digesting the dramatic increase in at least short-term inflationary pressures in the US. We think that, once it does, the path of least resistance for the greenback will continue to be down.

Will the Federal Reserve signal the end of its rate hike cycle next week?

GBP

Relief about the outcome of the Scottish elections and the lack of prospects for a renewed push for independence was reinforced by a spate of very positive reports on housing prices, monthly GDP for March and BRC retail sales. Sterling soared last week, ending the week higher against every major G10 and emerging market currency worldwide.

This week, in addition to the always key preliminary PMI activity numbers for May on Friday, we look forward to the inflation report on Wednesday. Markets are expecting a modest rebound in the core number. It will be interesting to see whether the massive surprise in inflation we saw last week is a worldwide phenomenon or remains for now limited to the US.

EUR

Investor confidence numbers in the Eurozone last week confirmed the turn to the better in European expectations and leading economic indicators generally. We think one of the key financial and economic factors for 2021 will be how the Eurozone bounceback compares to the US one, both in terms of speed and the accompanying inflationary pressures.

Due to data lags, we will not have a clear picture until midsummer, however. For now, we will focus on the leading indicators of economic activity such as the PMI indices out Friday. Another positive surprise in the services index could provide a late-week boost to the Euro.

USD

The long anticipated increase in inflation in the US burst into full view last week. Headline inflation is running at 4.2% on the year ended in April. More ominously, the steadier core index that strips out volatile food and energy components experienced the biggest jump since 1981; the three-month annualised rate is now running at almost 5%.

The key now will be the reaction from the Federal Reserve. While they have been making dovish sounds about looking past short-term price pressures and keeping policy at extremely stimulative settings, it is possible some members may have been rattled by the burst in inflation. As for currency markets, very low rates and rising inflation has seldom been a positive mix for any currency, and we do not expect it to be different this time.

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Dollar jolted higher as US inflation rises by most since 2009 - 13/05/21

Thu, 13 May 2021 09:24:49 GMT

US inflation number comes in much higher than forecasted

The Dollar was jolted on Wednesday following the release of yesterday afternoon’s US inflation data.

Market participants have been bracing for a sharp increase in US inflation in the past few weeks as highly accommodative fiscal and monetary policies, the unwinding of virus restrictions and pent up demand unleash greater consumer spending activity. That being said, yesterday’s inflation number was considerably higher than even the most extreme forecasts. Headline inflation jumped 0.8% month-on-month in April (4.2% on last April when the US spent its first full month under strict lockdowns), with core inflation also surging by 0.9% MoM versus the 0.2% consensus (3% year-on-year). To put into perspective, the headline jump in inflation was the most since 2009, with the sharp increase in core prices, which excludes the more volatile food and energy components, rising by the most since 1981.

The move higher in prices were broad based, with almost every component showing sharp increases on previous periods. Car prices delivered the biggest upside surprise, rising by 10% MoM. This is perhaps an indication that at least part of the jump in inflationary pressure also has to do with supply disruptions, with producers struggling to meet booming demand as states reopen their economies. The big question now is, how will the Federal Reserve respond to such a massive data blowout? FOMC chair Powell has continued to stress that any increase in inflation would prove temporary and that the bank would look through higher prices and keep interest rates on hold through until 2024. Upcoming inflation prints in the next few months will now be absolutely key for financial markets. Should US inflation continue to surprise to the upside, then the Fed’s resolve to hold rates low for longer will undoubtedly be tested.

The Dollar’s reaction to yesterday’s inflation data was an interesting one. The greenback was well bid following the release, then almost immediately retraced all of its gains before rallying again to end London trading higher against all of its major peers. The scale of the move was relatively contained, around half a percent versus the Euro. Investors were clearly not getting too carried away, nor should they off the back of one singular data print that may well prove a one-off. Fed Vice Chairman Clarida noted that he was surprised by the sharp jump in inflation, but we see it as likely that policymakers will, for now, continue to hold firm and state that the move higher in prices will be transitory.

UK economy suffers contraction in first quarter of 2021

This week is a relatively eventful one in term of macroeconomic data out of the main economic areas. In the US, attention will now turn to Friday’s retail sales data for April. Economists are pencilling in a modest 1% increase in sales versus the 9.8% jump a month previous, but it will be interesting to see whether this surprises to the upside in a similar fashion to Wednesday inflation data.

Meanwhile, the Euro came under a bit of selling pressure yesterday following a slightly disappointing set of industrial production numbers (0.1% MoM vs. 0.7% consensus). Confirmation that the UK economy entered into contraction in Q1 (-1.5% quarter-on-quarter) was met with a ‘so what?’ by investors that were already pricing in such a downturn. With Boris Johnson announcing that lockdown will be eased again as planned on Monday, investors have turned bullish on the Pound once again, with the currency now the best performer in the G10 in the past week.

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Greenback plummets on dismal US jobs data - 10/05/21

Mon, 10 May 2021 10:24:07 GMT

Dollar tumbles on worse than expected labour report

A much weaker-than-expected labour report broke the string of positive economic surprises out of the US and sent the Dollar tumbling versus almost every major currency worldwide.

Bond yields fell and commodities soared once again, dragging upwards commodity dependent currencies. In the G10, the Australian, New Zealand and Canadian dollars, together with the Norwegian krone, topped the tables, rising a massive 1% against the US Dollar. In emerging markets, the Brazilian Real, exploded upwards by nearly 4%, as the COVID wave there starts to break.

This week we will be paying very close attention to the US inflation report for April. Another strong inflation print after the increase in March would be an unpleasant coda to the weak payroll report last week, indicating perhaps that supply constraints are becoming a serious concern for the short term at least. As this is written, Scottish election results do not seem to have made much of a dent on Sterling, indicating perhaps that independence is not seen as a medium-term risk for the UK.

GBP

The Bank of England decided to slow down the pace of bond purchases, but this seemingly hawkish measure was dampened by the decision to leave both the expected end date of the purchases and the total purchase amount unchanged.

Scottish election results were released over the weekend and traders seemed to be unmoved by the results during Asian trading hours. While there will be a clear pro-independence majority in the Scottish parliaments, markets seemed to take heart at indications from Boris Johnson’s Government that any immediate push for a new referendum will be vetoed.

EUR

What little news there was out of the Eurozone was generally positive. German retail sales surprised to the upside, suggesting that the much awaited catch up with the US and UK economies as the lockdowns are lifted may finally be here. Also, though somewhat under the radar, progress was made on the political front and the EU's pandemic programmes moved closer to launch, which should provide a tailwind to the Eurozone's growth prospects starting in the second half of the year.

The common currency reacted mostly to the weak payrolls report out of the US and rose strongly for the week, a trend we expect to continue over the medium-term.

USD

A very weak payrolls report out of the US contrasted with the string of positive news elsewhere and, particularly, the price pressures that continue to develop along strained supply chains. It is possible that generous unemployment benefits and business reluctance to offer the higher wages warranted by a heating economy are slowing down hiring temporarily. If so, this issue should resolve itself over the next few months.

We remain very positive on US economic developments in the short and medium term, but will pay very close attention to indicators of labour market health over the next few weeks. Meanwhile, our view that the path of least resistance for the US Dollar is down received some strong validation last week.

CHF

Despite positive global sentiment, the risk-sensitive Franc continued to appreciate last week. The Franc ended the week around the middle of the G10 performance dashboard, doing much better than its safe-haven peers that trailed the pack. The overall strength of the Swiss currency seems to show just how important the behaviour of US yields is for the low-yielding assets. The outperformance compared with the Dollar and the Yen can be linked to a difference in newsflow: the news from Switzerland, and more broadly - Europe - has been particularly positive of late.

We don’t think that the appreciation of the Franc is a sustainable phenomenon and expect the currency to show weakness later in the year should US yields return to an upward trend and market sentiment continue to improve. In the short-term we’ll be focused mostly on outside news, as the domestic economic calendar for this and the coming week is nearly empty.

AUD

The broad sell-off in the US Dollar sent AUD sharply higher last week, with the currency up around 1.5% to its strongest position since late-February.

Interestingly, the Aussie Dollar didn’t receive too much support from last week’s Reserve Bank of Australia meeting, despite the RBA continuing to strike an upbeat tone over the state of the recovery. The bank raised its GDP projections and is now pencilling in growth of more than 9% in Q2, and nearly 5% in December 2021. Governor Philip Lowe did, however, stress that it will be ‘some years’ before wage growth is fast enough to lift inflation to target and that rates hikes were unlikely until at least 2024. The RBA’s continued insistence that policy will remain accommodative for the foreseeable future despite a strong rebound in economic data presents somewhat of a downside risk to AUD in the medium-term. That being said, investors are so far mostly focusing on the positives, and the Dollar looks well placed to post additional gains should risk sentiment continue to improve.

CAD

The scorching rally witnessed in the Canadian Dollar continued last week, with CAD once again sitting pretty at the top of the G10 FX performance tracker. We attribute the extent of the move to the hawkish policy stance adopted by the Bank of Canada, which last month became the first major central bank to begin normalising monetary policy since the outbreak of the COVID-19 pandemic. Canada’s vaccination programme is also now going rather well, with the pick-up in oil prices also providing solid support for the currency.

It will be interesting to see whether much of this positive news is now already priced in to the value of CAD, which could lead to a modest retracement in the recent rally. Recent macroeconomic news has been mixed and persistently high new virus case numbers suggest that an unwinding of restrictions may take place at a slightly slower pace than elsewhere. Last week’s labour report was particularly poor, showing a 207k contraction in jobs and a move higher in the jobless rate to 8.1% from 7.5%. If this is an indication of things to come, then we may well see a reversal in the recent appreciation in CAD in the near-term.

CNY

A very strong set of trade data out of China last week triggered both a sharp move higher in the Yuan and provided solid support for emerging market currencies in general. Export growth came in less than expected, although still accelerated in April, with imports growing by a massive 32.2% year-on-year in CNY terms versus the 12.6% consensus. This suggests that domestic demand is holding up very well in China, which bodes well for domestic activity and indeed global growth as a whole.

The Yuan has rallied by around 1% versus the US Dollar in the past few sessions off the back of the data, which is a rather violent move for a currency that is kept within a narrow range by the country’s central bank. All eyes will now be on the People’s Bank of China, with investors interested to see whether policymakers comment on the currency’s recent appreciation during upcoming communications. A strong Yuan is a negative development for the country’s export competitiveness and the recent appreciation will therefore test the central bank’s tolerance for a lower USD/CNY exchange rate.

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Dollar rallies on Yellen rate hike comments - 05/05/21

Wed, 05 May 2021 10:31:55 GMT

Yellen talks up higher rates and puts markets in a stir

The US Dollar has rallied against most of its major counterparts in the past few days as investors both favour the currency due to its safe-haven status and react to talk regarding higher US interest rates.

Former chair of the Federal Reserve and Treasury Secretary, Janet Yellen, caused a bit of a stir on Tuesday, suggesting that rate hikes may be required in the US in order to prevent the economy from overheating. According to Yellen, ‘it may be that interest rates will have to rise somewhat to make sure that our economy doesn't overheat, even though the additional spending is relatively small relative to the size of the economy.’ While she later played down these comments, her remarks have at least got investors talking about the possibility of a sooner-than-expected rate increase in the US, particularly given recent strong economic data and a build up of inflationary pressures.

Three Federal Reserve members are due to speak later today and their comments will be closely monitored by currency traders. It will be interesting to see whether they share Yellen’s view on the possibile need for tightening - if they do then another bout of strength in the Dollar would be highly likely to ensue. The Dollar is now back trading just below the 1.20 level versus the Euro and around its strongest position in trade-weighted terms in two weeks. Barring any major market moving comments from Fed members today, investors will have one eye on Friday’s all-important US nonfarm payrolls number. In the meantime, we will be paying close attention to this morning’s PMI numbers and tomorrow’s retail sales data for the Euro Area.

Sterling outperforms ahead of Thursday’s Scottish elections

Sterling has been among the top performers versus the Dollar in the past week, with the Pound actually rallying against the USD since the beginning of the week to around the 1.39 level. A modest alleviation of political uncertainty has somewhat helped the UK currency, after the latest polls suggested that Nicola Sturgeon’s SNP was unlikely to win an outright majority at Thursday’s election. There has been a number of market jitters surrounding the possibility of an SNP majority, which would inevitably pave the way for fresh calls for another Scottish Independence referendum. But this appears to be largely a tail risk, and another vote appears highly unlikely to come to pass, even following a strong showing from the SNP this week.

All the while, the UK continues to march ahead with vaccinations, and has now administered at least one vaccine dose to over 50% of the population and two doses to around 23% - around three times that of Germany. The path to economic near-normality in the UK appears very clear, with politicians suggesting that social distancing requirements could be scrapped altogether when the rest of the lockdown measures are removed in June. With most of Europe still lagging well behind with vaccinations, this could provide some upside to the GBP/USD cross in the coming weeks.

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Fed says no QE taper yet and USD weakens - 29/04/21

Thu, 29 Apr 2021 10:28:17 GMT

Powell dampens expectations for taper of asset purchase programme

The Federal Reserve fell short of market expectations during its monetary policy meeting on Wednesday and the US Dollar sold-off across the board as a result.

The Fed’s communications were not without optimism. Policymakers noted that economic activity and employment had strengthened as a result of the country’s vaccination programme and policy support. That being said, chair Jerome Powell continued to reiterate that the bank would look through temporary increases in US inflation, noting ‘a transitory rise above 2% inflation this year wouldn’t meet standard of moderate overshoot.’ He also pushed back at growing market expectations that the Fed could soon be in a position to begin discussing the need to taper its large-scale asset purchase programme. According to Powell, the Fed does not believe that now is the time to start talking about tapering, noting that employment was still well short of target and that it would take some time for the Fed to reach its goals.

It was the latter comments that investors latched onto yesterday. With the latest US economic data largely smashing past expectations in recent weeks, there were hopes among some quarters that the Fed could, at the very least, hint that it is considering unwinding some of its stimulus measures in the coming months. Wednesday’s rhetoric from the Fed does, however, suggest that the bank will keep policy accommodative for the foreseeable future and that could keep a lid on gains for the Dollar, particularly at a time when other major central banks, such as the Bank of Canada, are already beginning the process of policy normalisation.

Will Friday’s Euro Area GDP and inflation data shift the Euro?

EUR/USD touched its strongest position in two months during Asian trading, having risen by over half a percent following the Fed meeting. Euro Area inflation and growth data out tomorrow will be the main focal points for Euro investors in the next couple of days. With commodity prices rising and global demand beginning to pick up pace, we could see a slightly higher inflation print tomorrow, particularly after this morning’s price growth data for Spain came in comfortably higher than expected. Tomorrow’s GDP data will likely be less encouraging. We are pencilling in a fairly sharp contraction in activity in Q1, but given that this data point is backward-looking and rather dated given the constantly changing economic backdrop, we think that it will be largely overlooked by currency traders.

Sterling also rose to its strongest position in a little over a week versus the US Dollar following yesterday’s Fed meeting. There has been no economic news out of the UK at all this week, so the Pound has been driven almost entirely by goings on elsewhere. A number of political allegations surrounding Prime Minister Boris Johnson may perhaps be keeping a lid on gains for the UK currency, which has actually been right near the bottom of the G10 performance tracker in the past week, just above the Japanese Yen. Local elections will be taking place in the UK on 6th May and there looks likely to be another majority for Nicola Sturgeon’s pro-independance party in Scotland. Growing calls for another independence referendum may weigh on the Pound in the coming months, but the low likelihood of such a vote actually coming to pass suggests that this will likely be a tail risk.

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USD firm ahead of this evening's interest rate decision - 28/04/21

Wed, 28 Apr 2021 09:22:50 GMT

Dollar holds steady ahead of FOMC announcement

The US Dollar rebounded modestly against its peers ahead of this evening’s April meeting of the Federal Reserve.

With no updated macroeconomic or interest rate projections set to be unveiled, and very little prospect of any change in policy or forward guidance, this evening’s meeting may be a slightly low key one. That being said, economic news out of the US since the most recent meeting in March has been undeniably strong and investors will, therefore, be paying close attention to the Fed’s accompanying communications. It will be interesting to see whether the bank acknowledges the recent turn for the better in economic conditions and the rapid progress being made towards mass vaccinations in the US. Should they look past the upbeat data and continue to stress that above target inflation will be tolerated, then the US Dollar would likely sell-off. By contrast, rhetoric that suggests the bank could reach its targets sooner-than-expected would be bullish for the greenback. Any talk of tapering the bank’s asset purchases is highly unlikely, in our view, and will probably have to wait until June at the earliest.

Aside from tonight’s Fed meeting, this week will see a number of high profile economic data releases out of the US. Most important will be Thursday’s Q1 GDP and Friday’s PCE inflation data.

Most major currencies stuck in a narrow range

With very little news out of either side of the Atlantic on Tuesday, most major currencies were stuck in a tight range. The Pound has so far been largely unaffected by the weekend’s political noise, with investors instead appearing upbeat about the UK’s vaccine rollout and prospects for a sharp bounce back in economic activity in the coming weeks. Britain has now administered at least one vaccine dose to 50% of the population, with one-quarter of the population now fully vaccinated. It may take a few weeks for the latest unwinding of lockdown measures to be reflected in economic data, but last week’s bumper retail sales figures make us confident that a strong rebound is on the cards, which may be bullish for Sterling.

This week should be a slightly busier one in the Euro Area. We will be paying close attention to a speech from ECB President Lagarde this afternoon and the latest GDP and inflation data for Q1 and April respectively on Friday morning.

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Look ahead to Wednesday's FOMC meeting - 27/04/21

Tue, 27 Apr 2021 10:07:15 GMT

What impact will the FOMC meeting have on FX markets?

Most major currencies traded within a rather narrow band on Monday as investors awaited major news-flow later in the week.

The main focus for currency traders in the coming days will be Wednesday’s FOMC meeting. There will be no updated macroeconomic or interest rate projections from the Fed this week, and chair Powell is not expected to rock the boat too much during his accompanying communications. That being said, investors will be paying very close attention to his comments during the press conference for any indication as to whether the central bank is considering withdrawing some of its monetary stimulus in the not too distant future. While this seems a little too premature, we think that there is a good chance that Powell could take on a slightly more optimistic view of the US economy, given the country’s impressive vaccine rollout and the string of stronger-than-expected economic data out across the pond in the past few weeks. This could provide a bit of support for the Dollar in the second half of the week, in our view.

Prior to tomorrow’s meeting, the Dollar clawed back a bit of lost ground versus both the Euro and the Pound yesterday. EUR/USD has spent almost all of April thus far trending higher, edging above the 1.21 level for the first time in almost two months. Not only is the European vaccination programme beginning to pick-up pace, but economic data out of most major areas has largely surprised to the upside in recent weeks, raising hopes of a swift economic recovery once lockdown measures are removed later in the year. It will be interesting to see whether this trend continues during the remainder of the week. Euro Area GDP, inflation and unemployment data on Friday will be closely watched by the market. It was almost inevitable that the bloc’s economy entered into a double-dip recession in Q1, but a smaller contraction than what economists are currently pricing in may fuel optimism for the remainder of the year.

As far as the Pound is concerned, there is very little economic news out of the UK this week, but plenty of political headlines for investors to digest. Prime Minister Boris Johnson has faced a number of allegations in the media over the weekend, including his handling of the COVID-19 pandemic and the source of funds used to redecorate his 10 Downing Street flat. While mounting political uncertainty far from provides a conducive environment for Sterling strength, net speculative positioning suggests that investors remain long on the Pound, perhaps encouraged by both the continued trend lower in new UK virus cases and recent acceleration in the pace of daily vaccinations.

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USD continues to trend lower verses G10 currencies - 26/04/21

Mon, 26 Apr 2021 12:15:41 GMT

Emerging market volatility sees Dollar pullback further

The US Dollar continued its recent trend lower last week, falling modestly against every G10 currency save the Australian Dollar.

The moves there were, however, modest and most of the action took place in emerging markets. It was hard to discern a theme, since the Brazilian Real rose strongly but other Latin American currencies like the Chilean and Colombian Peso struggled. The worst performer was the Turkish Lira, down over 4% as investors continue to vote with their feet on Erdogan's unorthodox monetary policy.

This week focus will be squarely on the Federal Reserve April meeting on Wednesday, although markets are not expecting any significant changes either in policy or communications from the Fed. US GDP growth (Thursday) and PCE inflation (Friday) are also key, as will be the Eurozone flash inflation report for April, also released Friday.

GBP

Sterling largely looked past last week's strong data out of the UK, which saw higher rates of inflation, house prices and positive surprises in the April PMI indices of business activity and March retail sales. The latter, in particular, came in much stronger-than-expected. This bodes very well for growth in the second quarter of the year once taking into account that the data covered a period prior to the opening of high street shops in the UK on 12th April.

The Pound's rally has been cut short for now by jitters over the upcoming Scottish parliament elections and the potential for a second independence referendum there. Little news of any note this week means that Sterling will probably take its trading cues from elsewhere, notably the Federal Reserve meeting on Wednesday.

EUR

The improving tone in Eurozone economic data was confirmed last week by a very strong PMI report for the month of April and continued improvement in vaccination rates. The ECB also stayed out of the way of the Euro rally by adding little new information in its April meeting.

Overall, we think that the string of very positive economic surprises that we have seen in the US will now have its counterpart in the Eurozone, as lockdowns are progressively lifted and consumer pent up demand is felt, particularly in the services sector. Consequently, we think that the Euro rally has a way to go yet.

USD

Wednesday's meeting of the FOMC should be a non-event, with no changes to monetary policy settings and little in the way of fresh communications from the Fed, particularly given that there will be no updated economic or interest rate projections.

Far more interesting should be the two inflation-related data points this week. On Thursday, the GDP deflator for the first quarter, and then on Friday the personal consumer expenditure deflator for March. We expect both to continue the recent string of upward surprises in inflation data, which should start the next leg up in Treasury yields. What will be the immediate Dollar reaction to inflation surprises is less clear, however.

CHF

Last Monday, we pointed out that speculators’ futures positioning would be highly likely to turn CHF-negative in the coming weeks and indeed, Friday’s data from CFTC confirmed that for the first time in more than a year we’re seeing more bets in favour of a weaker Franc than a stronger one. This may be viewed as a milestone in a normalisation of the FX market situation after the pandemic gyrations of the past few quarters.

Overall, the Franc ended last week somewhat lower against the Euro and around the middle of G10 performance tracker. Lower US yields seem to be more or less balancing out recent improvements in risk sentiment, at least for now. In addition to monitoring the latest pandemic news, this week we’ll focus on economic prints, particularly sentiment data and Friday’s retail sales for March.

AUD

The Aussie Dollar was the worst performing currency in the G10 last week, although it still managed to end the week roughly where it began it versus the US Dollar. One of the big concerns for investors remains Australia’s so far disappointingly slow vaccine rollout that has seen only around 7 doses administered per 100 people. Parliament voted in favour of a shift in vaccine strategy on Thursday, which will now see the Pfizer vaccine restricted to over 50s, who will instead receive the AstraZeneca jab. Whether this helps speed up the pace of vaccinations among the older population remains to be seen, but it looks increasingly clear that the government will fall short of its initial target of delivering at least one jab to all of its citizens by October.

This week looks set to be a very quiet one, with very little macroeconomic data set for release out of Australia. Wednesday’s Q1 inflation data runs on a bit of a lag and will therefore likely be largely overlooked by currency traders. We instead think that shifts in commodity prices could be the main driver for AUD - we have already seen a bit of a bounce in the currency so far this morning following an uptick in iron ore prices.

CAD

Arguably the biggest news story in FX last week was the hawkish turn taken by the Bank of Canada. The BoC unexpectedly tapered its asset purchase programme by 1 billion CAD and brought forward its timetable for interest rate hikes. Policymakers in Canada now expect the first hike to take place in the second half of 2022, having previously said that this was unlikely to happen before 2023. With the country’s vaccine programme now progressing well, the bank also see’s higher growth of 6.5% in 2021 versus the previous 4% estimate. This is the first instance where we have seen a significantly more upbeat assessment from a major central bank since the start of the COVID crisis and could pave the way for additional gains and an outperformance in the Canadian Dollar versus its peers in the coming weeks.

Retail sales data on Wednesday and the February GDP print on Friday will be the main economic data releases in Canada this week. Yet, with both data points running on a bit of time lag, we could see investors pay more attention to events elsewhere, namely Wednesday’s FOMC meeting.

CNY

The Yuan continued to post gains against a broadly weaker US Dollar last week, rallying back below the 6.50 level to its strongest position since mid-March. CNY had come under a bit of selling pressure last month as the impressive vaccination rollout in the US caused a sharp move higher in long-term government bond yields. An easing in this move in US rates, which has seen the 10-year yield drop back below the 1.6% level has, however, provided room for a recovery rally in the Yuan, which remains an attractive proposition for EM currency investors. While the Q1 GDP data out earlier this month was a little bit of a disappointment, the stronger-than-expected set of retail sales data for March suggests that the economy is gathering momentum again.

This Friday’s PMI data from NBS may receive some attention among currency traders, but we ultimately expect the USD/CNY cross to be driven more by broad investor sentiment and the fallout of Wednesday’s FOMC meeting.

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UK retail sales beat economist expectations by almost 4% - 23/04/21

Fri, 23 Apr 2021 09:58:53 GMT

UK retail sales jump sharply even before lockdown easing

The Euro receive little support from the ECB yesterday, but it has rallied this morning following a better-than-expected set of PMI data. Both the Euro Area manufacturing and services indices increased in April, with the composite PMI rising to 53.7 versus the 52.8 priced in - its highest level since July. This has helped lift the common currency back towards the 1.205 level versus the dollar and just shy of Tuesday’s five-week high.

The big data surprise this morning has, however, come out of the UK. Retail sales in Britain jumped far more-than-expected in March, up 5.4% month-on-month versus the 1.5% that economists had pencilled in, its largest increase since June. Excluding fuel this increase was even greater, with sales up by 7.9% MoM. The strength of the data is all the more surprising given that high street shops were not reopened in the UK until 12th April. Clearly consumers in the UK are in a buoyant mood, which bodes very well for growth in the second quarter, which looks likely to show a sharp rebound following the expected contraction in Q1.

This morning’s UK PMI data was similarly impressive. The index covering the UK’s dominant services index rose to 60.1 in April - the indicators highest reading since August 2014. Investors will now be awaiting PMI data out of the US later this afternoon. As evident in the chart below, the divergence between this indicator in the US and Europe at the beginning of the year is now closing, which we think can partly be attributed to the recent retracement in the Dollar that has seen it lose almost 3% versus the Euro since the end of March.

ECB holds fire

Thursday’s European Central Bank meeting was largely a non-event for the FX market, as we had anticipated prior to the announcement.

There was very little new information to report out of the meeting - the ECB’s statement was left almost unchanged from the March meeting, with President Lagarde again stressing that the bank would use all of the tools available to support the economy, if required. She noted that the increase in the pace of purchases under the PEPP would continue, and that it was too premature to begin discussions around ending the programme. Lagarde also noted that the bank believed inflation would rise moderately and growth would return in the second quarter of the year as the pandemic situation improves.

While we are more upbeat than we were regarding the Euro Area’s vaccination rollout, clear downside risks to the growth and inflation outlook remain and the ECB will, in our view, be in no rush whatsoever to unwind its accommodative policy stance. We may see the bank announce that it will begin slowing the pace of asset purchases in June, but we certainly don’t expect any talk on the programme’s end date until at least the September meeting. At this point the bank will have a much clearer idea as to the state of the health crisis and, in particular, its impact on Euro Area inflation.

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Euro edges higher ahead of ECB, BoC springs surprise - 22/04/21

Thu, 22 Apr 2021 09:27:17 GMT

Euro continues to advance as Lagarde expected to keep things steady

The major currencies spent much of trading on Wednesday in a holding pattern ahead of a busy couple of days of central bank and macroeconomic announcements.

The Euro edged slightly higher against the Dollar yesterday prior to this afternoon’s European Central Bank meeting, although investors were in a slightly cautious mood. As we have mentioned previously, we think that today’s meeting will be a low-key one - we do not believe that the ECB will think about slowing the pace of purchases under its asset purchasing programme just yet and it is certainly too soon to think about winding it down completely. Despite recent resilience in macroeconomic data and optimism surrounding the bloc’s vaccine rollout, risks to the Euro Area economy remain and we think that President Lagarde will take a balanced view that attempts to not rock the boat too much.

That being said, there is a risk that the ECB could follow in the footsteps of the Bank of Canada, which struck a surprise during its policy meeting on Wednesday. The BoC unexpectedly tapered its asset purchase programme by 1 billion CAD and brought forward its timetable for interest rate hikes. Policymakers in Canada now expect the first hike to take place in the second half of 2022, having previously said that this was unlikely to happen before 2023. New virus cases are rising sharply again in parts of Canada, but the bank is obviously optimistic that the vaccine rollout will allow a significant bounce back in activity in the second half of the year - they now see growth of 6.5% in 2021 versus the previous 4% estimate. Should we see a similar hawkish surprise from the ECB today that would catch investors completely off guard and another move higher in the common currency would inevitably ensue.

How UK retail sales and PMIs could impact the Pound

With today’s ECB meeting likely to go mostly under the radar, investors may have one eye on a number of key economic data releases on Friday. In the UK, we will be paying particularly close attention to retail sales data for March and the services PMI for April. Regarding the former, it is still too soon for the reopening of high street shops to be reflected, so we may not see a big bump in the data until next month. The recent drop in virus cases and deaths in the UK, which are both now around early-September levels, and the country’s impressive vaccine rollout may, however, both be reflected in a stronger services PMI. We think that this could act as a catalyst for a move higher in the Pound, which appears to be gathering momentum following a rather challenging few weeks.

PMI data out of both the Eurozone and US will also be closely scrutinised by the market. These indicators have diverged in the past few months and we see it as likely that the data will continue to show the US economy powering ahead while the Euro Area barely posts positive expansion. With this outperformance already largely priced in, in our view, the reaction in the FX market could be relatively muted.

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Thursday’s ECB meeting - What to expect? - 21/04/21

Wed, 21 Apr 2021 09:39:54 GMT

Lagarde expected to state outlook for the bloc’s economy remains ‘broadly balanced’.

This Thursday’s meeting of the European Central Bank is expected to be uneventful for the FX market, but will be closely watched by investors nonetheless.

At the March meeting, the ECB stepped up its efforts to rein in rising European bond yields and support the economic rebound in the common bloc by announcing it would be front-loading the pace of purchases under its emergency pandemic asset purchase programme (PEPP). Since the March meeting, risks to the Euro Area economy have remained finely balanced. On the one hand, macroeconomic data has been largely resilient and there is now broad optimism surrounding the EU’s vaccination programme. On the other, virus cases have risen again and many nations in the bloc have either extended or reintroduced tougher lockdown measures.

With this in mind, we expect President Lagarde to state that the outlook of the bloc’s economy remains ‘broadly balanced’. We also think that the Governing Council will reiterate its commitment to maintaining a greater pace of asset purchases in Q2, and see little risk of a return to the previous 60 billion Euros a month level until either the June or September meetings. Regarding the future of the PEPP, we think that it is far too early for the bank to begin discussing policy normalisation, particularly given Euro Area inflation remains well short of target. The reaction in the market is, therefore, likely to be relatively muted.

Dollar claws back losses amid spike in virus cases in Asia

Prior to tomorrow’s ECB meeting, the euro consolidated some of its gains, having jumped back above the 1.20 level versus the US Dollar during Asian trading on Tuesday morning. The surge in new virus cases in parts of Asia, and indeed around much of the globe has caused investors to favour the safe-havens once again in the past 24 hours. While the general view towards the vaccine rollout around the world is an upbeat one, it remains the case that most nations have not yet vaccinated enough of their populations for restrictions to be unwound materially without leading to an increase in fatalities. India, for instance, has seen caseloads and deaths skyrocket in the past few weeks, while Japan has tightened restrictions following another uptick in rates of infection. The vaccine rollout has shown now more than ever that the COVID-19 pandemic will not be overcome until every country has rolled out vaccines to the masses, which still remains some way off despite the impressive progress made in a number of developed nations.

GBP/USD also retraced some of its gains this morning, opening London trading on Wednesday just above the 1.39 level. There has been a handful of data releases out of the UK so far this week, although market participants have largely continued to overlook economic news in favour of pandemic developments. Tuesday’s jobs data was pretty encouraging - the jobless rate dropped to 4.9% in the three months to February, below the 5.1% that investors had priced in. Yet, with almost 5 million people still enrolled on the government’s furlough scheme at the beginning of the year, we will still not really get a true read on the state of the labour market until later in the year when financial support schemes are wound down and the economy is reopened.

Investors will now be keeping one eye on the latest PMI and retail sales numbers out on Friday, both of which have the potential to shift Sterling this week.

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Risk assets surge on strong economic data & falling yields - 19/04/21

Mon, 19 Apr 2021 10:54:33 GMT

USD suffers as bond yields retreat

The somewhat puzzling retreat in US bond yields last week, together with very strong economic data, buoyed risk assets in general, including equities, commodities and credit.

The Dollar did not fare well, unsurprisingly, and fell against every other G10 currency and major emerging market currency. Strength in oil and copper prices is proving particularly supportive of Latin American currencies and the Ruble, which managed to shrug off the announcement of a new battery of US sanctions against Russia.

The Euro will be the main focus for the week ahead. The ECB meets on Thursday. No changes in policy are expected, and the focus will be once again on communication, particularly regarding the PEPP sovereign bond purchase programme. April ́s flash PMI surveys of business activity will then be released on Friday. This will be the first serious test of the Euro's fledging rally, as these are the most critical leading indicators of economic activity in the Eurozone.

GBP

Monthly GDP data out of the UK was consistent with expectations for a contraction in the first quarter, though the details were slightly better than feared. Markets looked through the badly lagging data, and Sterling traded in line with the Euro, rising modestly against the US Dollar on the back of lower US yields.

This week, the labour market should not move markets as it does not reflect the reopening of the UK economy. More important will be the PMIs of business activity on Friday and inflation data on Wednesday. The former in particular should show a healthy rebound, reflecting the April reopening measures.

EUR

The recent pullback in yields will provide a welcome breather to the ECB as it tries to keep financial conditions at a very accommodative level. Consequently, we do not expect much to change in ECB communications at the Thursday meeting, where we expect Lagarde to sound noncommittal about further expansions of the PEPP sovereign debt purchasing facility.

The PMI indices Friday are setting up to be the event of the week. Most strategists expect a retreat after last month ́s surprising strength, but it is possible businesses are already looking to the progressive lift up of the lockdowns and we could see an upside surprise, which would provide fuel for the recent Euro rebound.

USD

The slate of impressive economic data out of the US failed to have the expected impact on US yields, which actually pulled back, leaving the ten-year Treasury paying just 1.6%. There were positive surprises across the board, including inflation, jobless claims, housing starts and a huge jump in retail sales, the latter yet another sign of roaring demand. The Dollar sold-off on the wake of increasing risk appetite worldwide and lower yields.

We expect this week's mostly second tier data to further confirm the strength of the US recovery. US yields will be a wildcard, although we expect continued strength in data to fuel another increase there towards the top of the recent range.

CHF

The Franc sold off against the Euro last week and underperformed most of its G10 peers, but the scale of the currency’s weakness was quite limited. It would probably be more significant if not for the drop in long-term US yields, which is a positive for low- (and negative-) yielding assets such as the Franc. Nonetheless, sentiment towards the currency is becoming increasingly less favourable. One indication of that is a shift in speculators’ futures positioning visible in the CFTC data. Net longs have dropped to their lowest level since March last year, and as sentiment towards risk improves they are now highly likely to turn negative in the coming weeks.

With domestic macroeconomic data scarce, arguably the most interesting news last week was the removal of Switzerland from the US Treasury list of currency manipulators, where it was placed in December. A potential return to the list seems unlikely for now, especially given that the SNB has been less active in the market of late.

This week will be similarly data-light as the previous one, hence we’ll focus on the news from the country’s pandemic front, where rising case numbers haven’t yet caused any significant uptick in deaths and vaccinations are gathering pace.

AUD

The Australian Dollar benefitted more than most from the broad sell-off in the greenback last week, rallying to its strongest position since mid-March this morning. The move has been fuelled almost entirely by a weaker US Dollar and general improvement in risk sentiment. Last week’s Australian labour report came in stronger-than-expected, although the reaction in the FX market to its release was actually fairly limited. A net 70.7k jobs were created in Australia last month, more than double the market consensus, but a slight slowdown from a month previous. Investors were not bowled over as this merely reinforces the narrative that the Australian economy is on course to continue its robust recovery in the coming months as restrictions are eased and vaccines are rolled out to a larger percentage of the population.

The RBA minutes from the bank’s most recent meeting will be made available on Tuesday. We don’t envisage any major surprises here, so expect AUD to be driven largely by shifts in broader investor sentiment this week.

CAD

The Bank of Canada’s April monetary policy meeting this Wednesday will be the main focal point for investors this week. No change in rates is expected, but there has been growing speculation in the market that the BoC could be the first major central bank to begin unwinding its asset purchasing programme. We think that the market has perhaps got slightly too ahead of itself, particularly given that rates of infection in Canada are moving higher again and tougher restrictions are being reintroduced across much of the country. There are concerns that the latest wave could be the worst of the lot and that provides a far from ideal backdrop for an unwinding in stimulus measures. The BoC may instead decide to wait until a greater share of the population has been vaccinated before it makes any sweeping policy changes, which could be a bit of a CAD negative.

CNY

Friday’s first quarter GDP data out of China was a disappointment, with Asia’s largest economy growing by a smaller-than-expected 0.6% quarter-on-quarter versus the 1.5% consensus. While headline year-on-year growth of 18.3% was the fastest on record, this is merely a reflection of the lower base effect given that activity in the first quarter of 2020 halted to a near-stop following the imposition of tough lockdown measures in China. While the outlook for the rest of the year remains favourable, in our view, we think that this data may be an indicator that momentum is slowing somewhat, which does not bode particularly well for the global economy in general.

Investors did, however, largely overlook the downside surprise and instead continued to focus on the drop in US yields, sending the USD/CNY cross towards the 6.50 level this morning - its lowest level since mid-March. Next up for CNY will be the PBoC’s interest rate announcement on Tuesday.

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US Dollar slips to four-week lows on dovish Federal Reserve - 15/04/21

Thu, 15 Apr 2021 09:48:25 GMT

Euro continues to march higher against a broadly weaker US Dollar

The Euro continued to march higher against a broadly weaker US Dollar on Wednesday, with the greenback slipping to its weakest position in four weeks against its major counterparts.

We think that the move higher in the common currency is slightly counterintuitive given the balance of risks, but investors are clearly in a generally optimistic mood and are instead favouring riskier currencies at the expense of the safe-havens. Recent data out of the US economy has been impressive, but this appears to already be largely priced in and investors have been left unimpressed by the Federal Reserve that has continued to turn a blind eye and strike a dovish tone. FOMC chair Powell said yesterday that the bank would actively seek inflation moderately above 2% for ‘some time’ - another indication to market participants that policymakers will not in any way rush to raise interest rates in response to rising domestic prices.

The key physiological 1.20 level is up next for EUR/USD and given the sizable downside risks still faced by the Euro Area economy it may be quite a difficult resistance level to break through. Lets not forget that the European continent is still grappling with a third wave of infection and has so far not vaccinated enough of its population to ease measures without incurring an increase in virus-related deaths. There has been a general improvement in optimism towards the European vaccine rollout, but doubts over both the AstraZeneca and now the Johnson & Johnson vaccines are significant hindrances. The suspension of the one-shot Johnson & Johnson vaccine is a particularly big blow given that it was cited by many as the jab that could kick the bloc’s so far sluggish vaccine rollout into a higher gear. This may, of course, still prove to be the case - the blood clots reported following the jab have so far been incredibly rare and the suspension is likely to prove temporary.

This afternoon’s US retail sales data for March will be the main focal point for investors today. Sales dropped fairly sharply in February, although this was merely a consequence of the sharp jump in consumer spending in January following the disbursement of stimulus funds from the US government. Economists are eyeing a strong rebound in sales of around 6% month-on-month, although whether such an impressive reading will be enough to support the dollar remains to be seen given the market appears to have already priced in much of this economic outperformance.

Meanwhile, Sterling continues to hover just below the 1.38 level versus the Dollar. We attribute the modest move higher in the Pound to a weaker greenback more than anything else. The UK currency actually lies around the bottom of the 1-week G10 performance tracker, partly a result of concerns surrounding the AstraZeneca vaccine, which Britain relies heavily on. A complete absence of economic news out of the UK in the next few days is unlikely to lead to much volatility in GBP, which we expect to trade largely rangebound in the coming couple of sessions.

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Dollar Rally Weakens As US Bond Market Stabilises - 12/04/21

Mon, 12 Apr 2021 09:31:12 GMT

Selling abates and yields in Treasury bonds appear to be range bound

US bond selling has abated and yields in Treasury bonds appear to be range bound for now, with the 10-year rate oscillating between 1.60% and 1.75%.

The dollar had a mixed week, pulling back against every G10 currency except the pound as well as most emerging market currencies. We do not expect the rise in interest rates to stop here, but we will need higher inflation numbers to propel the next move upwards. Meanwhile, expectations of an improvement in the Eurozone vaccination rollout in the second quarter are driving better sentiment in euro trading. It’s worth noting the massive clearing out of short USD positions among future speculators, which means that short covering will not support the dollar in the near-term.

The Central Bank of Turkey meets Thursday and will receive an unusual amount of attention after the sacking of the previous orthodox Governor by President Erdogan. On the economic front, we will be paying very close attention to the March inflation numbers out of the US, where we think supply chain disruptions and surging demand create conditions for an upward surprise.

GBP

Sterling experienced a mild bout of selling last week, as the PMIs of business activity were revised modestly lower and the UK’s vaccination rollout slowed as expected following supply disruption of the AstraZeneca vaccine.

However, its performance so far in 2021 has been quite strong, and given the positive fundamentals and the overall success of the COVID vaccination programme in the UK we expect this weakness to be short lived. New daily virus cases and deaths have also both fallen sharply in the UK and restrictions are being eased as scheduled today with the reopening of pubs, restaurants, shops and gyms. Some near-term political jitters may delay a meaningful rally in the pound as we get closer to the 6th May Scottish parliamentary elections.

EUR

Last week brought mixed economic data out of the eurozone. The PMIs experienced an unusually large upward revision and German factory orders were strong, but February employment data came in weaker-than-expected. We think the former is more meaningful as the latter is a lagging data point.

There are increasing signs that the vaccine rollout in Europe may improve significantly from now on, and we see room for the euro rally to continue now, especially since the short position overhang on the US dollar appears to have been cleared out. The one shot Johnson & Johnson vaccine is set to be rolled out in the EU next week, which may help significantly speed up the so far very sluggish vaccine rollout in the bloc.

USD

Among the second-tier economic indicators released last week in the US, we would focus on the Producer Price Index for March, a measure of price pressures at the wholesale level. This was a significant surprise, coming in much higher than the market had expected and confirming our view that price pressures are building in the US.

Bond yields are taking a breather for now, but a potential upward surprise in the consumer inflation numbers out this week may provide a catalyst for another test of the top of the range there. Aside from that, we think that retail sales and industrial production data, both out on Thursday, could shift the US dollar in the second half of this week.

CHF

The Swiss franc was the second-best performing G10 currency last week after the Swedish krona, with the currency dropping below the 1.10 level against the euro - its strongest position since early-March. The Swiss currency seems to be supported both by the stabilisation in long-term US yields as well as improving sentiment towards the European region. It's also performing better than its Japanese safe-haven counterpart, which could be explained by the differences in the virus situation in both countries. Japan has recently seen a sharp increase in new cases and announced tighter restrictions in Tokyo, Kyoto, and Okinawa. The situation in Switzerland, on the other hand, is much more stable.

We think the Swiss currency could have some more room to appreciate in the short-term, although the currency’s safe-haven status could limit gains somewhat.

AUD

The Australian dollar was stuck in a narrow range versus the USD last week amid an absence of any domestic major market moving information. The Reserve Bank of Australia kept interest rates unchanged as anticipated last week, although struck a relatively upbeat tone on the state of the economy. Policymakers noted their expectations for above-trend growth this year and next, saying that the recovery was already well underway and had so far been better-than-expected.

The monthly labour report for March will be released this coming Friday. Investors are expecting a slight slowdown in the pace of job creation, but for the unemployment rate to tick down again by another 0.1 p.p to 5.7%. Aside from that, investors will be paying close attention to the country’s vaccine rollout, which has so far been a rather disappointing one, with only a little over 4 doses per 100 people so far administered in Australia since the programme began.

CAD

A much better-than-expected labour report for March helped support the Canadian dollar in the back half of last week, reversing an earlier sell-off in the currency versus the USD. A total of 303k net jobs were created in the country last month, which marks the largest number of jobs added since September. While this bumper month of job creation is undoubtedly an encouraging one, the imposition of fresh lockdowns in some regions suggests that this trend could reverse in April. A number of areas in Canada have experienced a jump in virus caseloads in the past couple of weeks or so, leading to the reimposition of curfews and closure of businesses in the likes of Ontario and Quebec. Unlike its neighbouring US, Canada appears to have not yet vaccinated enough of its population of withstand an increase in cases without tightening restrictions, although a recent acceleration in the vaccine programme is undoubtedly encouraging.

With little in the way of major macroeconomic data out of Canada this week, we think that CAD will likely be driven largely by developments elsewhere.

CNY

The yuan hovered around the 6.54-6.55 level versus the US dollar throughout all of last week. CNY has held up relatively well so far to escalating geopolitical tensions between the US and China in recent days. US-Sino tensions ramped up last week following the news that the US had added an additional seven Chinese supercomputing entities to its economic blacklist, the latest saga in an ongoing spat between the two nations that stemmed back to the early days of the Trump administration.

We think that there is a good chance that the yuan could break out of its recent range versus the dollar this week given the host of economic data releases scheduled for release in China. We will be paying particularly close attention to tomorrow’s trade data and Friday’s retail sales and industrial production figures for March. Friday will also see the release of the preliminary Q1 GDP data, which is expected to show annual expansion of more than 18% in the first three months of last year compared to Q1 2020 and the height of the COVID-19 lockdowns in China. Given that this is a lagging indicator it may, however, be partly overlooked by investors.

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Sterling drops to 2 month lows at 1.15 following sharp sell-off - 09/04/21

Fri, 09 Apr 2021 09:17:16 GMT

Pound falters but Euro continues 8-day rally vs US D ollar

Sterling suffered further losses on Friday morning, briefly slipping to its weakest position in two months against the US Dollar amid supply concerns over the AstraZeneca vaccine.

Up until recently, the Pound had been the best performing currency in the G10 in 2021, with investors piling into Sterling following the UK’s impressive vaccine rollout that has so far seen it administer at least one jab to almost half the population. Supply issues of the AstraZeneca vaccine have, however, halted proceedings somewhat in the past few days, with the pace of daily vaccinations slumping to its lowest level in almost a month. While this pace of vaccinations continues to outstrip the EU (0.50 per 100 people per day vs. 0.35), it is now almost half the pace of the rollout in the US (0.90 per 100 per day).

The disbursement of the Moderna vaccine in Wales earlier this week is, of course, an encouraging sign. The jab has not yet been rolled out in the rest of Britain, but the first doses are expected to be administered in England in the next week or so. This should help share the load currently being carried by the Pfizer and AZ vaccines, particularly given that the latter will not be given to those under the age of 30 in the UK amid concerns over very rare blood clots. A further slowdown is, however, likely in the coming days and that is being reflected in the pound, which fell below the 1.37 level vs. the dollar this morning for the first time since the end of March.

Euro continues to march higher as data beats consensus

The Euro once again moved in the opposite direction to Sterling yesterday, briefly rising back above the 1.19 level versus the US Dollar.

Economic data out of Europe has been slightly better-than-expected this week, which may have provided a bit of support for the common currency. The March business activity PMIs were revised higher on Wednesday, while yesterday’s German factory orders data came in comfortably above consensus (5.6% YoY vs. 1.4%). US initial jobless claims also unexpectedly increased in the week to 2nd April (744k vs. 680k expected). It remains clear to us that the US economy is continuing to comfortably outpace the Eurozone, but recent data suggests that this gap in performance may not be as significant as some of the market had priced in. Meanwhile, there was little reaction to the release of the ECB meeting accounts yesterday, which stressed that policy would remain accommodative for as long as necessary with policymakers seeing little risk of overheating.

Producer price index data out of the US will be the only real economic data release today, in what is likely to be a relatively quiet end to the week.

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Fed minutes strike dovish tone despite US growth rebound - 08/04/21

Thu, 08 Apr 2021 09:32:20 GMT

Officials remain cautious about ongoing risks posed by COVID-19

The Federal Reserve continued to strike a dovish tone in its March meeting minutes released yesterday, despite the broad uptick in US economic activity brought about by the country’s impressive vaccine progress.

According to the minutes, officials remain cautious about the ongoing risks posed by the COVID-19 pandemic, and continued to stress that the bank will provide ongoing support to the economy until it is on a more secure footing. They stressed that the Fed remains a long way off reaching its goals of on-target inflation and full employment and there was little sense of urgency around the need to begin normalising monetary policy any time soon. Again, there was also little concern shown for the recent increase in US bond yields, which were instead viewed as a sign of a general improvement in the economic outlook.

With nothing particularly noteworthy out of yesterday’s FOMC minutes, the market reaction was fairly limited. Most major currencies ended London trading on Wednesday roughly where they began it, although a clear exception to this was Sterling. The Pound has been on a clear downward trend in the past few sessions amid a modest reversal in vaccine euphoria that had sent Sterling to the top of the G10 FX performance tracker for 2021. Concerns largely centre around the safety of the AstraZeneca vaccine, which the UK has relied heavily on since its vaccination programme began in December. According to regulators, the vaccine remains safe for use, although unusual blood clots will now be listed as a possible ‘very rare’ side effect.

The UK will continue offering the jab, although it will use alternatives for those under the age of 30 with no pre-existing health conditions as a precaution, i.e those that are at extremely low risk of becoming seriously ill with the virus. Many nations in the EU have taken a far more cautious approach, with the likes of Spain, Italy, Belgium, France and Germany all restricting the jab to those over the ages of either 56 or 60. Given the extraordinary rare occurance of these blood clots, the approach adopted in the EU appears overly cautious and may do more harm than good, particularly given how poorly the bloc has done with its vaccine rollout so far.

Investors haven’t seemed to punish the common currency too much so far this week, with EUR/USD continuing to hover around the 1.19 level this morning, its strongest position in over two weeks. We don’t expect too much new information to come out of this afternoon’s European Central Bank meeting accounts, although currency traders will be keeping one eye on its release. Aside from that, this afternoon’s US initial jobless claims data should give us a good indication as to the current health of the US labour market.

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Sterling plummets and Euro strengthens after Easter break - 07/04/21

Wed, 07 Apr 2021 09:17:26 GMT

Sterling falters, Euro recovers ground after Easter break

The Euro recovered some of its recent losses versus the US Dollar on Tuesday, although Sterling stumbled as traders returned to their desks following the long Easter holiday.

The common currency fell to its weakest position since early-November at the end of March, although April has seen a reversal in this trend. There has been no real major catalyst for the move higher in EUR/USD, although investors perhaps view the currency as slightly oversold and may have already largely priced in the diverging vaccination efforts of the US and European Union. A move higher in Europe's STOXX 600 to its highest ever level has also provided some support for the Euro and suggests that market participants may be overlooking the third wave of infection in Europe.

This morning’s Euro Area PMIs for March were also largely encouraging, suggesting that the expected downturn in Q1 may not be a bad as first feared. The bloc’s composite index was revised higher from the preliminary estimate to 53.2 from 52.5, in large part due to a broad uptick in services activity last month. The near term outlook does, however, still remain grim, and additional losses in the Euro from current levels cannot be fully ruled out. Most of the European continent remain under strict lockdown measures, with many tightening restrictions over the Easter period, notably in France and Italy where infection levels have increased at an alarming rate in the past few days.

On the other end of the performance spectrum yesterday was Sterling, which ended as the worst performer in the G10 on Tuesday. Again, the move may simply be driven by investors unwinding previous bets in favour of the currency and profit-taking following Sterling’s rally of the past couple of weeks. News out of the UK has actually continued to be largely positive. New virus case numbers and COVID-related deaths continue to drop sharply, vaccination progress is going well and the UK will go ahead as planned with re-opening retail and hospitality venues this coming Monday. A slump in the pace of daily vaccinations since the start of the month may be partly causing the sell-off in the Pound, although news that the Moderna vaccine will begin roll out in the UK today will no doubt lift investors’ spirits.

The next couple of days looks void of any real major data releases out of either the EU or UK. We will instead be paying close attention to this evening’s FOMC meeting minutes, where we expect policymakers to reiterate their view that rate hikes in the US remain some way off.

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Risk assets continue to rally despite higher bond yields - 06/04/21

Tue, 06 Apr 2021 10:38:39 GMT

US stocks still moving higher as bond yields do the same

In a holiday-shortened trading week risk assets continued to rally, led by US stocks, seemingly ignoring the clear upward trend in global rates.

A strong payrolls report out of the US was no help to the dollar, which sold-off against every other G10 currency. Emerging market currencies joined in the party, led by the Turkish lira, although nearly every major one managed to post gains of more than 1% for the week.

We expect the positive tone in financial markets to remain in place for quite a while yet. The combination of zero or negative rates in developed markets, a storm of fiscal support hitting domestic economics, and clear though uneven progress in the vaccination front should keep risk assets well supported while bonds continue to fall, particularly in the US. We are particularly positive on emerging market currencies, which are both cheap and well placed to capitalise on the current environment.

GBP

Sterling outperformed every other G10 currency and a few emerging market ones last week. In addition to the strong vaccination rollout there was a modest upward revision to the growth numbers for last year. The current risk-seeking environment is proving a boom for the pound, which has now recovered all of its pandemic losses against the euro and quite a bit more than that against the US dollar.

This will be a shortened trading week and there are no significant UK data releases or policy decisions, so we expect sterling to continue following the path of least resistance upwards.

EUR

The main news last week was a disappointing print in March inflation that saw the core figure (excluding volatile items) pull back to 0.9% on the year. It is clear that the fresh wave of lockdowns is restricting consumption and delaying any onset of inflationary pressures in the Eurozone.

The highlight for this week will be the release of the ECB meeting minutes and industrial production numbers out of Germany, France and Spain, which should be reasonably strong as the manufacturing sector is less affected by the lockdowns. The impact on currency markets should be limited, however.

USD

The successful vaccination rollout in the US and the progressive easing of the COVID restrictions is impacting the economy faster than predicted. The payrolls report for March was much stronger than expected. The US economy restored a net 916,000 jobs in the month, much higher than consensus and the strongest month of net job creation since August

With the enormous stimulus package still to hit and a new infrastructure package on the horizon, economists are busy bringing their estimates for a full recovery from the pandemic forward in time. We think it is noteworthy that the dollar is not rallying and actually trending modestly lower in spite of rising US yields and a barrage of positive economic news.

CHF

The safe-haven franc continues to hover close to its recent lows against the euro. Domestic forward-looking indicators published last week showed a sharp increase in March, with the key KOF leading indicator jumping to its highest level in more than a decade. This suggests that the Swiss economy is on the verge of a significant rebound from the pandemic shock.

That being said, it’s hard to estimate when exactly we’ll see material improvements in the economy as news from the pandemic front is mixed. New cases are on the rise, albeit the increase is not nearly as dramatic as in some neighboring countries. Additionally, COVID-related deaths remain low, giving hope that an easing of restriction measures could come fairly soon.

This week’s economic calendar for Switzerland is quite empty. We’ll focus primarily on the latest COVID numbers and shifts in global sentiment.

AUD

The Australian dollar has spent much of the past week stuck within a very narrow 1% band versus the US dollar, largely due to the lack of major market moving domestic news out last week. Friday’s retail sales and trade balance data was for February and was, therefore, largely overlooked by investors.

Meanwhile, the Reserve Bank of Australia stuck to its guns this morning, keeping rates unchanged at record lows and stressing that the first post-covid rate hike remains a long way off. The bank continues to remain concerned about the uneven recovery in the economy, while stating that a sustained move higher in both wages and inflationary pressure would not take place for a number of years. They did voice optimism over a recovery in the Australian housing market, although there’s no reason to believe that this will materially alter the bank’s view on policy. In the RBA’s March meeting minutes, policymakers suggested that rates could remain unchanged until as far out as 2024.

CAD

The Canadian dollar remained one of the better performing currencies in the G10 last week, partly due to growing expectations that the Bank of Canada will slow the pace of purchases under its asset purchasing programme later this month. Strategists are eyeing an easing in the pace of purchases to C$3 billion from C$4 billion when the BoC meets in just over two weeks time, much sooner than both the Fed and ECB. Pessimism of a few weeks ago has turned to optimism. Oil prices remain well supported around the $63 a barrel mark, while the country’s vaccination programme is beginning to pick up pace - around 15% of the population have received at least one vaccine doses, which is now slightly more than the EU.

This week should be a much busier one for financial markets in Canada, with a handful of major macroeconomic data releases. We will be paying particular close attention to Friday’s monthly labour report for March, which is expected to show a slowdown in job creation to 90k a month.

CNY

The yuan consolidated its losses last week following the currency’s recent sell-off versus the US dollar. Data out of China has continued to point to a robust economic rebound. This morning’s services PMI from Caixin beat expectations, jumping to 54.3 from 51.5, its highest level in three months. Investors are, however, beginning to focus on a closing in the gap between China’s economy and that of the US. The rapid vaccination rollout in the latter, combined with the disbursement of massive fiscal stimulus from the US government, may pressure the USD/CNY cross higher in the coming weeks. China is lagging quite a way behind on the vaccination front, having so far only administered doses to less than 10 per 100 people, versus around 50 in the US.

With few major economic data releases on the calendar in China this week, the yuan could be driven by events elsewhere. That being said, we will be keeping one eye on Friday’s inflation data for March.

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Investors flock to safe haven USD despite Biden $3 trillion stimulus programme

Wed, 31 Mar 2021 09:25:07 GMT

EUR/USD weakens on Dollar strength and European vaccine woes

The main themes in the FX market of the past few weeks continued to play out once again on Tuesday, namely a broadly stronger US Dollar and an underperformance in the Euro.

Investors continue to bet on a rapid economic recovery in the US, where vaccinations are taking place at a very fast pace and don’t appear to be set for a slowdown any time soon. The passing of President Biden’s $3 trillion stimulus programme suggests that growth is set to boom in the US in the second quarter, while bond yields continue to rise with the 10 year Treasury now back above 1.7%. Biden is expected to outline how the US government intends to fund the $3 trillion package later today, which will likely include significant tax increases. This would ordinarily be a negative for the US Dollar, but currency traders appear unperturbed and far more encouraged by the pace at which virus restrictions are being unwound.

The story couldn’t be more different in Europe and that is being reflected in a weaker EUR/USD. Vaccinations continue to meander along at a very sluggish pace in the EU, in large part due to much higher vaccine hesitancy in the bloc than in either the US or the UK. The rollout of the AstraZeneca jab in much of the continent is becoming nothing short of farcical at this stage and this has hardly helped improve confidence in its safety among the European population. Germany, which initially only approved the AZ jab for those under the age of 65 before rolling it out to the rest of the population earlier this month, has now restricted its use in the under 60s just days after restarting its rollout following a temporary suspension. Concerns surrounding the triggering of rare blood clots remains unfounded and the benefits of the jab continue to far outweigh any negatives that may or may not arise according to regulators.

Italy’s Prime Minister Mario Draghi attempted to restore confidence in the jab yesterday by receiving the vaccine, but the damage already appears to be done. Reports out of France earlier this month suggest that around three-quarters of AZ stock are going unused, with Germany and Italy said to be using only around one-third of their supply. All the while the European Union has continued to criticise AstraZeneca itself for not providing enough doses and has threatened to ban exports of the vaccine to those nations that have made better progress than the common bloc. Decision making by authorities in the EU, on the surface, appears to be increasingly driven by political motives more than anything else. This is a worry for investors given the bloc appears to be heading for a third wave of infection that could be the most deadly of the lot. While the Euro has recovered some of its losses this morning, it continues to hover around its lowest level since November versus the US Dollar - we think that further moves lower could be on the cards in the near-term before any meaningful gains can take place.

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53% of UK adults now vaccinated and GBP soars higher

Fri, 26 Mar 2021 10:35:01 GMT

Sterling outperforms on rapid UK vaccine rollout

It is generally fairly unusual for the Euro and Sterling to trade in opposite directions versus the US Dollar, but that is exactly what happened on Thursday. The GBP/USD cross spent much of trading rallying back towards the 1.38 level, snapping a five-day losing streak versus the greenback. The UK’s impressive vaccine rollout continues to underpin the Pound and raise hopes of a swift return to normal by the summer. Not only has the UK now administered at least one vaccine dose to around 55% of the adult population, but it will also imminently leapfrog the EU in terms of second doses administered, despite leaving 12 weeks between doses rather than 3. The market will, of course, be wary that supply is set to slow next month, but for now vaccinations are continuing to take place at an extraordinary pace, which can only be good news for Sterling.

This morning’s retail sales data for February was in line with expectations (2.1% MoM), so there wasn’t too much reaction in the Pound. We think that the latest vaccine news will remain the chief driver for the UK currency in the coming weeks.

Euro falls below $1.18 as US economy powers ahead

The Euro dropped below the 1.18 level versus the US Dollar for the first time since mid-November on Thursday as the latest data continued to show a divergence in economic performance between the US and Euro Area.

With virus cases rising again and lockdowns either being extended or reintroduced, the outlook for the Eurozone economy is pretty grim in the first quarter. By contrast, the US economy continues to rebound well and looks firmly on course to outperform, particularly given the country’s impressive vaccine rollout that has now seen more than a third of the adult population receive at least one jab. This has allowed a pretty meaningful unwinding in restrictions in the US, particularly compared to Europe where only around 10% of the population have so far received their first dose.

The process of reopening is already being reflected in macroeconomic data. The US fourth quarter GDP number was revised higher yesterday, up to 4.3% annualised from the 4.1% initial estimate. Jobless claims also dropped sharply in the week to 19th March, down to 684k from the previous week’s 781k, its lowest level in more than a year. Personal income data out this afternoon will be a bit of an anomaly and is expected to show a sharp drop in February of around 7% month-on-month. This will, however, likely be largely overlooked by investors given that it is merely a result of the bump in income experienced in January following the disbursement of the US government’s stimulus payments.

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Investors price-in slowdown in UK vaccine supply - 25/03/21

Thu, 25 Mar 2021 11:42:33 GMT

Pound range bound ahead of European Council meeting

Sterling spent much of trading yesterday stuck in a narrow range. It appears that investors have now largely priced in the expected slowdown in UK vaccine supply in April - since the announcement the Pound has been among the worst performers in the G10. The pace of vaccinations in the UK in the past week or so has, however, increased sharply. Around 55% of Britain’s adult population has now received at least one vaccine dose, albeit the pace of increase in this is likely to slow in the coming weeks as supply drops and the administering of second doses becomes higher priority.

Focus today will be firmly on the European Council meeting, in which European leaders are expected to discuss how supply of the various vaccines can be increased in the bloc. High on the agenda will also be whether controls on vaccine exports to countries such as the UK are required. While we think that a full-blown export ban of vaccines to the UK is incredibly unlikely, investors will be watching very closely.

Euro slips to four-month lows on tougher EU lockdowns

The Euro slid to a four month low versus the US Dollar on Thursday morning, while Sterling also retreated to its lowest level since early-February, as investors continued to fret over rising virus cases in the European continent.

New cases of the COVID-19 virus have continued to increase in many EU nations, leading to the reintroduction of stricter lockdown measures. Germany’s plan to enforce a tougher five day lockdown over the Easter period was reversed in a surprise move yesterday, just one day after the measures were announced. This has done little to calm investors, particularly given the impact it is likely to have on further worsening confidence in the German government’s response to the pandemic. The current measures have, at least, been extended until 18th April, with Germany joining the likes of France and Italy in enforcing stricter shutdowns as caseloads begin to rise aggressively again.

Given the divergence witnessed in both case numbers and vaccinations between the US and Euro Area, a move lower in the common currency in the near-term seemed inevitable, which is exactly what we’ve had so far this week. Following the recent suspension of the AstraZeneca vaccine in a handful of EU nations, the pace of daily vaccinations in the bloc appears to have stalled and is now around one-third of that in the US and 3.5x less than the UK. This has ramped up bets in favour of a fairly significant outperformance in the US economy relative to the Eurozone, with the latter firmly on course to enter into contraction in the first quarter of the year. The US, on the other hand, continues to power ahead, with revised GDP data out this afternoon expected to confirm that the country expanded by more than 4% annualised in Q4 2020.

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EU’s threat to block vaccine shipments to the UK sees GBP fall to 6 week lows - 24/03/21

Wed, 24 Mar 2021 13:50:26 GMT

Sterling slides to six-week lows on EU vaccine spat

The US Dollar continued to advance against its major peers on Tuesday, rising to its strongest position in four months, as investors sought the safety of the currency amid concerns over rising virus cases in Europe.

Sterling has been among the currencies to bear the brunt of the sell-off in major risk assets, with the Pound briefly collapsing below the 1.37 level this morning - down more than 1% for the week so far. Tensions surrounding the EU’s threat to block vaccine shipments to the UK has slightly soured sentiment towards Sterling. The topic of vaccines will be high on the agenda at this Thursday’s European Council meeting. While we see an export ban as unlikely, the threat of one, combined with the news that vaccine supply is set to drop in April, has been enough for the Pound to lose its mantle as the best performing G10 currency in 2021.

This week is a very data heavy one in the UK. A larger than expected drop in the unemployment rate to 5% from 5.2% provided little assistance to the Pound yesterday. A sharp decline in February inflation data out this morning has also weighed on the currency, which is currently trading around its weakest position since the first week of February on the Dollar. The headline rate of consumer price growth slipped to just 0.4% year-on-year last month, well short of the 0.8% expected. This will likely quash any lingering thoughts that the Bank of England might be in a position to raise interest rates in the UK any time soon.

Having said that, the March PMI numbers, also out this morning, provided reason for optimism, with both the manufacturing and services indices coming in much higher than consensus. The jump in the services PMI to a comfortably expansionary 56.8 from 49.5 is a particularly welcome development and suggests that the downturn in activity in the first quarter may not be as bad as first feared.

Euro Area PMIs rise sharply, despite threat of third wave

The Euro has similarly lost ground versus the Dollar so far this week, although its sell-off has been slightly more contained. The ability of the common currency to better withstand losses is slightly hard to fathom, although it may partly be due to the fact that the Euro has already underperformed most of its major peers so far this year. Much better-than-expected European PMI numbers out this morning have also provided the Euro with a bit of assistance. Germany and France saw increases in both the services and manufacturing indices, helping to lift the Euro Area’s composite PMI to an eight month high 52.5. Fears over a third wave of infection in the bloc and the possibility of prolonged lockdowns may, however, drag this number back into contractionary territory in April. A host of countries in the EU have now either extended lockdowns, or reinforced restrictions in an attempt to allay the recent surge in infection, including Germany, France and Italy.

Attention this afternoon will now shift to a number of economic releases out of the US, including the March PMIs and durable goods orders. FOMC chair Powell will also continue his Congressional testimony, having yesterday reiterated his recent comments that any near-term increase in inflation will be transitory and therefore overlooked by the bank.

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Europe braces for third wave and risk currencies stumble - 23/03/21

Tue, 23 Mar 2021 10:40:31 GMT

European vaccine rollout still woefully slow compared to UK and US

The US Dollar was broadly stronger against its major peers on Tuesday morning as worrisome signs of rising virus infection in Europe triggered another bout of risk aversion in the FX market.

Most of the European continent is now either already in the midst of a third wave of infection or bracing for one in the coming weeks. With vaccine progress painfully slow compared to the US and UK, nations within the EU have not yet vaccinated anywhere near enough of the population to withstand a rise in caseloads without incurring an increase in deaths or needing to tighten restrictions. Germany has become the latest country to reintroduce tougher measures, reversing its plans to gradually reopen the economy and extending its lockdown until at least 18th April. New cases and deaths there have not yet taken off, but the sharp increase in the ‘R’ rate to above 1.3 (its highest level since early-November) is a big cause for concern. Germany’s Bundesbank has stated that the country’s economy is on course to contract sharply in Q1, but that will hardly come as a surprise to market participants.

All the while, political squabbling surrounding the distribution of the AstraZeneca vaccine continues to rage on. The EU has got to the stage where it is even threatening to block exports of AZ vaccine shipments produced within its borders to nations that have a vaccine rollout considerably higher than itself, i.e the UK. EU leaders are said to be against this proposal ahead of a summit scheduled for Thursday, so in reality this appears unlikely to come to pass. Regardless, the bloc’s overall handling of the vaccine rollout in general has been a poor one and with confidence in the AstraZeneca jab lower than ever, it is likely to take some time before any degree of immunity is built up within the population.

Sterling slides below 1.38 as AstraZeneca row continues

Despite the clear downside risks facing the Euro, the common currency continues to hold up remarkably well around the 1.19 level versus the Dollar. The same can’t quite be said for Sterling today, which has dropped by around half a percent against the USD to its weakest position since early-February. The ongoing row surrounding AstraZeneca shipments is undoubtedly providing a cause for concern, as is Boris Johnson’s comments from Monday that Europe’s third wave was likely to wash up on the UK’s shores in due course. The ace up the UK’s sleeve is that it has now administered at least one vaccine dose to 40% of the population (around half of all adults) - more than four times the same number in the EU. This gives the UK a much better chance of withstanding an increase in infection without needing to tighten restrictions or delay reopening.

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The Berkshire Exchange FX Market Report - 05/02/21

Fri, 05 Feb 2021 11:54:47 GMT

Sterling soars as bank of England eyes rapid UK recovery

Thursday’s Bank of England monetary policy meeting delivered a hawkish surprise, sending Sterling sharply higher against its major peers and back above the 1.37 verses the Dollar this morning.

Interest rates were kept unchanged, with no dissenters in favour of additional cuts. While this was not a major surprise, there were some market participants that had braced for the possibility that one or two of the more dovish members of the committee could vote for an immediate cut. Instead, the BoE struck an upbeat tone about the outlook for the UK economy. Activity is expected to contract by another 4.2% in the first quarter of the year, with Britain set to spend most, or perhaps even all of it, in a full national lockdown. Policymakers did, however, say that they expect a strong rebound in spring, with the UK’s so far impressive vaccine programme to lead to a ‘material recovery’ in household spending.

The Pound was no doubt buoyed by the Bank of England’s optimistic view of the UK economy. Arguably a bigger bounce came from their comments on the possibility of negative interest rates, something that has long been speculated by investors. Governor bailey warned high street lenders to prepare for sub-zero rates, although he ruled out such a policy in the immediate-term, stressing that a move below zero may not be necessary. We have said all along that we thought the possibility of negative UK rates are highly unlikely, with yesterday’s comments merely confirming our suspicions.

EUR/USD under pressure ahead of US nonfarm payrolls report

The recent move lower in the Euro continued on Thursday as investors remained concerned about the economic outlook for the common bloc.

Eurozone sales beat expectations yesterday, although this morning’s German factory orders for December fell back into negative territory. The biggest concern at the moment for investors is that it could take much longer for activity to return back to more normal levels in Europe than in the US, given the underwhelming vaccine progress currently being made in the bloc. Unlike in the US and UK, vaccine capacity has not really increased at all in the likes of Italy and Spain in the past month, nor has it in the past fortnight in either France or Germany, which is a bit of a concern.

We could get signs that the US is powering ahead of its European counterpart this afternoon with the release of the monthly nonfarm payrolls report for January. Following December’s surprise contraction in net employment, we think that a return to positive job creation is likely this afternoon. The tick lower in jobless claims and sharp upside surprise in the ADP employment number suggest that there is a decent chance of a larger reading than the 50,000 that economists are pencilling in. Any reading above this level could trigger another move lower in EUR/USD towards the 1.195 level.

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The Berkshire Exchange FX Market Report - 02/02/21

Tue, 02 Feb 2021 10:55:52 GMT

Sterling remains best performing G10 currency in 2021

The Pound continues to strengthen in 2021 and is currently the best performer in the G10. Britain has now administered more than 14 vaccine doses per 100 people and is now vaccinating at more than five times the pace of its counterparts over in Europe (0.58 per 100 per day). New cases have also fallen dramatically to early December lows, while deaths appear to have peaked.

Macroeconomic data out yesterday was also encouraging. The manufacturing PMI comfortably beat expectations, rising to 54.1 in January verses the 52.9 consensus. A similar upward revision to Wednesday’s services index would be a welcome development for Sterling. Meanwhile, investors will be eagerly awaiting Thursday’s Bank of England meeting. We do think, however, that this will be largely a non-event for currency markets, with no change in policy expected or any material shift in guidance. We will instead have one eye on Friday’s US payrolls report, which may well be the biggest market mover in FX this week.

Euro underperforms on sluggish EU vaccine progress

The Euro slipped around its lowest level since early-December verses the us dollar on Monday as investors fret over the economic outlook for the common bloc.

Data out this morning is expected to show that the Eurozone economy contracted again in the final quarter of last year following the reintroduction of tough lockdown measures designed to suppress the rate of the virus contagion. Signs for the near-term outlook are not particularly encouraging either. Consumer demand appears to have stalled – German retail sales out yesterday showed a quite alarming 9.6% month-on-month contraction, which is a much sharper decline than witnessed at the start of the crisis in April 2020.

Investors have also been pushing back their expectations for the timing of an unwinding in virus restrictions in the Euro Area, given the sluggish progress being made towards mass vaccinations in the bloc. AstraZeneca confirmed yesterday that they would supply an additional nine million vaccine doses to the EU in Q1, although this only takes the total quantity to half of what was originally expected. With an extension in current lockdown measures on the cards, it appears growingly likely that the Euro Area economy is heading for a double-dip recession. This is souring the near-term outlook for the Euro, which is now languishing back below the 1.21 level against the Dollar.

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The Berkshire Exchange FX Market Report - 01/02/21

Mon, 01 Feb 2021 13:37:52 GMT

Euro steady in spite of European Central Bank noises

The ECB last week reacted in the usual belated fashion to the sharp rise of the Euro and its potential effects on Eurozone inflation and economic recovery.

For now, the impact on the currency has been muted, but we expect to see many variations on the theme that the currency has risen too much, too fast in the coming weeks, which introduces short-term downside risks for the Euro. All G10 currencies lost ground against the Dollar save Sterling, buoyed by the UK´s fast progress in vaccinating its population.

Emerging market currencies were mixed, but overall, they withstood fairly well the significant sell-off in stocks and risk assets in general. The short squeezes in some stocks like GameStop have provided plenty of entertainment and lush news coverage but we expect the impact on currency markets to be negligible, given the much larger volumes and limited retail investor access to these markets.

We think that markets will focus on macroeconomic data this week. The Eurozone calendar is busy, with fourth quarter GDP growth released on Tuesday and January inflation on Wednesday. The former is expected to be negative, while the latter should rebound on technical factors in Germany, namely the reversal of a temporary reduction on German VAT and higher energy taxes. In the UK, the February meeting of the Bank of England will be held on Thursday. Finally, the US January job market report out Friday will also be closely watched.

GBP

The UK is vaccinating people faster than any other major country, and we believe this is one of the main reasons why we are seeing a relative outperformance of Sterling against the Euro in the last few weeks. Last week was no different, and Sterling rose against every other G10 currency. The Pound is currently top of the year-to-date on the G10 performance tracker with the Euro, which has been lagging well behind in its vaccination efforts, near the bottom.

Thursday’s meeting of the Bank of England should be a non-event, and the MPC will vote unanimously to stay on hold and keep its options open. We expect the Pound to continue to trade well as the prospect of an end to the lockdowns draws closer.

EUR

Eurozone central banks in the Netherlands and Finland expressed their discomfort with the speed and extent of the recent Euro rally last week – expect to see more of this in coming weeks.

Poor economic data this week should weigh on the common currency, as will continued subpar performance on the vaccination front. We expect to see a sharp one-off rise in Eurozone inflation this week, largely due to technical factors in Germany. Markets should pay more attention to the preliminary fourth-quarter GDP growth data on Tuesday. We think that there is room for a downside surprise in the data and we may see Euro weakness as a result.

USD

The recent negative correlation between Dollar performance and risk assets weakened this week. While stocks worldwide tumbled, the US Dollar failed to rally significantly against most other currencies.

The key payrolls report for January comes out on Friday. Markets are expecting an essentially flat report, both in terms of the unemployment rate and the number of jobs created or lost in January. The lack of historical precedent makes it harder than ever to make a prediction, but we are on the side of a positive number given the absence of generalised lockdowns in the US in January.

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The Berkshire Exchange FX Market Report - 28/01/21

Thu, 28 Jan 2021 15:04:12 GMT

Euro under pressure as ECB official talks up rate cut chances

The Euro sold-off fairly aggressively versus its major peers on Wednesday following some unexpectedly dovish comments from a European Central Bank member.

Investors were caught wrong-footed by comments by ECB member and renowned hawk Klaas Knot, who implied that the bank had room to cut interest rates further in order to stem the recent appreciation in the Euro. A report from Bloomberg also suggested that ECB officials thought that the market was under-pricing the possibility of an additional cut in the bank’s main interest rates. The timing of such an admission is a bit of a surprise, given that they have waited this deep into the crisis before even entertaining the possibility of further reductions in rates. While this may be a genuine consideration among policymakers, it could merely be an attempt to verbally talk down the value of the Euro.

EUR/USD rebounded somewhat following the sell-off yesterday afternoon. This didn’t really have anything to do with last night’s FOMC meeting, which largely went according to the script. There was very little new information to report. Chair Powell noted that there would be a moderation in activity and employment, with US inflation to be modest this year. As we anticipated, he also said that it was too early to think about tapering the bank’s asset purchases. This would ordinarily be a bearish signal for the Dollar, but investors largely overlooked it, perhaps given that such comments were already almost entirely priced in prior to the meeting.

Attention now turns to this afternoon’s US GDP data. We are expecting modest growth in the fourth quarter following the record expansion registered in Q3.

Pound gives back gains as investors profit-take

Meanwhile in the FX market, Sterling lost a bit of steam yesterday, edging off its strongest position in eight months versus the Euro. No one catalyst can be attributed to the pound’s retracement in the past 24 hours, other than perhaps investors profit-taking following the currency’s recent rally. Sterling has been the best performing currency in the G10 so far this year, largely a consequence of the impressive progress being made on the vaccination front. We are also beginning to see encouraging signs of both a slowdown in new cases and a levelling off in the number of new COVID-related deaths. Should these both continue to trend lower and the number of vaccinations continues to accelerate, then additional gains for the pound in the immediate-term are very much on the cards, in our view.

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The Berkshire Exchange FX Market Report - 27/01/21

Wed, 27 Jan 2021 11:09:25 GMT

Pound rises on vaccine progress as UK hits grim virus milestone

The UK hit a grim milestone of 100,000 COVID-related deaths on Tuesday, but currency traders continue to focus on the impressive progress the UK is making towards mass vaccinations.

Sterling leapt back through the 1.37 mark verses the US Dollar yesterday, while rallying to a fresh eight month high on the Euro. Britain has now administered at least one dose of the Pfizer or AstraZeneca vaccine to around 10% of the population, including the vast majority of over 80s. By contrast, the European Union is lagging well behind, with both Pfizer and AstraZeneca saying that production problems mean that they are unable to supply the expected quantity of vaccines to the common bloc.

The EU is yet to approve the AstraZeneca jab, but it may only be a matter of days until it does. A report from Reuters has suggested that the quantity of the UK produced vaccine may be as much as 60% lower in the first quarter than the EU had initially agreed. This very gradual vaccine rollout in Europe relative to the US and UK is providing a bit of a stumbling block to Euro strength, with the common currency stuck around the 1.21 level against what has been a broadly weaker greenback in the past 24 hours.

What to expect from tonight’s FOMC meeting?

Focus in financial markets will quickly shift to this evening’s FOMC meeting. Investors don’t expect any big surprises from the bank today, with policy to remain unchanged and no major shift in rhetoric expected.

Markets will likely be paying close attention to chair Powell’s comments on the current health of the US economy and the possibility of tapering in asset purchases. Regarding the former, the recent worsening in labour market conditions and slowdown in consumer spending could cause Powell to adopt a slightly more dovish tone over the near-term outlook. We think that this message will, however, be laced with optimism given the ongoing vaccine rollout, albeit talk of a tapering in the bank’s quantitative easing programme is far too premature, in our view.

Prior to this evening’s FOMC meeting, investors will have one eye on today’s US durable goods order data. There is no major data out of Europe today, so EUR/USD is likely to be driven by events in the US and shifts in broader market sentiment.

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The Berkshire Exchange 4 step plan for SME budgeting

Thu, 19 Nov 2020 16:03:04 GMT

4 steps for SMEs to budget properly for the coming year

During the challenging times of COVID-19, it is difficult to forecast orders and costs, especially for SMEs that operate internationally and, therefore, are exposed to currency fluctuations and market movements. That is why we've provided you with a four-step guide to ensure that budgeting is done on time and effectively.

Upcoming project costs, sales and fixed costs must be defined or forecasted. Budget planning should be as accurate as possible right from the start of the process so that there are no unexpected consequences at the end of the year. Young companies in particular have found it difficult to estimate future costs and revenues. With the effects of the COVID pandemic it has become difficult for all companies no matter the size or history to plan and make sales forecasts. Early planning and hedging is especially important for companies that work internationally and are therefore particularly exposed to currency risk.

We specialise in protecting companies from currency risk so we’ve provided you with a 4 step-guide to help SMEs take the right measures for the coming financial year in time for budget season:

Step 1: Identify exposures - estimate your costs or sales in foreign currencies

As difficult as it may seem, every company must estimate its expected fixed and variable costs for the coming year. Most companies can forecast their revenues based on experience or existing orders.

However, start-ups or young companies should also be able to at least estimate their costs thoroughly including rents, insurance, wages and production costs. Special attention should be paid to costs or revenues that are spent or received in a foreign currency.

Step 2: Define objectives & risk appetite - profit / cost assurance or upside participation

As soon as approximate forecasts for the coming year are in place, the company should consider the importance of currency management and look to define its objectives and risk appetite. Regular earnings or expenditures in foreign currencies are obviously exposed to fluctuations in exchange rates, which can rapidly ruin intended profit margins or increase costs.

If the company is risk averse and happy with the current exchange rates, they may wish to create certainty by hedging with 'Forward' contracts. This means that the exchange rate would be fixed in order to mitigate risk and volatility whilst ensuring there are no unexpected negative consequences at the end of the year.

Alternatively, the company may have a larger risk appetite married with a positive outlook on the market. In this scenario the company would look to benefit from any potential favourable moves in the exchange rate. This strategy can be managed in a variety of ways;

- Using a 'Stop Loss Order' to define a worst case rate while giving the market time and space to move in their favour .

- Using a 'Limit Order' to target a specific rate to be automatically executed as soon as it is achievable.

- Scaling in with tranches of 20% (for example) as price moves favourably to improve average price.

- Participate in the market at the improved prevailing spot rate to reduce hedging costs.

- Hedge exposure at the improved rate to reduce import costs, maximise export profit margins and create certainty.

Step 3: Create a robust hedging strategy - establish the market outlook

The budget is set, the currency management goals are defined, the major part is done! Now it is a matter of defining the budgeted rates for the various currencies based on the current exchange rate. A buffer of about 5% can be quite useful when doing this, i.e. instead of fixing the exchange rate for revenues in USD/CHF at the current 91 cent, a rate of 95 cent could be budgeted. In this way, the minimum budget rate is defined and any negative exchange rate movement can be at least partially compensated for.

The next questions are: What currency developments can be expected? What is the industry outlook? Is the company's order situation relatively secure? Or is there practically no empirical data?

In the third step all these questions are answered with your personal relationship manager who is an expert on FX markets. We then create a tailored hedging strategy in close consultation with the client based on their FX goals and risk appetite.

Step 4: Implement and review regularly - ensure a flexible fit

It’s done: the measures have been defined, now it’s time for implementation.

While we implement the steps discussed and continuously monitor them, the company focuses on its core business. In contrast to traditional financial services providers such as banks, The Berkshire Exchange constantly monitors international trade and political events in order to assist clients with strategy adjustments. The Berkshire team is supported by state-of-the-art technology and international currency analysts.

It makes no difference whether the changes are driven by the currency market or whether the company’s order situation itself is changing. This allows the SME to focus on its operational business, which is priceless in the current uncertain climate.

�� Contact us to discuss your business’s needs and how we can help you.

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The Berkshire Exchange FX Market Report - 03/11/20

Tue, 03 Nov 2020 11:12:12 GMT

What to expect in FX on US presidential election day

Americans head to the polls today in what has been billed by some as one of the most important in recent history as the world grapples with the worst public health crisis in a century.

Democratic candidate Joe Biden continues to hold a comfortable lead in the national polls (7 points), although this lead has narrowed slightly in the past few days. Online political prediction website FiveThirtyEight continues to give Biden the clear edge (89% chance of winning), with a similar measure from PredictIt suggesting a closer race (64%). Biden also remains clear in six of the seven most important swing states, albeit Trump has closed the gap in many of them and markets remain wary of another surprise result, as we saw in 2016.

Voting will open as early as 6AM eastern time in some states and will close between 7-9PM ET depending on the state. The first exit polls should be known soon after, when we expect the first significant bout of volatility to take place. Providing the large increase in mail-in ballots doesn’t delay the results, we may have a good idea as to who is set for the White House in early-morning UK time on Wednesday. The narrowing in the swing state polls and sharp jump in mail-in votes (around 100 million already cast) does, however, mean that both a delayed or contested result remain possibilities. Either outcome could drag the process days or weeks into the future, as was the case when Bush won in 2000. Under such scenarios we would expect investors to flock to the safe-havens, including the dollar, and sell just about everything else.

As previously mentioned, we maintain our view that a Democrat blue wave remains the most likely scenario. We would likely see a sharp relief rally, with emerging market currencies appreciating and the safe-havens selling off. Another surprise Trump win would trigger even sharper moves, in our view, with investors piling into the safe-haven dollar at the expense of most other currencies.

More Bank of England stimulus likely on the way

Ahead of today’s election, the US Dollar has been on the back foot, falling rather sharply against both the Euro and Sterling so far this morning. The Pound is back hovering around the 1.30 mark versus the dollar, with levels of overnight volatility in Sterling now at its highest level since March. An added risk factor for the UK currency this week is Thursday’s Bank of England meeting. Following the weekend’s announcement from Boris Johnson that England will enter into another lockdown as of Thursday, the market is now bracing for a large increase in the BoE’s QE programme. We are pencilling in a £100 billion increase in asset purchases, with Bailey to keep open the possibility of more rate cuts in 2021 without committing either way.

As for the Euro, we expect it to be driven almost entirely by the US election this week. A number of Euro Area data releases will, however, be worth keeping tabs on. Revised PMI numbers for October on Wednesday, and September retail sales on Thursday could prove market movers.

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The Berkshire Exchange FX Market Report - 02/10/20

Fri, 02 Oct 2020 09:56:20 GMT

FX market jolted after Trump tests positive for COVID-19

Financial markets were jolted this morning on the news that US President Trump had tested positive for the COVID-19 virus.

With a little over a month to go before Americans head to the polls, Trump and the first lady are expected to quarantine for at least the next ten days. This puts not just the next televised debate into question but the entirety of the rest of his campaign march. As tends to be the case during bouts of uncertainty, the safe-haven currencies rose sharply on the news - the yen rose by over half a percent, while the dollar itself also briefly rallied. Currencies were spared even larger swings as it is not yet known whether Trump is suffering any symptoms and both the president and the first lady are said to be ‘well’.

A concern for markets will be the fact that Trump is in the group deemed as higher risk, due both to his age and that he is considered overweight. UK Prime Minister Boris Johnson, who is eighteen year Trump’s junior, was out of action for around a month after he tested positive in March, having had a spell in the intensive care unit.

It will be interesting to see how the markets react from here. It is plausible that we could see an unwinding in safe-haven flows in the coming days, should the markets perceive the chances of a Biden victory as increased and the possibility of a close, contested election as lessened. Trump will no longer be travelling to Florida for campaigning today - one of the key swing states that he would almost certainly need to win in order to triumph in the election.

That being said, all this will hinge on news regarding Trump’s recovery. Having a president incapacitated for a prolonged period of time would likely further increase safe-haven flows, chiefly we think of the Japanese Yen and Swiss Franc. This afternoon’s US labour report, which usually steals all the headlines in the markets, may well take a bit of a back seat today.

Pound rallies on Brexit hopes, Euro Area inflation sinks to new lows

News of Trump’s positive COVID test sent reverberations around financial markets. Equities fell, while higher risk currencies such as the Aussie and New Zealand Dollar also both sold-off. Sterling also briefly lost ground, although its move lower was very temporary and the Pound actually rallied back above the 1.29 level this morning.

As we mentioned yesterday, significant issues still remain between the EU and UK in the latest round of Brexit discussions, mostly centred around state aid. Investors have, however, been encouraged by the possibility of compromise in upcoming discussions. The UK’s chief negotiator David Frost will be meeting Michel Barnier today, while Johnson himself will be in talks with European Commission President Ursula von der Leyen on Saturday in order to discuss the next steps in the process.

Elsewhere, the euro slipped back towards the 1.17 level versus the Dollar following this morning’s disappointing Euro Area inflation numbers. Headline inflation fell further into negative territory (-0.3% YoY), while the core measure sank to just 0.2% from 0.4%, its lowest level on record. This will undoubtedly heap added pressure on the European Central Bank to adopt a more dovish policy in the coming months.

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The Berkshire Exchange FX Market Report - 18/09/20

Fri, 18 Sep 2020 09:16:00 GMT

BoE opens the door to negative UK interest rates

Sterling ended Thursday trading higher versus the broadly weaker US dollar, despite a more dovish than expected set of communications from the Bank of England.

The Pound initially fell by over half a percent versus its major peers, before recovering most of its losses, after the MPC talked up the possibility of negative UK interest rates. The minutes of the meeting noted that the MPC had discussed the use of negative rates and had been briefed on how such a policy ‘could be implemented effectively, should the outlook for inflation and output warrant it’. This is a bit of a departure from comments from the central bank prior to this month, in which it has noted that sub-zero rates were merely part of the ‘toolbox’ of measures that it could utilise.

As we thought that it might, the bank also talked up the growing downside risks facing the UK economy. The MPC noted that the outlook was ‘unusually uncertain’, explicitly mentioning Brexit, the recent increase in COVID-19 cases in the UK and the end of the government’s furlough scheme. The vote on the QE programme was, however, mildly hawkish, with policymakers voting unanimously in favour of no change after some of the market had expected one or two dissenters.

We think that the wording of the BoE’s communications leaves open the possibility that the bank could ease policy again during its November meeting. While the move to a negative interest rate policy (NIRP) is one such option, we think that it remains highly unlikely in 2020, although a 10 basis point cut to zero is a possibility. We remain of the view that the more likely move would be for the bank to ramp up its quantitative easing programme by another £50 billion in November. With the BoE one of the few major central banks looking likely to ease policy in the next few months, this could present a bit of a downside risk to Sterling.

US dollar on the back foot following dovish FOMC

As mentioned, the dollar was weaker across the board yesterday as investors continued to digest Wednesday’s Fed announcement that no US rate hikes were likely for the foreseeable future, at least through to the end of 2023.

Macroeconomic data out of the US yesterday was also on the weak side. Weekly jobless claims rose more-than-expected, while both building permits and housing starts for August were softer than economists had pencilled in. This follows data from Wednesday that US retail sales grew at its slowest pace since April’s record contraction in August, up just 0.6% month-on-month. This is a slightly concerning sign that demand may be stalling following the sharp bounce back post-lockdown.

Economic reports out today are few and far between, although investors will be looking out for any market moving comments from ECB members De Guindos and Schnabel. Aside from any meaningful new information here, we could be in for a relatively quiet end to the week in the FX market.

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The Berkshire Exchange FX Market Report - 17/09/20

Thu, 17 Sep 2020 10:40:54 GMT

What to expect from today’s Bank of England meeting

Sterling edged higher versus its peers yesterday, even ending the day up against the broadly stronger dollar, ahead of today’s Bank of England meeting.

With investors bracing for a cautious message from the BoE today, we think that the rally in the pound can be attributed, at least in part, to investors unwinding some of their bearish bets in the knowledge that the bar for a dovish surprise is now quite high. We think that the key to the market reaction will be the vote on the bank’s QE programme. While our base case scenario is for policymakers to vote 9-0 in favour of keeping the programme unchanged, we think there is a very good chance that at least one of the more dovish members of the committee votes for an immediate increase in QE this week. This would open the door to an increase in the programme towards the end of the year, potentially the November meeting. A unanimous 9-0 vote would, by contrast, likely support sterling, in our view.

The bank’s rhetoric will also be watched closely by currency traders. A more dovish set of communications that talks up downside risks posed by Brexit and the end of the government’s furlough scheme could weigh on sterling. Any comments from the bank that raises the chances of the BoE cutting interest rates below zero would also be greeted negatively by the market and would likely trigger an aggressive move lower in the pound.

The Bank of England’s interest rate decision, meeting minutes and monetary policy summary will all be released at 12pm BST on Thursday (1pm CET).

Fed sees no US rate hikes through at least 2023

The Federal Reserve indicated last night that interest rates were likely to remain at current record low levels for the foreseeable future, but the US dollar actually rallied following the announcement.

We said prior to yesterday’s meeting that the key takeaway would probably be the FOMC’s updated ‘dot plot’, which shows where committee members expect rates to be over the forecast horizon. As we suspected, a handful of members, three to be precise, showed support for the return to rate hikes in 2023, with one of the seventeen members in favour of hikes before the end of 2022. The vast majority, however, see no change over the next three years, with the median dot stuck in the current 0-0.25% range.

Notably there was a sharp upward revision to the Fed’s GDP projections. The US economy is now only expected to contract by 3.5% this year, far less than the 6.5% it had anticipated in June. Unemployment was also revised lower, with the Fed now expecting the jobless rate to decline to 7.6% by the end of the year, versus June’s 9.3% projection. In its communications, Chair Powell noted that rates would be going nowhere until the bank achieves maximum employment and inflation ‘moderately exceeded’ its 2% target. This inflation target is now not expected to be breached until 2023.

While the reaction in the dollar to the promise of low rates for the foreseeable future may seem counterintuitive, it is worth noting that the market had largely expected this prior to the meeting. There were also some investors that had braced for an even more dovish outlook, with many left somewhat disappointed by the ambiguity of the Fed’s forward guidance. These factors, combined with hefty upward revision to the bank’s GDP estimate, triggered an unwinding in short dollar positions, sending EUR/USD back below the 1.18 level for the first time in a week.

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The Berkshire Exchange FX Market Report - 09/09/20

Wed, 09 Sep 2020 09:32:31 GMT

Sterling sell-off deepens amid ongoing Brexit row

The pound was once again one of the worst performing major currencies in the world on Tuesday, tumbling back below the 1.30 level versus the US dollar amid ongoing concerns surrounding Brexit.

The UK government yesterday admitted that its plans to introduce legislation that allowed ministers to change the Brexit Withdrawal Agreement would break international law. European Union officials have called the UK’s demands as unacceptable, while Boris Johnson has warned that Britain will walk away from the negotiating table in mid-October should no common ground be reached.

With talks seemingly going nowhere, investors have grown increasingly concerned over the possibility of ‘no deal’ at the end of the transition period, a scenario described by German finance minister Olaf Scholz this week as a ‘real disaster for Britain’. This has triggered the largest sell-off we’ve seen in sterling in a number of weeks, with the pound down 2% already for the week to its lowest level versus the US dollar since late-July.

Euro drifts lower as investors await ECB announcement

Risk currencies in general were weaker for the second straight day on Tuesday, while stock markets continued to move lower following some rather concerning headlines surrounding US-China trade relations. President Trump claimed earlier in the week that the US would ‘end its reliance’ on China, whether by ‘decoupling’ or putting massive tariffs on Chinese imported goods.

The prospect of a dovish tone of communications from the European Central Bank at its meeting this Thursday has further weighed on EUR/USD in the past few days, with the pair now back trading around its lowest point since 21st August. As we mentioned previously, we think that there is a real risk that President Lagarde attempts to talk down the value of the euro tomorrow, given the impact that a strong currency has on both suppressing inflation and worsening export competitiveness.

With no real economic data releases of note out of the major areas, we think that expectations for tomorrow’s ECB announcement could begin to dominate the narrative in the markets today. The Bank of Canada’s latest interest rate announcement may also come into focus. We expect no change in policy, although policymakers may strike a more optimistic note given recent improvements in macroeconomic data.

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The Berkshire Exchange FX Market Report - 08/09/20

Tue, 08 Sep 2020 10:02:09 GMT

Pound slides as investors fearful of ‘no deal’ Brexit

The ongoing political wrangling surrounding Brexit was back dominating financial markets in the UK again on Monday.

Sterling was the worst performing major currency yesterday, down over half a percent versus its US counterpart following some more doom and gloom headlines out of the Brexit negotiations. According to reports, Britain was preparing legislation that would undercut its withdrawal agreement with the European Union, raising the risk of the UK exiting negotiations without a full trade agreement in place. EU officials warned in no uncertain terms on Monday that any tinkering with the withdrawal agreement would scupper a potential trade deal, causing investors to fret about a possible ‘no deal’ scenario before the year is out.

The reaction in the pound to the growing possibility of a ‘no deal’ Brexit has, however, been rather less aggressive than one would have anticipated - we’ve certainly not seen any knee-jerk panic selling that has characterised much of the process thus far. It will be interesting to see how Sterling reacts to official word out of the negotiations, which are set to resume later on today. Should it become increasingly clear that a ‘no deal’ is the most likely scenario before Boris Johnson’s self-imposed 15th October deadline, then we think there is certainly more room for the Pound to fall from current levels.

Euro rangebound ahead of Thursday’s ECB meeting

With all attention in the market on news out of the UK yesterday, there wasn’t too much in the way of volatility in the other main currency pairs. EUR/USD spent much of the day in a holding pattern, with investors reluctant to open sizable positions in either direction ahead of this Thursday’s European Central Bank meeting. News that we did have on Monday was negative for the Euro, with disappointing German industrial production numbers raising fresh concerns over the economic recovery in the bloc.

Aside from Friday’s US inflation data, this week is relatively light on major macroeconomic news, so almost all attention will be on Thursday’s ECB announcement. We think that last week’s weak Euro Area inflation data will cause the central bank to adopt a more dovish stance during its communications this week. There is also a possibility that President Lagarde attempts to talk down the value of the Euro.

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The Berkshire Exchange FX Market Report - 07/09/20

Mon, 07 Sep 2020 12:21:42 GMT

Latin American currencies join US dollar in strong rebound

Last week we saw an unusual combination of winners.

The US dollar bounced back, perhaps unsurprisingly given the stretched short dollar positioning in markets, yet another positive surprise from the US labour market, and the general correction of recent trends in financial markets. Unusually, however, key Latin American currencies managed to buck the usual correlations and actually rose against the greenback. The Brazilian real and the Mexican peso both finished at the top of the weekly performance rankings. Signs that the pandemic may be peaking in both those countries deserve some of the credit, undoubtedly, but also the fact that both those currencies had suffered the worst pandemic losses of all the majors and were undoubtedly cheap.

The key for trading this week will be the ECB September meeting on Thursday. Markets will be eager to see the central bank's reaction to the latest economic numbers, especially the inflation shocker that saw core inflation drop to an all-time low of 0.4% year-on-year. We think that the combination of Euro Area inflation weakness, US labour market strength and extreme long euro positioning is likely to result in temporary weakness in the common currency.

GBP

Sterling seems to be caught between two opposing trends. On the one hand, economic data in the UK has been surprising to the upside. On the other, there seems to be no progress in the Brexit negotiations so far. Our expectation is for economic data to start taking a back seat to Brexit negotiations over the next few weeks.

Given how fast the Pound has risen since the pandemic lows and the tendency to take Brexit negotiations down to the wire, this could mean recent short-term weakness in Sterling continues. PM Johnson has reportedly set a 15th October deadline for an agreement to be reached, so expect some volatility in the markets as this date draws near.

EUR

Alarms must have gone off at the ECB's Frankfurt headquarters last week. A shocking inflation report showed the key core inflation measure come in vastly under expectations at 0.4%, its lowest point ever. The euro then breached the psychological level of 1.20 to the dollar at one point, though it fell back later in the week.

We'd wager that neither development had been expected by the ECB at its previous meeting. While we do not expect any immediate change in monetary policy, this week's meeting takes on added importance for FX traders. It will be key to see how much tolerance there is in Frankfurt for further currency appreciation in the context of near zero inflation.

USD

US economic data was fairly strong last week. The ISM indices of business activity are all in solidly expansionary territory, above 56 for both services and manufacturing. Critically, the labour market report for August confirmed the positive news from the weekly jobless numbers. A net 1.4 million jobs were recovered in August. Even more positive was the household report on unemployment, pegging the unemployment rate at 8.4%, far below expectations.

This week, with little in the way of news beyond Friday's inflation numbers, we expect the dollar to react primarily to news from the ECB meeting as well as any headlines from the negotiations between Democrats and Republicans on the size and composition of additional stimulus measures.

CHF

After falling to its lowest level against the euro since June last week, the franc regained a portion of its losses and continues to trade around the 1.08 mark.

Macroeconomic readings from Switzerland released in the past few days have continued to point towards improvements in the economic landscape in Q3. Stubbornly low inflation deep in negative territory does, however, cloud this largely positive picture. Consumer prices fell 0.9% in August from the year prior, showing the same dynamics as in the previous month. This does not, however, mean that deeper negative rates are necessarily on the horizon. Recent communications from SNB president Jordan suggest that FX intervention remains the bank's preferred tool, rather than additional interest rate cuts.

Wednesday’s unemployment data will be the only key data point out this week. This is expected to show a further, albeit limited deterioration in the Swiss labour market. The franc will, however, likely continue reacting mostly to outside news.

AUD

The Reserve Bank of Australia kept interest rates on hold at record lows last week. With no change in policy expected going into the meeting, investors were instead looking out for comments in the accompanying communications regarding the state of the domestic economic recovery. Governor Lowe stated that the recovery would be uneven and bumpy, warning about the impact of the prolonged lockdown measures in the state of Victoria. He did, however, state that the downturn had not been as bad as first feared and that the recovery was under way across most of Australia. This upbeat tone makes us more confident in our view that the RBA will no entertain the idea of cutting rates below zero any time soon.

Meanwhile, the Q2 GDP data surprised to the downside last week. The Australian economy contracted by a greater-than-expected 7% QoQ versus the 6% contraction priced in. The lack of timeliness in the data ensured that investors largely overlooked its release, with the sell-off in AUD largely driven by the broadly stronger US dollar. This week is quiet in terms of domestic news, so we expect the Aussie dollar to trade mostly off external developments.

CAD

Friday’s Canadian labour report came in mostly in line with expectations, with a net 246,000 jobs created in August. This was, however, slightly below consensus, as was the unemployment rate, which fell to 10.2% after investors had eyed a decrease in the measure to 10.1%. Investors chose to largely overlook the data, with CAD ending the week more-or-less unchanged versus the US dollar, making it the best performing currency in the G10. This outperformance is fairly astonishing given that global brent crude oil prices ended the week almost 9% lower - a development that would ordinarily feed its way through to a weaker CAD.

We now look ahead to Wednesday's interest rate decision from the Bank of Canada. With rates almost certain to be kept unchanged, we will be paying close attention to the accompanying press conference from governor Tiff Macklem as he addresses the bank’s view on the state of the economic recovery. Should he again emphasise the need for a prolonged period of accommodation, or even hint that an increase in stimulus could be on the way soon, then CAD could come under a bit of selling pressure this week.

CNY

A strong set of domestic economic data proved enough to allow the Chinese yuan to end last week modestly higher versus the broadly stronger US dollar.

Last week’s macroeconomic news out of China was encouraging, providing further evidence that Asia’s largest economy was bouncing back well following the COVID-induced lockdowns. Early in the week, the August PMIs from Caixin and Markit all overshot expectations. Arguably the most encouraging is the big positive surprise in the services index from Caixin, which came in at a very healthy 54.0 last month versus the 50.4 that investors had pencilled in. This morning’s trade data for August also surprised to the upside, suggesting that both domestic and worldwide demand was holding up well despite the virus uncertainty. Exports jumped by 9.5% year-on-year in US dollar terms (11.6% in CNY), its third consecutive month of increases.

This week should be a slightly quieter one in China, with the latest inflation data on Wednesday the only economic data release on tap. We expect CNY to instead be driven largely by any headlines out of US-China trade discussions.

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The Berkshire Exchange FX Market Report - 04/09/20

Fri, 04 Sep 2020 09:46:54 GMT

What to expect from today’s Non-Farm Payrolls report

Arguably the most noteworthy headline in financial markets yesterday was the sharp retracement witnessed in US equity markets, which sold-off from all-time highs.

Despite the situation appearing to stabilise, the US continues to reel from the aggressive spread of the COVID-19 virus. A fragile recovery in the US economy has also raised concerns that the recent equity rally may be slightly excessive and not justified by fundamentals. The extent of the move lower in stocks has actually proved good news for the US dollar, which has been a broad benefactor of the risk aversion that has swept through financial markets.

Today could be a pretty pivotal moment for the dollar, with this month’s nonfarm payrolls report set for release. The market is eyeing a headline job creation number around the 1.4 million mark, which would be a slight slowdown from last month’s 1.76 million jobs created, although still a very healthy level. We think that risks are slightly skewed towards a positive surprise this afternoon. Not only have the latest virus numbers eased, but we have also seen a drop in jobless claims, an increase in the ADP employment number and improvements in the employment components of ISM’s services and manufacturing indices.

A strong report today could trigger a more protracted rebound in the dollar, whereas a weak reading would raise concerns over the US recovery and could send EUR/USD back above the 1.19 level, in our view.

Sterling set for worst weekly performance since mid-June

Elsewhere, sterling was on course for its worst weekly performance since mid-June this morning, as it hovered around the 1.33 level versus the broadly stronger US dollar. Concerns that the UK will not be able to secure a trade deal with the European Union before the end of the year continues to remain a risk for sterling. The EU’s chief negotiator Michel Barnier has once again fuelled these concerns this week, claiming that he was ‘worried and disappointed’ regarding discussions. We have certainly not seen any knee-jerk reaction in the UK currency just yet to the prospect of a ‘no deal’. Yet with every week that passes the reality may set in for investors, and we may see a bit of fragility in the pound as we approach year-end.

This morning’s UK construction PMI was largely overlooked, with investors instead focusing all their attention on this afternoon’s US payrolls report.

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The Berkshire Exchange FX Market Report - 03/09/20

Thu, 03 Sep 2020 11:09:57 GMT

Dollar recovery continues as US stocks hit record highs

The dollar continued to claw back ground against its major peers yesterday, reversing some of its recent losses that have seen the greenback tumble to its weakest position since mid-2018 in trade-weighted terms.

We have mentioned in the past couple of weeks that a retracement in the dollar could be on the cards in the near-term, particularly given the very stretched levels of investor positioning - euro net longs are at record highs, while dollar net shorts are around their highest level in nine years. This can be partly attributed, we think, to the currency’s recent pullback, with investors realising some short-term profits ahead of tomorrow’s US nonfarm payrolls report. A rally in US stocks to fresh record highs has also helped draw investors to the dollar, in our view.

Investors mostly overlooked yesterday’s underwhelming ADP employment change number, which bodes ill for the more meaningful nonfarm payrolls report later in the week. Private US companies added 428k jobs last month, around half what economists had anticipated. Given the recent lack of correlation between the strength of this number and the corresponding NFP figure, the market will be hopeful of a slightly more upbeat reading tomorrow afternoon.

Euro reverses gains as investors brace for dovish ECB

The aforementioned recovery in the dollar was among the most pronounced against the euro on Wednesday, as investors grew increasingly concerned surrounding next week’s European Central Bank meeting. This month’s ECB meeting is likely to take on greater importance than expected after the release of the pretty dismal August inflation numbers for the Euro Area. This has raised expectations that the bank will adopt an even more dovish stance at its meeting next week and could potentially lay the groundwork for an increase in its stimulus programme later in the year.

The euro did, at least, find some footing following this morning’ Eurozone services PMI, which rose to 50.5 in August from July’s 50.1. An unexpected decline in German retail sales in July is much more of a concern, particularly given the waning reliability of the business activity sentiment indices.

Bailey keeps negative UK interest rates on the table

Sterling was able to mostly hold its own against the broadly stronger US dollar yesterday, although the UK currency did edge slightly lower as London trading opened this morning.

The pound came under a bit of selling pressure on Wednesday after governor of the Bank of England Andrew Bailey refused to rule out the possibility of taking interest rates into negative territory to combat the impact of the COVID-19 virus on the UK economy. Bailey noted that sub-zero rates were ‘in the box of tools’ at the bank’s disposal, while stating ‘if it was the right thing to do, then the case for bringing it out of the box would be strong’. He did, however, reiterate that there were no immediate plans to cut rates into negative territory, suggesting to investors that there would need to be a fairly significant deterioration in economic conditions in order to warrant such action. The market therefore took Bailey’s comments in its stride, with sterling continuing to find support around the 1.33 level versus the dollar.

Next up will tomorrow’s UK construction PMI from Markit and a speech from BoE member Michael Saunders.

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The Berkshire Exchange FX Market Report - 02/09/20

Wed, 02 Sep 2020 09:29:28 GMT

Euro tumbles as Eurozone inflation turns negative

The euro found strong resistance around the 1.20 level versus the US dollar yesterday, before ending the trading session sharply lower following some contrasting economic news between the US and Euro Area.

The common currency had started the day off strongly, rising to its highest position versus the greenback since May 2018, having very briefly broken through the key psychological 1.20 mark. Investor appetite for the currency was, however, sapped following the release of yesterday’s disappointing German PMI numbers and Euro Area inflation figures. The latter will be of particular cause for concern for the European Central Bank. Headline inflation sank below zero year-on-year for the first time in four years, despite the host of stimulus measures recently launched by the ECB, while the core measure declined to just 0.4% - its lowest level on record. A strong euro and expected increase in future unemployment suggest further downward pressure on prices is likely in the coming months.

An increase in new coronavirus cases in Europe is also beginning to concern investors. Spain undoubtedly appears at the epicentre of the flare-up, with new cases there leaping back above 8,000 yesterday for the first time since the peak of the crisis on 23rd March (according to worldometers). This has raised concerns surrounding the possibility of a second wave of infection and the possible re-introduction of lockdown measures. Spain’s health minister ruled out the return to the draconian measures imposed at the beginning of the pandemic. Yet with schools set to return this week the reimposition of at least some measures may be required in order to halt the virus’ spread. This undoubtedly presents itself as somewhat of a downside risk to the euro, in our view.

US manufacturing activity posts unexpected pick-up

Across the Atlantic, data out of the US economy was unexpectedly strong. Manufacturing data from ISM beat expectations, with the index rising to 56 in August from 54.2 a month prior - its highest level since November 2018. Given the recent surge in US virus cases and prolonged shutdown measures imposed in the country, this caught investors by complete surprise and bodes well for the more meaningful services index, set for release on Thursday.

As for sterling, the UK’s manufacturing PMI from Markit was also released on Tuesday, although this came in more-or-less unrevised. The UK currency instead traded mostly in lockstep with the euro and is currently trading roughly where it was at the beginning of the week, having briefly extended its gains to its strongest position since December’s general election yesterday morning. Focus today will be firmly on Bank of England Governor Andrew Bailey, who will be delivering a mid-week speech alongside a handful of his MPC colleagues at the annual meeting of the Central Bank Research Association. Investors will also have one eye on tomorrow’s revised UK services PMI for August.

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The Berkshire Exchange FX Market Report - 28/08/20

Fri, 28 Aug 2020 10:13:55 GMT

Powell paves way for low rate era with historic monetary policy shift

The big headline out of financial markets on Thursday undoubtedly came from chair of the Federal Reserve Jerome Powell, who unveiled a very significant shift in the central bank’s policy strategy.

Down the years, the FOMC has had a dual mandate when setting its monetary policy - ensuring full employment and targeting US inflation of 2% year-on-year. After over a year of deliberation and analysis, which spanned back past the onset of the current pandemic, the Fed has decided to take a new approach. This approach will now involve the Fed adopting an ‘average inflation target’, whereby it aims to keep inflation around 2% on average over time, with greater emphasis now placed on bolstering the US labour market, particularly the high levels of income disparity.

This shift marks one of the biggest changes in the Fed’s policy framework in a number of decades. But what impact will this have on the bank’s monetary policy and the FX market? Historically, when inflation has exceeded the bank’s 2% target, it has generally been followed by a shift to a less accommodative policy - i.e. higher US interest rates. Yet, with the Fed now willing to look through short-term increases in inflation, this is a signal to the market that ultra-low interest rates are here to stay for the foreseeable future and certainly longer than they would have been under the old strategy.

As for the market reaction, stocks unsurprisingly rallied on the prospect of lower rates for longer - the S&P 500 index rose by over one percent for the day. The reaction in the dollar was a more complex one. The dollar initially began to sell-off before almost immediately regaining its losses.

We think that the immediate U-turn in the dollar following Powell’s statement can be largely attributed to the fact that the announcement was mostly priced in by the market. The promise of ample policy accommodation is also good news for the US economy, while higher asset prices should help entice foreign investors. Longer-term we do, however, think that this is a US dollar negative, particularly should we start seeing other major central banks signal higher rates are on the horizon long before the Federal Reserve. This, we think, has been reflected in dollar this morning, which has begun selling off again versus its major peers as investors continue to digest yesterday’s announcement.

So the big question is, has this change in strategy been triggered by the COVID-19 pandemic? According to Powell, the announcement is a reflection of both a slowdown in US growth and the diminishing chances of high inflation, which has continuously undershot its target for a number of years. While this change was likely inevitable, the pandemic has no doubt sped things along, given the impact it has had on suppressing both growth and inflation. The greater emphasis on supporting the labour market will be a particularly welcome development for those millions of Americans that remain without work due to the ongoing shutdown measures.

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The Berkshire Exchange FX Market Report - 26/08/20

Wed, 26 Aug 2020 09:20:50 GMT

Pound rallies on fresh vaccine hopes

The pound was one of the better performing major currencies yesterday, edging back above the 1.315 level versus the US dollar this morning.

A lack of major market moving news been good news for the pound, with the aforementioned move higher in the currency largely driven by the general improvements that we are seeing in investor sentiment. That being said, headlines that Oxford University could be ready to hand over data to the regulators from its COVID-19 vaccine trial in the autumn has helped in this regard, raising hopes that a vaccine could be available before the end of the year. This has helped lift the pound higher, even after yesterday’s disappointing retail sales data from the Confederation of British Industry that revealed jobs in the sector were slashed at their fastest pace since 2009.

The next big test for risk appetite will come on Thursday, with central bank heads set to meet virtually at the annual Jackson Hole symposium. In the meantime, we are looking ahead to this afternoon’s US durable goods orders, which may give us a decent indication as to how the US economy was holding up in the month of July.

Euro rallies despite jump in European virus cases

The major currencies have been largely rangebound so far this week, with a lack of news during the typically quiet August holiday period providing little to write home about.

Risk currencies have edged slightly higher - both the euro and sterling are trading modestly higher so far for the week, although the moves have been limited to less than half a percent. The US and China have both confirmed their commitment to honouring their ‘phase 1’ trade agreement, which was signed by both parties back in January. China yesterday signalled that progress was being made towards a full agreement, which has calmed market nerves somewhat.

It is interesting to note that we have not yet seen any meaningful reaction in the euro to the contrasting virus news we are now seeing across both sides of the Atlantic. New US virus cases continue to ease and are now at their lowest since the third week of June. By contrast, new daily cases in Europe’s big four nations have risen to their highest level since mid-April in the past few days, raising concerns over the possibility of a second wave of virus infection.

It is perhaps the fact that this spike in cases has been almost entirely confined within Spain that we are seeing such little reaction in the common currency, which continues to receive some support above the 1.18 level. This will, however, certainly provide something to keep an eye on.

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The Berkshire Exchange FX Market Report - 20/08/20

Thu, 20 Aug 2020 09:36:08 GMT

Dollar has best day since early-June after FOMC minutes

A less dovish-than-expected set of meeting minutes from the Federal Reserve provided some much needed support for the US dollar on Wednesday.

The dollar has sold-off hard in the past few weeks, teetering around its lowest level since May 2018 versus the euro and in trade-weighted terms on Wednesday afternoon. We have been saying in the past couple of weeks or so that a short-term correction in the dollar may, however, be on the cards given stretched investor positioning, albeit a catalyst may be needed to instigate such a turnaround. The catalyst for yesterday’s move at least came in the form of the FOMC meeting minutes, which delivered slightly mixed signals to investors.

The minutes talked up heightened risks from the virus, reiterating that a ‘highly accommodative stance of monetary policy [is] likely needed for some time'. There does, however, appear to be little appetite among some members of the committee for the use of yield curve control, in which the Fed would purchase a certain amount of bonds in order to cap yields at a particular level. According to the minutes ‘many participants judged that yield caps and targets were not warranted in the current environment but should remain an option that the FOMC could reassess in the future if circumstances changed’.

There was also no consensus surrounding the immediate need to change forward guidance. There had been speculation prior to the meeting that the Fed could signal it is ready to adopt an average inflation target and would thus look through short-term above target inflation. Comments on this were very vague and there was certainly no sense that an announcement regarding this was at all imminent. This was largely good news for the dollar, which registered its strongest daily performance since early-June, rallying by almost one percent for the day versus the euro.

Will the ECB meeting accounts shift the euro today?

Attention today now shifts to the ECB, which will also be releasing the accounts from its latest monetary policy meeting. The minutes from the Governing Council tend to be slightly more low key than its US counterpart, so we’re not expecting too much in the way of major market moving news - particularly given the likelihood of no immediate change in policy. That being said, investors will be keeping a close eye on any comments regarding the bank’s view of the state of the Euro Area economy and whether it appears on course for a ‘V-shaped’ recovery.

Aside from that, investors will have one eye on tomorrow morning’s Eurozone PMI data for August, which is expected to come in largely unchanged on the July data. Today looks set to be a relatively quiet day in the UK, although Friday will also see the release of the latest UK PMI numbers and July retail sales. News that sales growth moved back into positive territory year-on-year for the first time since the start of the pandemic could provide a bit of a lift for sterling, which is currently back trading where it was at the beginning of the week versus the dollar following yesterday’s rally in the latter.

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The Berkshire Exchange FX Market Report - 19/08/20

Wed, 19 Aug 2020 10:04:06 GMT

US dollar hits new lows ahead of FOMC meeting minutes

The key trend that we have witnessed in the foreign exchange market in the past three months continued once again on Tuesday, with the US dollar selling off against just about every other major currency.

The sharp depreciation seen in the greenback since the beginning of June is turning into a move of unprecedented magnitude. Against the dollar, the euro is currently trading at its strongest position since May 2018, up almost one percent for the week already and over 6% since the start of last month. Sterling gained by an even greater amount on Tuesday, breaking through the 1.32 level and sitting comfortably at its highest level since the UK’s general election in December 2019. In fact, the dollar has lost ground against every other G10 currency in the past two months, particularly versus those deemed as higher risk, notably the Norwegian krone and Swedish krona that are trading almost 10% higher during that time.

The rationale for the sell-off in the currency continues to be much the same, namely the high levels of virus contagion in the US and concerns over the country’s economic recovery relative to the rest of the developed world. There also remains no news out of Congress on an agreement to extend the government's additional unemployment insurance benefits programme. To worsen sentiment further, Donald Trump stated yesterday that problems with mail-in voting during November’s Presidential election may force officials to re-do the vote.

Investors will now be looking to tonight’s FOMC meeting minutes for a catalyst that could trigger a reversal in the recent move. There has been talk that the Fed may adopt a more relaxed view of above target inflation - any comments regarding this would likely be a market mover later today.

UK inflation rebounds sharply in July

A sharp rebound in UK inflation this morning was largely overlooked by currency traders. According to data from ONS, headline inflation jumped back up to 1.0% in July from June’s 0.6% reading. While this is not particularly good news for consumers, it does at least suggest that spending activity is rebounding well as lockdown measures are lifted and retail outlets return to some form of normal capacity.

It will be interesting to see whether this increase in price growth deters the Bank of England from easing policy further when its QE programme is expected to run dry later this year. At this stage, we don’t think that it will, although it would certainly provide reason for caution should inflationary pressure continue to rise at the current pace over the coming months.

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The Berkshire Exchange FX Market Report - 18/08/20

Tue, 18 Aug 2020 13:08:48 GMT

Dollar sell-off continues during thin August trading

Risk currencies got off to a strong start to the week on Monday and Tuesday, with the US dollar extending its losses against most of its major counterparts.

The dollar has been under heavy selling pressure in the past few weeks as investors grow increasingly concerned over the state of the US economic recovery post-lockdown. While new virus cases in the US finally appear to be easing, the still lack of agreement in Congress over an extension to the additional unemployment insurance benefits programme continues to leave millions of Americans without a meaningful source of income. With no real major news headlines out of financial markets on Monday, there has been nothing to prevent this overall trend of dollar selling from continuing.

The limited news and data that we have had in the past few days has also been broadly negative for the US dollar. Yesterday’s New York Empire State Manufacturing index massively undershot expectations, declining to just 3.7 after investors had eyed a reading of 15. News over the weekend that the review of the US-Sino ‘phase one’ trade deal, due to have taken place on Saturday, was postponed has led to an unwinding in safe-haven bets. This delay has actually been treated by investors as a positive sign, given that it gives China more time to fulfil its promised purchases of US goods as part of the agreement - purchases that have, of course, been disrupted by the covid pandemic. While no date has yet been set to complete the review, comments from US officials have been encouraging of late, suggesting that they have no plans to abandon the deal.

With short dollar positioning becoming increasingly stretched, it will be interesting to see whether this trend of dollar weakness continues in the coming days or if there emerges any catalyst for a reversal. Wednesday’s FOMC meeting minutes could provide such a catalyst, although we don’t expect too much in the way of new information from the Federal Reserve this week. As far as the euro and sterling are concerned, a host of European and UK data out this week could stop both currencies in their tracks should they surprise to the downside. We will be paying closest attention to the Euro Area PMI data for August and UK retail sales for July, both out on Friday.

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The Berkshire Exchange FX Market Report - 14/08/20

Fri, 14 Aug 2020 10:11:53 GMT

Soft China data lifts safe-havens, US jobless claims ease

The major currencies remained relatively directionless during listless August trading on Thursday.

There has not been a huge amount to write home about this week, with no real major economic data releases out yesterday. That being said, investor did have the weekly US jobless claims data to digest, which actually came in much stronger-than-expected. The number of those Americans newly claiming unemployment benefits slowed below one million last week for the first time since the beginning of the lockdowns (963,000). While this appears highly encouraging at first glance, it is worth noting that the data is likely being suppressed by the expiration of the US government's additional $600 a week benefit supplement. This is almost certain to be discouraging those freshly laid off from filing for unemployment benefits that otherwise would have done had the extra benefits still been available.

There still remains no word out of Congress regarding an extension to the aforementioned extra benefits. Somewhat surprisingly, the dollar has continued to largely hold its own this week, despite the lack of breakthrough, currently trading more-or-less unchanged versus the euro. Some weak data out of China overnight has helped the dollar’s cause to some extent. Retail sales in Asia’s largest economy unexpectedly remained in negative territory for the seventh month in a row year-on-year in July. This has raised concerns over the pace of the Chinese and indeed global economy, leading to the traditional flurry of bets in favour of the safe-havens, the dollar included. An increase in virus cases in areas such as New Zealand and South Korea may also be fuelling this flock to safety.

Will today’s US retail sales data shift the dollar?

Activity should pick-up in the currency markets today. We don’t expect too much volatility to follow the updated second quarter GDP data for the Euro Area, which is expected to remain unrevised. Investors are, however, likely to be paying very close attention to this afternoon’s US retail sales figures, which should give the market a decent indication as to how well the world’s largest economy is emerging from its covid-induced slump.

Sales are expected to have grown at a slower pace in July than a month previous (1.9% versus the 7.5% MoM increase in June). While much of this slower rebound will be due to a higher base effect, the re-imposition of shutdown measures in a handful of US states may have also driven consumer spending lower. We think that any number in the +1-3% range is unlikely to materially shift the US dollar. It may take a number materially higher than consensus to lead to anything more than a temporary rally in the greenback, in our view, given the still lack of agreement in Congress. House Speaker Pelosi’s comments that the Republicans and Democrats remain ‘miles apart’ suggests a deal may not be in the offing any time soon.

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The Berkshire Exchange FX Market Report - 12/08/20

Wed, 12 Aug 2020 10:25:20 GMT

UK economy enters deepest recession on record

The UK economy officially entered into recession in the second quarter of the year, with the covid-induced lockdowns triggering the largest slump in activity on record.

According to data from ONS released this morning, the UK’s GDP contracted by 21.7% year-on-year in the three months to June (20.5% quarter-on-quarter), albeit both came in slightly stronger than economists had pencilled in. This therefore pushes the UK economy into a technical recession, denoted as two consecutive quarters of negative economic growth, for the first time since the global financial crisis in 2009. There were, however, signs that the economy is already beginning to bounce back well from the downturn, with GDP expanding by a better-than-forecast 8.7% month-on-month in June.

Despite the positive surprises, the data makes for pretty grim reading - on an annual basis the UK economy shrank by a far greater amount than some of its peers in Europe, notably Germany (-11.7%), Italy (-17.3%) and France (-19%), albeit by not quite as much as Spain (22.1%). This is not at all unexpected given that the UK government has been far more cautious in easing lockdown measures than some of its peers. It is worth remembering that non-essential shops (15 June) and restaurants (4 July) opened much later in the UK than almost all of the rest of Europe, which is clearly reflected in today’s data.

The reaction in the pound this morning was very limited, with sterling stuck within the 1.30-1.31 range. We think this lack of reaction is due to both the lagged nature of the release and the slight irrelevance of the data, given that the extent of the downturns have been dictated almost entirely by the timing of the lockdowns. The real test for currencies will be how well respective economies bounce back from the contractions. Indicators so far suggest the UK recovery has got off to a decent start.

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The Berkshire Exchange FX Market Report - 11/08/20

Tue, 11 Aug 2020 10:45:40 GMT

UK unemployment benefit claims creep up in July

Sterling has edged higher so far this week, although has also been relatively range bound, trading just below the 1.31 mark versus the US dollar.

This morning’s UK labour report came in worse-than-expected, although the reaction in the currency markets was almost non-existent. The rate of unemployment unexpectedly remained unchanged at 3.9% in the three months to June after economists had eyed a 0.3 p.p increase. July’s claimant count number, which provides a more timely measure of labour market performance, did, however, come in higher than predicted. The number of those claiming unemployment benefits rose by 94.4k last month, an increase of 3.6%, (+10k expected). The lack of a more meaningful move in sterling to the news may perhaps be due to the slight irrelevance investors are placing on the data due to the government's furlough scheme, which is acting to artificially deflate these unemployment numbers.

The next main focal point for investors will be tomorrow morning’s UK second quarter GDP data, which is almost certain to show the largest contraction on record.

Euro retraces gains as investors use calm to profit take

The typically quiet August trading was in full swing in the FX markets on Monday, with most major currency pairs stuck within a relatively narrow range, particularly by recent standards.

Amid the lack of major market moving news, investors took the opportunity to sell the euro, sending the currency to its lowest level in a week versus the US dollar. As we mentioned last week, we think that the main EUR/USD pair could be in for a minor short-term correction following the recent sharp rally in the cross that has seen it rise to its highest level since May 2018. The recent move higher in the euro has been aggressive, leaving net long euro positioning at just about the most stretched it has ever been according to some sources. This tends to indicate that a reversal in the recent trend may be on the cards, with investors to possibly use the relative calm of August trading to profit take.

It is also worth noting that we have begun to see a mild improvement in the latest US virus numbers, which may be behind at least some of the currency’s recovery. New daily cases have dropped back below the 50k level from almost 80k at one stage. Ongoing uncertainty surrounding US-China trade relations has also acted in the dollar’s favour in the past few trading sessions, given that this tends to fuel safe-haven flows into the greenback. Negotiations between the two countries are set to resume later this week, with tensions running high after the tit-for-tat imposition of sanctions on senior officials from both countries.

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The Berkshire Exchange FX Market Report - 07/08/20

Fri, 07 Aug 2020 11:25:52 GMT

Pound gives up gains after BoE’s Bailey comments

Sterling received a bit of a lift from yesterday’s more upbeat economic assessment from the Bank of England. The rally in the currency was, however, short-lived, with the pound opening this morning lower than where it was prior to the bank’s announcement. This upbeat mood was tarnished somewhat by comments from Governor Andrew Bailey later in the day, who dismissed the idea that the bank’s outlook was too optimistic. He instead backed the end of the government’s furlough scheme in October, noting that some parts of the UK economy were no longer viable post-covid.

Meanwhile, the euro was stuck mostly in a narrow range on Thursday amid a lack of major market moving information. We did have some data out of Germany that was actually highly encouraging, although mostly overlooked by investors. Factory orders in Europe’s largest economy leapt by 27.9% in June versus the 10% forecast, providing more evidence that the recovery in the bloc was taking place at a faster pace than initially anticipated. With no economic news out of the Euro Area today, investors will be paying close attention to the latest virus numbers, particularly out of Spain, which appears to be experiencing the beginning of a second wave of virus infection. Aside from any major developments here, the euro is likely to be driven largely by this afternoon’s US payrolls report.

What to expect from this afternoon’s US payrolls report?

The major currencies were relatively range bound during the course of London trading on Thursday as investors awaited this afternoon’s all-important US nonfarm payrolls report.

Expectations are relatively low for today’s labour report. Economists have pencilled in a job creation number of approximately 1.6 million, down on the record 4.8 million that were created in June. We actually think that this may well surprise to the downside. We outline below arguments for, and against, a strong payrolls number this afternoon:

Arguments in favour of a strong NFP number:

– Continuing jobless claims have fallen, down to a post-lockdown low 16.1 million in the week to 25/07.

– The four-week moving average of initial jobless claims fell to its lowest level since 27/03 last week.

Arguments against a strong NFP number:

– New daily virus numbers hit fresh highs throughout July, leading to widespread re-introduction of lockdown measures and the closure of workplaces.

– Initial jobless claims ticked up in the two weeks to 24/07, albeit fell to a post-lockdown low last week.

– Wednesday’s ADP employment change number massively undershot expectations (167k vs. 1.5 million projected).

– Employment component of ISM’s non-manufacturing PMI eased to 42.1 in July from 43.1.

Aside from being a busy data day, today also marks Congress’ self-imposed deadline for coming to an agreement on an extension to its additional unemployment insurance benefits. Despite a few upbeat comments from some sides of the discussions, both the Republicans and Democrats appear to be at loggerheads over the actual sum of weekly payment. A lack of an agreement here, combined with a worse-than-expected payrolls report, could spell doom for the US economy and would likely trigger another bout of weakness in the dollar later this afternoon.

The payrolls report will be released at 13:30pm BST (14:30 CET).

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The Berkshire Exchange FX Market Report - 06/08/20

Thu, 06 Aug 2020 10:02:27 GMT

Pound jumps as BoE says downturn less severe than feared

Sterling briefly jumped to just shy of its highest level so far this year on Thursday morning after the Bank of England delivered a more upbeat assessment of the UK economy than the market had expected.

As anticipated, policy was kept unchanged following the bank’s monetary policy meeting, with interest rates held at a record low 0.1% and the quantitative easing programme maintained at a capacity of £745 billion. With that being a foregone conclusion, investors were much more interested in the bank’s updated economic projections, particularly its GDP forecasts. These show that the bank now expects the downturn to be less severe in 2020 than it had anticipated during its latest quarterly Monetary Policy Report in May, with the economy on course to return to its pre-covid size by the end of 2021.

The bank now expects the UK economy to contract by 9.5% this year (less than the 14% pencilled in back in May but still the largest recession on record), with slightly flatter growth over the next two years of 9% and 3.5% respectively (versus 15% and 3% previously expected). We think that the downward revision to the latter largely has to do with the higher base effect, rather than concerns regarding a slower recovery. We will find out more when Governor Andrew Bailey conducts his press conference slightly later on at 11:30am BST.

One of the big concerns among investors going into the meeting was that the MPC may talk up the need for negative interest rates to combat the downturn. While Bailey’s comments on the subject could shift markets later on, the communications released this morning suggest that the bank’s stance towards the use of sub-zero rates has not materially changed. As we stated that they might, the MPC noted that the use of negative rates would remain ‘under review’. This, we think, ensures that the bank will keep their options open to cut below zero, albeit in the knowledge that this is probably something that they are not giving serious consideration to just yet.

The BoE’s communication was all generally positive news for the pound, notably the apparent lack of appetite for negative rates among the committee. Sterling reacted as one would expect, moving around 50 pips higher versus the US dollar. The move higher in the UK currency was, however, relatively mild. We think this has to do with the more upbeat tone being largely priced in by the market prior to the announcement, with investors also cautious to open up any sizable positions ahead of Bailey’s presser later on this morning.

Euro breaks through 1.19 level amid contrasting economic news

News out of the US economy yesterday was largely mixed, although investors chose to look at the negatives, sending the dollar another half a percent lower versus the euro. The pair briefly rose above the 1.19 level, although retraced some of its gains this morning.

Wednesday’s US non-manufacturing PMI from ISM beat forecasts, unexpectedly rising to 58.1 in July from June’s 57.1. The latest ADP employment change number did, however, massively undershoot expectations. Just 167k net jobs were created in the private sector, nowhere near the 1.5 million that investors had priced in. This does not bode at all well for tomorrow’s much more critical nonfarm payrolls report, which we think could also surprise to the downside.

In Europe, the July composite PMI was revised up slightly from the initial estimate to 54.9 from 54.8. There was also some pretty good news on Euro Area retail sales. While the July number fell short of expectations, this was more than made up by a sharp upward revision to the June data, which showed that sales rose by a record 20.3% month-on-month (17.8% initially estimated). This is highly encouraging news that points to evidence of a potential ‘V-shaped’ economic recovery in the bloc.

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The Berkshire Exchange FX Market Report - 05/08/20

Wed, 05 Aug 2020 09:46:25 GMT

What to expect from the BoE on ‘Super Thursday’

Sterling briefly rose back up above the 1.31 level versus the US dollar this morning ahead of tomorrow’s ‘Super Thursday’ announcement from the Bank of England.

We don’t expect any immediate change in policy from the BoE this week. Interest rates are almost certain to be held at record lows, with the bank’s quantitative easing programme also highly likely to be maintained at its existing £745 billion capacity. With no change in policy expected, investors will instead be keeping a close eye on comments in the bank’s accompanying communications on the state of the UK recovery and potential future policy moves, notably in the bank’s quarterly Monetary Policy Report.

Chief economist Andy Haldane, the only member on the MPC to not vote for an increase in the QE programme in June, stated last month that the UK economy was enjoying a ‘V-shaped’ recovery. Given recent data strength, notably the June retail sales figures, it will be interesting to see whether any other members of the committee are coming around to this view. This week’s Monetary Policy Report will also contain updated projections for both growth and inflation. While the latter will be largely irrelevant, more upbeat-than-expected GDP forecasts would likely provide some support for sterling this week.

Investors will also be keeping a close eye on comments on the possibility of negative interest rates. While we don’t think that the bank will definitively rule out the possibility of negative interest rates this week, we also don’t think that they will indicate it is on the immediate horizon either. An opening of the door to a negative interest rate policy (NIRP) on Thursday would be a big surprise to the market and could lead to a sharp sell-off in the pound. Should the bank again indicate that NIRP is under consideration, then we don’t think we’ll see too much of a reaction in financial markets.

US dollar sell-off resumes as Congress talks continue

The dollar resumed its slide against its major peers yesterday afternoon, dragged lower by falling US yields and the inability of Congress to come to an agreement on extending its additional unemployment insurance benefits. The lack of agreement between the Republicans and Democrats is now becoming a very significant cause for concern to investors. Without the additional income support, millions of Americans are currently in precarious financial positions after the covid-induced lockdowns led to mass layoffs on a scale not witnessed in recent memory. The government has set an end of the week deadline to come to an agreement, with Treasury Secretary Steven Mnuchin claiming yesterday that progress was being made.

Politicians are, however, running out of time to get funds to those that need it, particularly amid reports that more than 40% of US renters could be facing eviction. This does, of course, come at a delicate time for the US, which has seen the mass reintroduction of shutdown measures in a number of states in order to combat the rising virus numbers. Consumer confidence is likely to be low and while this nervousness over the outlook has not yet been reflected in US economic data, we think that it will only be a matter of time, especially if the uncertainty over the lack of government support drags on much longer.

Even without the lingering political uncertainty mentioned above, the dollar could be in for another volatile few days of trading, with a number of tier-1 economic data releases on tap. This afternoon’s non-manufacturing PMI from ISM should receive a fair amount of attention, as will Friday’s nonfarm payrolls report for July. We think that this week’s report could be set to surprise to the downside, given the recent increase in virus cases and rise in weekly jobless claims. A disappointing reading here would be a big warning sign and could trigger another bout of weakness in the greenback toward the end of the week.

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The Berkshire Exchange FX Market Report - 04/08/20

Tue, 04 Aug 2020 09:13:04 GMT

Pound holds above 1.30 ahead of Thursday’s BoE meeting

Sterling consolidated its gains yesterday, holding firm just above the 1.30 level versus the dollar.

Not only was last month the worst month for the greenback in a decade, but it was also one of the pound’s best Julys in around three decades. Whether this move higher can continue will depend on a number of factors, namely Brexit and the UK’s economic recovery post-lockdown. We’ll get more news this week on the latter with the revised UK PMI numbers. Yesterday’s manufacturing index was revised slightly lower, although remained comfortably in expansionary territory at 53.3 from the initial 53.6 estimate. Wednesday’s services index should receive much more attention from currency traders.

The main focal point this week will, however, be Thursday’s Bank of England meeting. We expect policy to be kept unchanged, with investors to instead focus on governor Bailey’s comments on the pace of the economic recovery. The market will also be looking for clues as to whether the bank is keeping its options open to lower interest rates into negative territory at a later date, should it deem appropriate.

Dollar claws back ground after worst month in 10 years

The recent sell-off in the US dollar abated on Monday, with most major FX crosses fairly stable ahead of a busy week of announcements and economic data releases.

Last month was the worst month for the dollar in ten years, with rising US virus numbers and concerns over the country’s path to an economic recovery causing investors to sell the greenback en masse. As tends to be the case, the sharp move higher in EUR/USD, in particular, has meant that positioning has become stretched - net longs on the euro have never risen as high or as fast as they have done since March. This tends to indicate that a retracement and some profit-taking is likely in the offing, which we think is what we got during London trading on Monday.

The issue for the dollar is that very little appears to be in its favour at the moment. New daily US virus cases appear to be easing, although deaths caused by the virus are now showing a visible uptrend. A deal over extending the additional unemployment insurance benefits scheme also remains elusive in Congress. Talks were reportedly productive on Monday and we remain confident that a deal will be struck, albeit the extra benefits are set to be significantly watered down from the previous $600 a week payments. It will be interesting to see whether this will be enough to lift the flagging dollar and calm concerns that the US recovery is set to lag that of Europe.

Aside from news out of Congress, investors will be awaiting this Wednesday’s non-manufacturing PMI data from ISM and Friday’s payrolls report. Yesterday’s manufacturing PMI from ISM beat expectations, although a similar indicator from Markit painted a totally different picture. Regardless, given the small contribution of the sector to US output, markets were largely unmoved following the releases.

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The Berkshire Exchange FX Market Report - 03/08/20

Mon, 03 Aug 2020 10:07:12 GMT

US Dollar suffers worst month in a decade

The aggressive sell-off witnessed in the US dollar continued last week, with the currency posting its worst monthly performance in trade-weighted terms in ten years.

Concerns surrounding still high US virus numbers, and the possibility of prolonged shutdown measures in the country, have been largely to blame, sending the dollar index to its lowest level since May 2018. The inability of Congress to agree on an extension to the additional unemployment benefits scheme far from helped the currency last week, amplifying already heightened concerns over the state of the US economic recovery.

Every G10 currency ended last month higher versus the greenback, led by the higher-risk Swedish krona and sterling, the latter continuing to rally even amid the ongoing uncertainty surrounding Brexit. Most emerging market currencies also ended July higher versus the dollar. We did, however, see a handful sell-off violently again last week, notably the South African rand and Russian ruble, which ended the week as the two worst performers.

Attention this week will remain on Congress and whether we’ll see an agreement to extend income support measures. Investors will also be eagerly awaiting a host of economic data releases this week, notably the July US payrolls report on Friday.

GBP

No news was good news for sterling last week. With hardly any economic data releases or political announcements of note, the UK currency was able to extend its gains versus the broadly weaker dollar. Even Friday’s announcement that the re-opening of some parts of the UK economy would be delayed was not enough to derail the pound, which ended the month roughly where it was prior to the market panic at the beginning of March.

It will be interesting to see whether this trend continues this week when investors will have much more UK data and policy announcements to digest. We will be paying close attention to the revised PMI numbers (today and Wednesday) and the Bank of England’s latest monetary policy decision on Thursday. We expect the BoE to keep policy unchanged, with attention instead likely to be on comments regarding the expected pace of the recovery.

EUR

The euro continues to go from strength to strength, ending last week around its strongest position since mid-2018. The latest virus numbers out of Europe have raised some concerns regarding the possibility of a second wave of infection in the common bloc, notably in Spain where new infections rose to their highest level since 11th May. While this was reflected in a sell-off in European equity indices last week, the resilience of EUR/USD is a good indication of just how sour sentiment has turned towards the dollar of late.

We should get a better idea as to how well the Euro Area economy is rebounded from the worst of the downturn this week, with both the composite PMI and retail sales figures set for release on Wednesday. The former is a revision to the July data, so investors may focus their attention on the latter.

USD

As mentioned, July was the worst month for the dollar since 2010, with rising virus numbers, political bickering and falling yields causing investors to abandon the US currency en masse.

This week could be a very important one for the dollar. Not only could we get news out of Congress, but there will also be a host of economic data releases for investors to digest, most of which will cover the period after the reintroduction of lockdown measures in a handful of states. We will be paying closest attention to Wednesday’s non-manufacturing PMI from ISM and Friday’s nonfarm payrolls report for July. Given the latest worsening in weekly jobless claims data, we think there is a chance that the latter surprises to the downside.

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The Berkshire Exchange FX Market Report - 31/07/20

Fri, 31 Jul 2020 10:15:57 GMT

Dollar hammered as US GDP contracts by most since WW2

The relentless sell-off in the US dollar continued for another day on Thursday, with the greenback hammered following the release of yesterday’s second quarter GDP figures.

According to the data, the US economy posted its worst contraction since the Second World War in the three months to June, with activity declining by 32.9% annualised (9.5% year-on-year). While this number was slightly better than economists had forecast, it still paints a very grim picture as to the state of the world’s largest economy, which is now confirmed to be suffering from a recession of historic proportion. Unlike in previous recessions, the recovery is expected to be a relatively swift one, with activity in Q3 set to be considerably better than in Q2. The main risk does, of course, remain a continued increase in new virus numbers. Fortunately, these appear to have stabilised at around the 65k a day mark, with the reimposition of lockdown measures in a number of states not completely halting activity in the manner that it did during the height of the downturn.

The outlook does, however, remain fairly bleak, with millions of Americans out of work and without a source of income. US politicians have continued to bicker over an extension to the additional unemployment insurance benefit scheme, so far to no avail. This is set to expire today, with some Americans set to see a more than a 90% drop in income support as a result. The Republicans have proposed lowering the additional benefits to $200 a week from $600, but even that has been greeted negatively by the markets. A lack of a prompt agreement here would be a seen as a big failure by the market, and would likely continue to weigh on the dollar in the coming days.

German GDP falls by most in 50 years, sterling rally continues

Thursday also saw the release of GDP data out of Germany, which came in slightly worse-than-expected. Europe’s largest economy contracted by 11.7% year-on-year in Q2 (-10.9 predicted), its worst downturn since 1970. This was a larger contraction than the same measure in the US and also missed expectations, whereas the US number exceeded the median forecast, yet EUR/USD still rallied following their release. This is another sign to us of just how bad sentiment is towards the dollar at the moment.

Meanwhile, no news has been good news for sterling so far this week. There has been hardly any news to report whatsoever out of the UK this week, with no economic data releases or political announcements worth mentioning. The lack of any bad headlines here, combined with the ongoing easing in UK virus numbers that are now consistently posting less than 800 new cases a day, has allowed the pound to post very strong gains versus the broadly weaker US dollar. Sterling is now trading more than 6% higher for July, currently back above the 1.31 for the first time since prior to the crisis. It will be interesting to see whether this trend continues next week when investors will have much more data and policy announcements to digest, notably revised July PMIs and the Bank of England latest monetary policy decision.

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The Berkshire Exchange FX Market Report - 30/07/20

Thu, 30 Jul 2020 09:32:24 GMT

Powell talks up virus risks ahead of US GDP data

Sterling briefly edged above the psychological 1.30 level versus the US dollar yesterday - the first time it has done so since the violent sell-off in the currency during the onset of the market panic on 10th March.

The dollar did, in fact, trade lower across the board for another day, first in anticipation of a dovish set of communications from the Federal Reserve and then again after Chair Powell’s comments during the FOMC press conference. As we anticipated, Powell struck a cautious tone, talking up the considerable risks posed to the US economy and stating that the bank will continue to use a range of tools in order to support it. While he did note that there were signs of a recent pick-up in economic data, he tempered this by noting that the path of the recovery would be highly dependent on the course of the virus.

On the topic of interest rates, which were unanimously kept unchanged, Powell noted ‘the Committee expects to maintain this target range [0-0.25%] until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals’. At the June meeting the Fed indicated that rates would likely remain unchanged until at least the end of 2022. These comments are very much in line with that, with many economists now pushing back their calls for higher rates until three or four years in the future. This seems a reasonable assumption, in our view.

German GDP numbers surprise to the downside

Today bodes to be a relatively busy one in the markets, with a host of economic data releases on tap. This morning’s German GDP data was slightly disappointing, showing that Europe’s largest economy contracted by a larger-than-expected 10.1% quarter-on-quarter in Q2, versus the 9% consensus. This was, however, offset by some encouraging news on the labour front. The number of those unemployed in Germany declined by 18,000 in July, the first time it has done so since prior to the crisis in March. While this suggests that the Euro Area economy is rebounded well as lockdown measures are unwound, it is worth noting that this only accounts for less than 3% of the total net jobs lost during the pandemic.

Next up will be this afternoon’s US GDP data for the second quarter. The market is eying an annualised contraction of 34% (the equivalent of approximately 8.5% QoQ). As we mentioned yesterday, should this number significantly surprise to the downside then that would likely fuel the narrative that the prolonged shutdowns are weighed more heavily on activity in the US relative to Europe, which could drag the dollar even lower this afternoon.

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The Berkshire Exchange FX Market Report - 29/07/20

Wed, 29 Jul 2020 09:15:04 GMT

What to expect from tonight’s FOMC meeting

The dollar continued to sell-off against its major peers on Wednesday morning as investors braced for a dovish tone of communications from the Federal Reserve this evening.

As mentioned yesterday, this evening’s FOMC announcement is not expected to bring any significant policy changes, for a number of reasons. Financial markets have bounced back from their virus-induced sell-off. The S&P 500 index is currently trading more-or-less unchanged for the year, having rallied by over 40% since its lows in March. Macroeconomic data has also shown broad improvements, in part due to the large state and central bank response and the unwinding of lockdown measures. The US government is also still yet to agree on an extension to its additional unemployment insurance benefit scheme, with talks said to be ongoing between the Republicans and Democrats. For this reason, we think that the Fed is likely to sit tight and try to keep a low profile while it awaits news out of Congress.

That being said, Chair Jerome Powell’s comments could still shift the markets. We expect policymakers to continue stressing that interest rates will remain at current record low levels for the foreseeable future. Powell is also likely to strike a cautious tone, noting the significant downside risks that remain, notably the rising US virus numbers and the possibility of further lockdown measures. In anticipation, investors have continued to go short the dollar, sending the currency above the 1.175 and 1.295 levels versus the euro and sterling respectively.

Investors await tomorrow’s US, Euro Area GDP data

This week has been a relatively quiet one so far in terms of macroeconomic news, with the major currencies driven largely by shifts in investor sentiment.

Activity will begin to pick up in the next couple of days, with market participants likely to have one eye on tomorrow’s US second quarter GDP data. This will be the first real hard indicator of just how significant the downturn was during the height of the lockdowns. Investors are bracing for an eye watering 34% annualised contraction. Second quarter GDP data will also be released out of Germany tomorrow, followed by the Euro Area number on Friday. While these data point do of course run on a little bit of a lag, we still expect some volatility around their release. Should the data suggest that the prolonged lockdowns led to a greater-than-expected slowdown in the US relative to Europe, then we could be in for another bout of strength in the common currency.

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The Berkshire Exchange FX Market Report - 28/07/20

Tue, 28 Jul 2020 10:48:10 GMT

Why has the Pound been suffering against the Euro?

The Pound has faced significant headwinds in 2020 and continues to underperform against the Euro.

Coronavirus

The pandemic has had a dramatic impact on Sterling strength as we saw between February and March, when the currency plummeted and lost 15% of its value. Although there was an initial bounce-back of around 10%, the Pound did not fully recover and has been taking gradual steps lower over the past 3-4 months and now trades just below the 1.10 level.

Brexit

To add further pain, the Brexit negotiations seemingly continue to hit a brick wall.

The recent rhetoric has been far from encouraging to investors, leading to a risk off appetite towards the Pound.

Last week the EU’s chief negotiator, Michele Barnier, made it clear that reaching an agreement by year-end was ‘unlikely’.

The Euro

The Euro continues to weigh on the Pound after it got a shot in the arm when the €750Bln EU recovery fund was approved last week. The Euro has also strengthened off the back of optimism that the Eurozone will recover at a faster pace than expected and certainly before the US economy does so.

Green shoots

It's not all doom and gloom however, we are starting to see some green shoots emerging.

Despite all of the factors above, Sterling has not seen any recent pronounced sell-offs, which we would attribute to the fact the UK economy is recovering relatively well. Last weeks data is a good example of the resilience we are seeing in the UK as retail sales outperformed with a 13.9% jump in June. Another positive is that after such a blockbuster rally in the Euro, investors may be looking to take some profits off the table, especially since Friday’s second quarter GDP numbers for the Eurozone are expected to show a brutal double digit contraction.

This could give the Pound a much needed breather and the chance to form at least a short term rally against the Euro.

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The Berkshire Exchange FX Market Report - 27/07/20

Mon, 27 Jul 2020 10:40:05 GMT

Euro breaks to new highs on EU recovery optimism

The main theme in currency markets continues to be general US dollar weakness.

The greenback dropped against all of its major peers last week. The move was notable because it took place in the absence of typical dollar-bearish trends elsewhere. Risk assets generally fell, and interest rate differentials between the US and elsewhere were for the most part unchanged. Strategists seem to be ascribing this weakness to the euphoria surrounding the agreement over the approval of the EU recovery fund, but that does not explain dollar falls against other currencies, including emerging market ones.

We maintain the view that concerns over governance and state capacity in the US, highlighted by the poor response to the COVID pandemic, are at least partly to blame. Either way, the euro rose to its highest levels vs. the dollar since September 2018. As this is written, it is rallying sharply again during early morning Asian trading.

This week is packed with news on both the economic and policy front. The Federal Reserve meeting on Wednesday and the rhetoric emanating therefrom will be key for the US dollar. Friday will be a packed data day from the Eurozone, as second quarter GDP data and flash July inflation are released simultaneously. The former, in particular, will provide the first comprehensive gauge of the damage wrought by the pandemic on the economy of the Eurozone.

GBP

Macroeconomic news that we had out of the UK last week was broadly encouraging. Most notable was Friday’s retail sales figures, which posted a significantly sharper-than-expected rebound in June, lifting sales back up to where they were prior to the lockdown. In spite of good economic news, the absence of signs of progress in the Brexit negotiations with the EU prevented the pound from keeping up with the euro’s rally, though it did manage to post significant gains against the US dollar.

This week, the UK calendar for macroeconomic data looks pretty thin, in contrast with those across the Channel or the Atlantic. Therefore, we expect sterling to largely track the euro's move against the US dollar.

EUR

As in the UK, the PMIs of business activity blew away expectations, led by a much stronger-than-expected rebound in services. The resulting optimism only added to the euphoria over the approval of the EU economic recovery package, which marks a fundamental shift on the EU approach to this crisis as compared to the previous one. Markets thoroughly approved of both developments, sending the euro higher against all non-European major currencies worldwide.

This week's second quarter GDP numbers are expected to show a brutal double-digit contraction from the previous quarter. Given the furious pace of the recent euro rally and the increasingly stretched long positioning of speculative investors on the common currency, these numbers may provide an excuse for profit taking and a pause in the euro’s climb.

USD

As US COVID numbers continue to diverge sharply from those in Europe, the US dollar is suffering. The short term issue is the likelihood that the Eurozone economy will rebound faster. Here, consumers and business' perception that the pandemic is under control is key, and the Eurozone seems to have the advantage so far.

Longer-term, changing perceptions on US institutional quality and state capacity may dent the dollar's role as a reserve currency. 62% of world reserves are held in dollars, while only 20% are in euros. Any convergence in the numbers would provide a steady headwind against the greenback. In the short-term, the dollar has fallen very fast and speculators are now significantly short the currency. We would not be surprised to see a short-term bounce back.

CHF

The EUR/CHF pair ended last week little changed, trading in a relatively narrow range. This comes in stark contrast to the week prior, which saw quite a significant rally in the pair. Nonetheless, the franc was one of the best-performing G10 currencies, doing much better than its safe-haven peers, the USD and JPY. The difference between the franc and those two, to some extent, can be attributed to the fact that the US and Japan have both recently posted record increases in the number of new daily virus infections.

News from Switzerland last week was rather scarce. Exports picked up in June from the previous month, but the country's producers were still struggling. One of the exports the country is renowned for, watches, was down by staggering 35.1% from the previous year in June after posting a 67.9% decline in the month prior. This week will bring the latest sentiment and retail sales readings. While the latter provides more solid insight into the state of the Swiss economy, it will not be as up-to-date as the sentiment prints, which cover the current month, therefore may prove more market moving.

AUD

The Aussie dollar edged higher against the US dollar last week, although we attribute this largely to USD weakness rather than anything else.

Domestic news that we had out of Australia last week can be perceived as largely negative for AUD. Concerns remain around the recent increase in COVID-19 cases in the country, which have now leapt back up to similar levels from the initial peak in late-March, almost all of which have been reported in the state of Victoria. An extension to the six-week lockdown period in Melbourne now looks on the cards, which if confirmed could weigh on AUD. Last week’s June retail sales figure were also highly disappointing, falling well short of forecasts. Sales increased by just 2.4% month-on-month after investors had eyed a 7.1% expansion. This covers the period prior to the re-imposition of lockdown measures, which is an even greater cause for concern for the outlook.

This week will see a host of economic data out of Australia, although most of it is second-tier and will likely be overlooked by the market. Of highest importance will probably be Wednesday’s Q2 inflation data, although we don’t expect its release to be particularly market moving. The latest virus numbers could therefore be key for AUD this week.

CAD

The Canadian dollar ended last week around one-and-a-half percent higher versus dollar, helped by a move higher in oil prices and contrasting virus data between the US and Canada. While virus numbers in the US continue to climb, those in Canada have remained largely stable since the beginning of June. Deaths caused by the virus have also fallen sharply and are now in single figures per day.

With lockdown being eased, we are beginning to see a sharp rebound in Canadian economic data. Consumer spending appears to have rebounded more aggressively than witnessed almost anywhere else in the developed world, which is a highly encouraging sign. The preliminary estimate for June showed a near 25% increase in retail sales month-on-month, the largest jump on record. Should this trend of a faster-than-expected rebound in data continue, then additional gains for CAD versus the currently fragile USD appear on the cards, in our view. This Friday will see the release of the May GDP data for Canada, although given the data’s lag we don’t expect any significant reaction in the currency market.

CNY

The yuan was one of only a handful of emerging market currencies to sell-off versus the US dollar last week, albeit its losses were very minimal and capped to less than half a percent.

Ongoing trade tensions between the US and China can be at least partly to blame for the divergence in performance between CNY and most other EM currencies. Tensions worsened last week after the US closed the Chinese consulate in Houston, leading to a tit-for-tat retaliation from China. This adds to a long list of negative US-Sino news headlines so far this year, notably surrounding China’s new Hong Kong security law, telecoms-gear maker Huawei and Trump blaming China for the COVID-19 outbreak. While a worsening in relations is not a significant issue for the US, which relies largely on domestic consumption rather than external demand, it is a cause for concern for China, given that the US accounts for around one-fifth of its overall export revenue. A worsening in relations between the two countries therefore tends to send the USD/CNY cross higher, rather than vice versa, as we have witnessed in the past week.

This week is a relatively quiet one in terms of Chinese data. Friday’s PMI number will, however, grab investors’ attention. Following a recent sharp bounce back in the data, we expect a moderation in the index just above the level of 50 that denotes expansion. Aside from any major surprises here, ongoing trade headlines and shifts in general sentiment in the market will continue to be the main driver for CNY this week.

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The Berkshire Exchange FX Market Report - 24/07/20

Fri, 24 Jul 2020 09:46:46 GMT

Euro at near two-year highs, UK retail sales soar

The rally in the Euro continued to go from strength to strength yesterday, with the common currency seamlessly breaking above the 1.16 level versus the US dollar.

This recent extraordinary move higher in the Euro has seen the currency appreciation from the 1.12 mark to 1.16 level already so far this month, sending the EUR/USD pair to its highest level since September 2018. As we’ve mentioned throughout the week so far, there has been a host of factors causing investors to favour the Euro, particularly at the expense of the greenback:

1. 1) EU leaders agreeing on the 750 billion euro coronavirus stimulus package.

2. 2) The lack of agreement in Congress on an extension to the unemployment insurance benefit scheme.

3. 3) High new US virus cases + uptick in US virus deaths.

4. 4) Improvements in market sentiment amid a stronger-than-expected pick-up in global economic data.

Investors were given further reason to pile into the common currency this morning following the latest Euro Area PMI data for July. Both the manufacturing and services indices beat expectations, suggesting that business owners are much more optimistic about the outlook than they were a month ago. The all-important services PMI was particularly strong, rising to 55.1 versus 51.0 expected, the first time it has breached the key level of 50 that denotes expansion since the onset of the crisis. This lifted the composite index back up to 54.8 - its highest level since June 2018.

We’ll get the same PMI data from Markit for the US this afternoon. A disappointing reading here that suggests the ongoing lockdown measures are worsening the economic outlook could act as a catalyst for another bout of weakness in the dollar today.

Brexit deal ‘unlikely’ by year-end says EU’s chief negotiator

The lack of a meaningful move higher in the Pound at a time when the Euro is surging goes to show that the rally in the latter has not been driven entirely by improvements in risk appetite.

Sterling continues to meander around the 1.27 level versus the US dollar, unable to break higher amid continued doom and gloom headlines surrounding Brexit. The EU’s chief negotiator Michel Barnier delivered some more crushing news yesterday, stating that both sides remained far apart in negotiations and that a deal by the end of the year was unlikely. The UK’s chief negotiation David Frost was slightly less downbeat, saying that a deal could be reached in September. Should it become clear in the coming few months that a deal is off the table, then a move lower in the pound from current levels would seem likely. But for now, investors appear relatively confident that some form of arrangement will be reached that avoids a cliff edge exit.

Meanwhile, we saw minimal reaction in the UK currency to this morning’s PMI numbers. Similarly to the Eurozone, the UK PMIs came in much stronger-than-expected, with the crucial services index jumping to a five-year high 57.1. Even more surprising was the lack of reaction to today’s bumper retail sales numbers, which showed that sales leapt by another 13.9% in June, a record high and much stronger than the 8% expected. This is a highly encouraging sign that suggests that the UK economy could be getting swiftly back on its feet following what is expected to have been the worst downturn in decades.

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The Berkshire Exchange FX Market Report - 17/07/20

Fri, 17 Jul 2020 08:35:39 GMT

ECB stands pat as Lagarde warns over downside risks

In what we billed to be one of the more eventful days in the currency markets for a number of weeks, ended with most major currencies stuck within relatively narrow ranges.

As expected, Thursday’s European Central Bank announcement was a very low-key one, with not much in the way of new information offered by President Christine Lagarde. Policy was kept unchanged, with no alteration to interest rates or the bank’s asset purchase programmes. On the topic of its PEPP programme, Lagarde stated that it was working well and that the ECB would use the full allocation of purchases unless there was a ‘significant upside surprise’. A handful of senior policymakers have noted that the full 1.35bn euros allocation of purchases may not be required given the recent improvements in Euro Area data.

Lagarde did, however, stop short of talking up the economy too much, instead keeping a relatively measured approach that noted the still significant downside risks facing the economy. The euro briefly eked out some gains following her comments, although the move was only very minor and short-lived.

US retail sales rise again, but virus uncertainty lingers

The US dollar managed to end London trading yesterday slightly stronger versus the euro and more-or-less unmoved versus sterling - the latter receiving very little assistance from yesterday’s stronger-than-expected UK labour report.

The greenback received only minor support from Thursday's much stronger-than-expected US retail sales data, which bode well for the strength of the economy’s recovery. Sales in retail sales jumped by 7.5% month-on-month in June, larger than the 5% increase that the market had priced in. While this marks a moderation on the previous months’ revised 18.2% increase, no one expected another reading anywhere remotely as strong given the very low base that the May data was working off.

Perhaps the lack of a more meaningful rally in the dollar can be attributed to the uncertainty about what’s to come for the US economy. Another daily record high number of COVID cases were recorded in the US yesterday - now more than 70,000. Infections are continuing to rise in the majority of US states, with a handful reporting record high death tolls. With containment measures being rolled back to prevent the spread of the virus, it is likely that this strong recovery so far witnessed in US economic data may prove short-lived.

European inflation and US housing data will both be released today. Aside from any significant surprises here, we think that the major currencies could be driven more by shifts in general market sentiment.

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FX Market Report - 16/07/20

Thu, 16 Jul 2020 10:43:41 GMT

UK labour numbers stronger-than-expected but GBP still retreating

The Pound fell overnight and has continued its decline in early trading despite this morning’s better than expected UK employment figures.

According to this morning’s UK labour report, unemployment remained unchanged in the three months to May at 3.9%, after economists had eyed a modest uptick to 4.2%. Arguably even more encouraging was the decline in unemployment benefit claims witnessed in June. The claimant count number actually declined last month, with 28,100 less people claiming benefits last month than in May. This is a vast improvement on the 566,400 increase in claims in May and much better than the +250,000 number that the market had priced in.

While these numbers are of course a step in the right direction, they do not take into account the millions of workers placed on the government’s furlough scheme. The 28.1k decrease in claims also only represents a modest correction, with the vast majority of those made unemployed since the start of the crisis still out of work. Regardless, we’ll only really get a true read on how the labour market is actually holding up once the dust has settled and the furlough scheme has ended.

What to look out for in a hectic day for financial markets

Today bodes to be one of the busiest, and perhaps most volatile, that we’ve seen in the currency markets for a number of weeks.

This afternoon’s European Central Bank meeting will probably be the main focal point of the day. While we don’t expect any change in policy from the ECB, we think that we could have some market moves off the back of President Lagarde’s comments on both the state of the European economy and the need for extra stimulus. Should Lagarde both talk up the possibility of a ‘V-shape’ recovery in the economy and forcefully signal that it is now the government’s turn to do more, then we think we may see a bit of strength in the euro during Thursday's press conference. You can read more about our thoughts ahead of the meeting in our special report.

Thursday is also a very hectic one in terms of economic data. Arguably the most important will be this afternoon’s US retail sales figures for June, which should give us a clearer idea as to how well the economy is bouncing back from the height of the shutdowns. Following May’s record high jump in sales, another similarly lofty number would be unrealistic. Spending should have been stronger last month given the ongoing unwinding in lockdown measures, although investors are eyeing an easing in the month-on-month number to 5% from May’s record 17.7% expansion.

China GDP jumps, but retail sales paint gloomy picture

In the build-up to today’s announcements, EUR/USD ended trading on Wednesday roughly where it began it, retreating from its highest level in four months.

The pair continued to move lower during Asian trading hours following the release of a host of Chinese economic data. China’s GDP data for the second quarter was actually highly impressive. The economy rebounded well in the three months to June, expanding by 11.5% quarter-on-quarter (3.2% year-on-year). Investors, however, focused more on the details, notably the relatively weak levels of consumer spending activity in the country post-lockdown. This does not bode all that well for the developed world, most of which relies much more heavily on consumer demand than China.

Today’s GDP numbers were also tempered by a disappointing set of retail sales numbers for June - given extra weight by currency traders due to its timeliness. Sales in China fell unexpectedly by 1.8% in June, perhaps a result of the reintroduction of some of the virus containment measures, notably in Beijing. The result was a souring in global market sentiment, with investors favouring the safe-haven dollar overnight and selling higher risk assets such as the Euro.

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FX Market Report - 15/07/20

Wed, 15 Jul 2020 09:35:56 GMT

Encouraging vaccine trial results boost Euro and risk assets

The Euro surged to its strongest position in four months against the US dollar this morning, with other risk assets also rallying on signs of progress towards a COVID-19 vaccine.

Nothing else matters more in the markets at the moment than progress towards producing a successful vaccine to the virus that can be rolled out en masse as quickly as possible. We had some positive news on that front late-yesterday, with Moderna Inc stating that all 45 of their volunteers produced high-levels of antibodies to the virus, so far with no side-effects other than fatigue and achiness. While highly encouraging, it will likely remain a while before any vaccine can be widely distributed, with best guessing suggesting it could be available at the beginning of next year at the earliest.

As we mentioned yesterday, this week is a busy one in terms of European policy announcements. Investors now appear reasonably confident that the EU’s proposed €750Bln fiscal rescue package can be forced through during this Friday-Saturday’s summit - confidence that can also be attributed to some of the recent strength in the Euro. Chancellor Angela Merkel has stated this week that they will push for a compromise, suggesting that there is a good chance it gets forced through on Saturday.

There was enough positive news yesterday for the Euro to completely overlook the latest economic data, which was actually rather disappointing. Industrial production increased sharply, although rose by a less-than-forecast 12.4% (15% expected). The ZEW economic sentiment index also edged up only marginally to 59.6 after investors had eyed a jump to 78.1. Aside from tomorrow’s ECB meeting, intention will now shift to Thursday afternoon’s US retail sales.

Pound brushes aside GDP data, UK inflation rises

Sterling quickly brushed aside the disappointment of yesterday’s GDP data for May, recovering most of its losses for the week against the Dollar amid the general improvement in market sentiment. Investors will be hoping for better news at this Thursday’s UK labour report, which will show the latest unemployment data for May and the claimant count number for June. We think that the latter will be more important, given that it is more timely and will account for the period after the lockdown was eased.

Meanwhile, this morning’s UK inflation data rose more-than-expected, a positive development that suggests consumer spending activity may be picking up pace from the lows during the height of the lockdown. The headline rate of inflation remained low, although picked up to 0.6% YoY from 0.5% with core inflation also back up to 1.4% from 1.2%. While official retail sales data for June has not yet been released, a report from the British Retail Consortium on Tuesday suggested that last month saw the largest increase in sales in more than three years.

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FX Market Update - 14/07/20

Tue, 14 Jul 2020 16:13:39 GMT

Sterling falls ahead of Brexit talks, UK data disappoints

Sterling fell back below the 1.25 level on Tuesday morning, extending its sell-off from a day previous amid ongoing Brexit concerns and some weak UK economic data.

The pound shed around three-quarters of a percent versus the US dollar during London trading on Monday, making it one of the worst performing majors. The move was perhaps merely a result of investors taking profit following a sharp move higher in the currency so far this month, fuelled by higher risk sentiment and Chancellor Sunak’s budget announcement. There is also the small matter of the ongoing Brexit negotiations, which are continuing to hold back the pound from posting any meaningful gains. This week could be a crucial one on that front, with ‘intensive’ talks scheduled in the hopes of breaking the apparent deadlock.

Meanwhile, this morning’s GDP data for May fell short of expectations, suggesting that the recovery in the UK economy could be a more gradual one than hoped. GDP expanded by 1.8% month-on-month in May. While this is much better than the 20%+ contraction recorded a month prior, it was slower than the 5% expansion that economists had pencilled in. This data does, however, run on a bit of a lag, so the reaction in sterling this morning was not overly dramatic.

Broad sentiment in the market actually appears to have improved in the past few days, with the sell-off in the pound largely idiosyncratic rather than a sign that investors are selling risky assets. EUR/USD actually rose yesterday, with the pair briefly touching its strongest position in a month. Investors appear to be overlooking the continued increase in US virus cases so far this week, perhaps given the reports that two pharmaceutical companies (Pfizer and BioNTech SE) had been given status to speed up the production of their potential vaccines. If all goes well, this could see 30,000 patients enrolled for testing by the end of the month, with a best-case scenario that a vaccine is developed by the end of the year. Positive news on this front would provide a massive boost to risk sentiment.

What to expect from a busy week in the FX market

This week looks set to be a very busy one in the foreign exchange market, much more so than the relative calm that we have witnessed in the past couple of weeks. A number of important economic releases are on the docket in the US, included June inflation data this afternoon, which we think could surprise to the upside. Industrial production (Wednesday) and housing data (Friday) may also receive some attention, but the main release will undoubtedly be Thursday’s retail sales figures for June. The latter should give us a decent indication as to how well the US economy is bouncing back from the height of the downturn.

Over in Europe, investors will also be eagerly awaiting both the July European Central Bank meeting on Thursday and the European Council meeting on Friday-Saturday. Regarding the former, no change in policy is expected, with President Lagarde likely to instead again pressure European authorities to do more to support the bloc’s economy. Should Lagarde both talk up the recent improvements in Euro Area economic data and forcefully signal that it is now the government’s turn to do more, then we think we may see a bit of strength in the euro during Thursday's press conference. As far as the EC meeting is concerned, news that authorities have reached an agreement on the €750Bln stimulus package may be greeted positively by the markets, although we think that this is largely already priced in.

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FX Market Report - 13/07/20

Mon, 13 Jul 2020 11:05:30 GMT

US dollar retreats amid ongoing pandemic concerns

Risk assets worldwide had a mixed performance last week.

It seems that the worsening pandemic numbers in the US are starting to take their toll on the greenback. With new cases hitting record highs almost daily, and deaths starting to tick upwards, the dollar fell against every other G10 currency last week, save the Canadian dollar. Economic data in the US is still generally strong, but most indicators that are released do not yet reflect the impact of the new closings in response to the surge in cases. Emerging market currencies are also beginning to reflect the relative performance of different countries in coming to grips with the pandemic. The Brazilian real and the Mexican peso were the worst-performing major currencies of the week, while the Chilean peso and the Chinese yuan ended up near the top of the rankings.

This week, the focus will squarely on the COVID figures out of the US and the European Union summit later in the week (Friday-Saturday). As new cases in the US continue to print daily records while deaths and hospital utilisation play catch up, we think that a likely positive outcome of the EU summit could well energise the euro.

GBP

Sterling had a good week, in spite of the lack of any visible progress in the Brexit negotiations. The credit for the rally probably goes to positive noises about a more generous fiscal stance in the Chancellor's mini-budget last Wednesday.

This week is data rich in the UK, with releases on GDP (Tuesday), inflation (Wednesday) and the labour market (Thursday). There is scope for the rebound in all of these to surprise to the upside, in line with recent data elsewhere, so we expect the pound to follow the euro higher against the US dollar. Aside from that, investors will continue to pay close attention to the latest virus numbers for any signs that the recent easing in lockdown measures is having an impact on pushing up infections.

EUR

There was little data out of the Eurozone last week, but the euro was generally well supported by optimism about the approval of the EU recovery fund. Angela Merkel seems to be resolved to overcome opposition from the so-called ‘Frugal Four’ (Austria, Denmark, the Netherlands and Sweden) and get the plan approved no later than the European Union summit this week.

The ECB meeting on Thursday is unlikely to see any significant changes in the central bank's extremely easy monetary policy. President Lagarde is likely to instead use this week’s meeting as an opportunity to again pressure European authorities to do more to support the bloc’s economy. That being said, we expect a positive outcome from the EU summit to keep the common currency well supported against the US dollar.

USD

The dichotomy between dismal daily COVID data in the US and comparatively stronger economic data in the US has yet to resolve itself. We are slightly less positive than we were last week. Daily new cases continue to hit record highs. The one silver lining we noted last week is fading, as daily deaths start to climb and catch up with the former. On the positive side we still see positive surprises in economic numbers. Last week it was the jump in ISM non-manufacturing PMI (the rough equivalent of the European PMIs) and a decent drop in weekly jobless claims. However, neither of those reflect yet the reintroduction of lockdown measures over the last few days.

This week we think inflation numbers will be more important than the market does. So far, supply disruptions have not resulted in any inflationary pressures, in spite of the successful income-supporting measures enacted by the Federal government. It will be interesting to see whether that's still the case four months into the pandemic.

CHF

Similar to the week before, the Swiss franc ended last week little changed against the euro. Since late-June, the pair has remained within a very narrow band of 1.06-1.07, recently trading within an even tighter range. Last week’s labour market data from Switzerland surprised to the upside. On a non-seasonally adjusted basis, the rate came in at 3.2% in June, lower than the previous month’s 3.4%. The data, however, did not have a strong influence on the exchange rate. The franc seems to continue being driven largely by shifts in sentiment - or the lack of it.

Aside from SNB president Thomas Jordan’s speech on Tuesday, this week is mostly empty in terms of important news from Switzerland. Outside news has a greater potential to provide volatility in the EUR/CHF rate than domestic information, in our view.

AUD

AUD spent much of last week relatively range bound against the US dollar - a good gauge of the lack of clear direction in market sentiment as investors are caught between rising virus cases and improving economic data.

So far, an increase in virus numbers in Australia, and the reintroduction of lockdown measures in areas such as Melbourne, have not yet translated into a weaker Aussie dollar. New daily cases of the virus in Australia rose to its highest level since late-March last week, up from single figures to around 300 within the space of a month. The majority of these cases have been recorded in the state of Victoria, which has now imposed stricter measures on travel and a six-week lockdown on Melbourne. The lack of reaction in the currency may be due to the low death rate, with only six COVID related deaths recorded in the country since late-May.

Meanwhile, the RBA kept interest rates unchanged last week, with governor Lowe again noting the improvements witnessed in domestic data. We’re likely to get further evidence of this pick-up in activity on Thursday, with the release of the monthly labour report for June.

CAD

The underperformance of the Canadian dollar last week was fairly remarkably considering the impressive data we’re continuing to see out of the Canadian economy. Canada's Ivey PMI for June massively exceeded expectations, rising to an expansionary 58.2 from the previous month’s 39.1. Housing starts for June also rose more-than-expected, while Friday’s labour report showed that the Canadian economy added almost a million net jobs last month. A record 953,000 net jobs were created in June, meaning that around 40% of those jobs lost since the onset of the crisis have now been recovered - a quicker pace than originally anticipated. These improvements in economic news have, however, been largely overlooked by currency traders, with the moves witnessed in the currency last week driven largely by technical factors.

This Wednesday’s Bank of Canada meeting is almost sure to have more of an impact on the currency. While no change in policy is expected, investors will be eagerly awaiting the BoC’s comments on the state of the Canadian economy, particularly its updated economic projections.

CNY

The yuan broke through the physiological level of 7 to the US dollar early last week, the first time it has done so since the height of the market panic in mid-March.

We mentioned last week that optimism surrounding a recovery in the Chinese economy has been behind much of the recent strength in the yuan. While that certainly continued to support CNY last week, the move higher in the currency was triggered largely by the sharp move higher witnessed in Chinese equity markets. The Shanghai Composite index jumped over 10% last week, due to a combination of technical factors and an easing in the number of COVID cases in China. This is a development that tends to attract foreign investors, hence the rally witnessed in the yuan last week.

Investors will have a host of economic data releases out of China to digest this week. Among the most noteworthy, and potentially market moving, will be Tuesday’s trade data and Thursday’s retail sales figures for June. We will, however, be paying closest attention to the initial GDP estimate for the second quarter, also due on Thursday. Following a record 9.8% contraction in Q1, the market is pencilling in a record expansion in excess of 10% for the three months to June. Confirmation of this would be evidence that the Chinese economy is bouncing back strongly from the COVID-induced downturn and could help lift investor sentiment this week.

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FX Market Report -10/07/20

Fri, 10 Jul 2020 10:01:44 GMT

Safe-havens rally as US virus cases continue to rise

A surge in the number of new cases of the COVID-19 virus in the US kept low-risk assets well bid on Thursday, with the safe-haven US dollar, Japanese yen and Swiss franc leading the gains in the FX market.

A total of more than 60,000 cases of the virus were reported in the US yesterday, the largest daily tally recorded thus far. An even greater cause for concern is that this jump in reported cases is now beginning to feed its way through to an increase in the death rate, debunking the theory that the rise in cases was merely a result of increased testing. The three-day moving average death count is now at its highest level in the country in almost a month, having earlier in the week fallen to pre-lockdown levels.

It will be interesting to see how long this trend of rising US cases and dollar strength continues. At present, safe-haven flows into the dollar are overriding concerns stemming from the possibility of US lockdown measures being in place for a prolonged period of time. Should investors believe, however, that the shutdowns are beginning to materially damage the US economy, then we think we may start seeing a reversal in this trend.

Slightly better-than-expected jobs data out of the US wasn’t enough to prevent the dollar falling back below the 1.13 mark versus the euro. US initial jobless claims fell more than predicted, coming in at 1.31 million. Yet, with many states reimposing lockdown measures, the idea of this number falling significantly in the coming weeks seems far fetched.

Sterling eases despite UK budget announcement

The general risk off mode kept sterling on the back foot yesterday, with the UK currency trading back below the 1.26 level versus the greenback this morning. While the pound remains well supported by both the declining number of new cases of the virus in the UK and Chancellor Rishi Sunak’s budget announcement, the ongoing Brexit risks are preventing these gains from being more meaningful than they have been. Talks will continue between both the UK and EU in Brussels next week.

Elsewhere, the best performing major currency yesterday was the New Zealand dollar. Unlike its neighbouring Australia, New Zealand is not experiencing a second wave of virus infections, with reported cases there essentially evaporated.

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FX Market Report - 03/07/20

Fri, 03 Jul 2020 11:02:53 GMT

Why did markets overlook Thursday’s US payrolls report?

Thursday’s US labour report came in much stronger-than-expected, fuelling hope in some quarters of a V-shaped recovery in the global economy.

The US nonfarm sector added a record 4.8 million jobs in June, the second straight month of positive job gains following April’s near 21 million contraction. This was larger than the 3 million that economists had pencilled in, bringing the total amount of net job hires to almost 7.5 million in the past two months alone.

While an encouraging step in the right direction, we are not getting overly carried away by yesterday’s data. It is worth noting that the vast majority of those jobs lost were deemed as temporary lay-offs, with most of the subsequent job gains merely re-hires in sectors such as retail and hospitality that are now up and running again post-lockdown. There are also suggestions that many employers may simply have re-hired staff in order to qualify for the government's PPP loan forgiveness programme, which would skew the data slightly higher. Another problem with the data, and one of the reasons why it was largely overlooked by investors, is that it only covers the one month period up to the second week of June, i.e. before the latest surge higher in US virus cases.

The result was a limited reaction in currency markets to the data’s release, although the dollar did strengthen across the board later in the day - we think due to growing concerns regarding the latest COVID-19 infection numbers, rather than the data itself. We think that the real test will be how the US labour market holds up once the government's extra unemployment benefit runs out at the end of the month. Should this be extended, which seems likely, that would probably be seen a positive for risk assets.

Today looks set to be a very quiet one in the markets. Aside from this morning’s revised PMI data, we expect currencies to be driven largely by the latest COVID numbers.

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FX Market Report - 02/07/20

Thu, 02 Jul 2020 09:47:07 GMT

Hopes of virus vaccine send risk assets higher

A generally more upbeat tone swept through financial markets on Wednesday, sending stocks and risky currencies higher and safe-havens such as the US dollar lower.

In an environment with no real direction in the market, investor sentiment has shifted fairly abruptly in both directions of late on the smallest of news headlines. Reports that an early human trial for a COVID-19 vaccine in Germany had yielded positive results was enough to buoy the market yesterday. While a final vaccine remains some way off, the mere hope that one could be found in the not too distant future is providing plenty of impetus for rallies in risk assets such as equity markets and emerging market currencies.

The economic newsflow also continues to provide reason for optimism that the recovery in the global economy could be closer to a ‘V-shape’ than the market had anticipated a few weeks ago. Business activity data out of the US yesterday was highly encouraging, with the ISM manufacturing PMI unexpectedly rising back above the level of 50 that denotes expansion. The ADP employment change number, which represents that net jobs gained or lost in the US private sector, also provided reason for hope. While the June number fell short of expectations, the May data was revised sharply higher from a near 3 million contraction to a 3 million gain in jobs.

Next up for the dollar will be this afternoon’s nonfarm payrolls report. Given the strength of the ADP report, another positive month of job creation with upward revisions to the previous months data looks likely. The market is currently eyeing a job creation number of around 3 million, with the jobless rate expected to have eased back to 12.3% last month.

Sterling extends gains as Brexit risks recede

The broad sell-off in the dollar allowed EUR/USD to make a march towards the 1.13 level yesterday, with sterling up another one percent or so to around the 1.25 mark.

Last night’s FOMC meeting minutes were actually largely overlooked by the market, despite policymakers reiterating that a negative interest rate policy in the US was unlikely. The euro was instead supported by an upward revision to the June manufacturing PMI and much better-than-expected German labour and retail sales data. The latter posted its biggest monthly jump on record, rising by 13.9% month-on-month in May following a record contraction in April.

Sterling, meanwhile, continues to receive good support, now up almost 2% in the past couple of trading sessions. There has been no real catalyst behind the move, aside from the broad improvements in market sentiment. The lack of bad news on the Brexit front in the past few days has, however, raised hope that some sort of deal between the UK and EU is more likely than not before year end.

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FX Market Report - 18/06/20

Thu, 18 Jun 2020 10:35:16 GMT

What to expect from today’s Bank of England meeting

The pound has been stuck in a relatively narrow range against its peers as investors brace for this afternoon’s Bank of England meeting.

We think that interest rates are highly likely to remain unchanged, although we see a strong possibility that the BoE will increase its bond buying programme for the second time since the onset of the pandemic. According to the latest data on Bank of England gilts holdings, the existing QE programme will reach the £645 billion capacity by late-July at the current pace of purchases, i.e. before the following MPC meeting in August. We therefore think that an increase in stimulus will be required now in order to keep yields suppressed and ensure that businesses and households have access to cheap funding.

We are therefore pencilling in a £100 billion increase in asset purchases, which would bring the programme to an overall size of £745 billion. We think that a £100 billion increase in the asset purchase programme is already largely priced in by the market. An increase in purchases of this magnitude would therefore not materially shift the pound, in our view. As has been customary during the current crisis, we think that a larger package of measures in excess of £100 billion would likely support sterling. By contrast, a smaller increase, or lack of immediate action would, we believe, likely trigger a fairly sharp move lower in the currency.

The BoE’s policy announcement, statement and minutes will all be released at midday this afternoon.

High-risk currencies remain on the back foot

Elsewhere in the markets, investors remaining in a cautious mood, continuing to favour safer currencies over those deemed as high-risk.

The latest virus numbers, particularly out of the US, remain a cause for pessimism. A handful of US states are continuing to report record high daily case numbers, while much stricter containment measures are being reintroduced in Beijing in order to prevent reinfection there. This has included the closure of schools and the halting of around two-thirds of all outbound and inbound flights.

News that a relatively cheap steroid, Dexamethasone, can be used to materially lower the chance of death from COVID-19 is highly encouraging. Even still, risk assets have remained on the back foot in the past 24 hours - perhaps at least in part due to the recent flare up in geopolitical tensions between both India & China and North and South Korea.

Aside from today’s BoE announcement, investors will be awaiting this afternoon’s US initial jobless claims number for signs of a continued slowdown in the rate of job losses across the pond.

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FX Market Report - 17/06/20

Wed, 17 Jun 2020 10:40:17 GMT

UK price growth falls to fresh four-year lows

Sterling ended London trading yesterday roughly where it did on Monday afternoon, with a broadly stronger dollar erasing any gains the UK currency was able to eke out on Tuesday morning.

This morning’s UK inflation data failed to materially shift the pound, despite showing a faster-than-expected slowdown to a four-year low 0.5% year-on-year. By far the biggest drag on prices in May was fuel, which tumbled by almost 17%. The level of core consumer price growth, which strips out the volatile fuel component, actually held up reasonably well, albeit still declined to 1.2% YoY.

This deflationary trend that we’re witnessing around the developed world is not at all surprising. Despite vast amounts of both monetary and fiscal spending being injected into economies, lockdowns have triggered a complete absence of consumer spending activity - the key determinant on price pressure. The re-opening of shops in the UK as of this week may help in this regard.

US retail sales rebound by most on record in May

Hopes of a faster-than-expected rebound in the US economy helped buoy the dollar on Tuesday afternoon, which rallied against almost every other major currency.

News of a sharp bounce back in US retail sales in May provide room for optimism that the economic recovery post-lockdowns could be a swifter one than first envisaged - perhaps closer to a ‘V-shape’ than a ‘U-sharp’. Sales in US retail stores jumped by 17.7% month-on-month, the largest ever increase in the measure. This followed record levels of declines during the height of the lockdown in the two months prior.

Whether such resilient levels of spending are sustainable is uncertain, particularly given the recent fresh daily high virus cases recorded in a number of states. Combined with last month’s remarkably good labour report it does, however, suggest that the virus-induced downturn in Q2 may not be as severe as some of the doomsayers have predicted. This is a positive development for both US equities, which rose almost 2% for the day yesterday, and the US dollar that ended London trading around three-quarters of a percent higher versus the euro.

Gains for the greenback were tempered slightly by some cautious comments from Fed Chair Powell, who noted ‘significant uncertainty remains about the timing and strength of the recovery’ during his testimony to Congress. He also stated that a ‘significant number’ of those 20+ million Americans that have lost their jobs during the crisis are unlikely to return to the workplace any time soon. This mass unemployment does, in our view, provide the biggest hurdle for a rapid and successful rebound in the US economy post-lockdown.

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FX Market Report - 15/06/20

Mon, 15 Jun 2020 12:59:51 GMT

Risk aversion rises after dovish Federal Reserve

Last week was almost a mirror image of the one before.

Equities sold-off worldwide while government bonds and safe havens bounced back. Interestingly, peripheral bonds in the Eurozone managed to end the week nearly unchanged, in spite of the general wave of risk aversion, in a sign that the massive ECB response to the crisis is working. This price action also lent support to the euro, which finished the week down only slightly.

In G10 we must mention the enormous volatility in Norwegian krone trading, which overreacts to moves in both directions on thin liquidity. Emerging market currencies generally sold-off, with Latin American ones the worst losers and Pacific Rim managing to close the week nearly unchanged.

This week is relatively quiet in terms of data releases, with the main event risk likely to be the Bank of England’s June meeting on Thursday. We will also be paying close attention to the new virus cases in the US, where certain states like California, Texas and Florida have shown an unsettling pattern towards caseload increases rather than decreases.

GBP

The April GDP numbers painted a truly dismal picture of the state of the UK economy at the worst of the lockdown. The economy contracted by an unprecedented 20.4% for the month, with falls in manufacturing and construction of over 40%. Markets looked through this somewhat outdated data to the more recent hopeful signs on the economy, and sterling held up fairly well in a week of risk asset sell-offs.

This will be a busy week for the pound, with a top level meeting between Boris Johnson and the EU on Brexit followed by the Bank of England meeting on Thursday. We see a strong possibility that the BoE will increase its bond buying programme, with the market bracing for a pledge for another £100 billion in asset purchases. With this largely priced in, we think

that any accompanying dovish rhetoric that opens the door to the possibility of negative rates could weigh on the pound.

EUR

Last week was a quiet one for European data, and this one will not be very different. EUR/USD was instead driven largely by the aforementioned shifts in overall market sentiment, rallying to a fresh three-month high at the beginning of the week, before falling back below the 1.12 level on concerns regarding a possible second wave of virus infection.

Inflation data on Wednesday should provide insight into the relative damage wreaked by

the lockdown on the supply and the demand sides of the economy. Beyond that and the potential for progress in the Brexit talks early in the week, we expect the common currency to mostly trade off events elsewhere.

USD

The Federal Reserve’s communications following its June meeting last week were decidedly dovish, with an emphasis on reassuring markets that rates will not go up for years and that the Fed is committed to a policy of extreme monetary easing. This message, together with worrisome signs of an increase in the pace of infection in certain US states, meant that the dollar did not benefit as much from its safe-haven status when the equity market sell-off began Wednesday night.

This week, retail sales and industrial production data for May should give a clearer picture

of the extent of the bounceback in May. As always, the most timely data point during this crisis will come on Thursday, when the weekly initial and continuing jobless claim data are published.

CHF

The Swiss franc was one of the best-performing major currencies last week, rallying against all of its G10 peers, save the Japanese yen. The rebound in the franc came amid the turn for the worse in global risk sentiment, with investors yet again decided to flock to safety. Last week’s economic data from Switzerland was largely positive, with the jobless rate ticking up

only slightly, to 3.4% in May. The release failed, however, to have a strong impact on the exchange rate.

When it comes to upcoming news from Switzerland, the key event this week will be the SNB meeting on Thursday. While it’s very unlikely that we’ll see an interest rate cut, the accompanying assessment from the SNB, particularly regarding the prospects for the country’s economy as well as the inflation forecast, will be worth watching. Rhetoric regarding the currency’s strength and SNB action in this context will also be important. When it comes to the latter - sight deposits decreased in the past two weeks, suggesting that pressure for sizeable intervention in the FX market has decreased significantly since the height of the market panic in March-May.

AUD

The reversal in risk appetite hit the high risk Australian dollar hard last week, which sank almost 3% to its lowest level since the beginning of the month versus the US dollar. Fears of a second wave of virus infection following a handful of new cases in Beijing triggered another sell-off in AUD during Asian trading this morning, although the currency appears to have found some footing so far during London trading.

The minutes from the latest RBA meeting will be released on Tuesday. We don’t expect anything newsworthy to come out of the minutes, however, with markets instead likely to turn their attention to this Thursday’s labour report for May. With Australia easing containment measures at a faster lick than most other countries, we expect a much improved report in April and see scope for a surprise to the upside in the data. Should we begin to see signs that the Australian economy is recovering faster than much of the rest of the developed world, then we would expect the recent move higher in AUD to continue.

CAD

CAD reversed its recent run of gains last week, as investors instead favoured the slightly lower risk major currencies. With economic news out of Canada very limited last week, the USD/CAD pair was driven almost entirely by the aforementioned shift in overall market sentiment and shifts in oil prices, which also ended its run of gains last week.

This week is a very busy one in terms of macroeconomic data out of Canada. This Wednesday’s inflation data is expected to show a further easing in price growth in May, as significantly reduced spending activity forces down prices. Labour and housing data on Thursday could shift the markets, as could Friday’s retail sales numbers for April. The latter is expected to fall by a record amount due to the collapse in demand that the lockdown triggered across the globe.

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FX Market Report -12/06/20

Fri, 12 Jun 2020 10:59:38 GMT

UK economy contracts by most on record in April

Data out of the UK economy this morning was pretty dire, with GDP contracting by a record 20.4% month-on-month in April - slightly worse-than-expected. Virtually every component of the UK economy was hit hard due to the lockdown, particularly hospitality, education and car sales. There is, however, some crumb of comfort that this is likely the worst of the downturn, with activity set to have picked up in May as restrictions were gradually lifted.

Sterling, meanwhile, fell sharply yesterday, declining back below the 1.26 mark for the first time in over a week. Ongoing concerns surrounding Brexit were likely partly to blame for this underperformance.

A notable exception to the risk-off trading was the euro, which managed to mostly hold its own throughout much of trading yesterday. While an exact rationale for this resilience is hard to pinpoint, the still easing number of virus cases and re-opening of economies in the bloc is likely providing comfort for investors. There’s not been too much in the way of European macroeconomic data for currency traders to digest so far this week. This morning’s industrial production numbers may, however, receive some attention.

Fear of second wave of infection sends risk assets lower

Risk aversion returned to financial markets again on Thursday, with concerns over a potential second wave of the COVID-19 virus leading to a violent sell-off in stocks and high risk currencies.

US equity markets experienced their biggest daily drop since the height of the market panic in March, with the S&P 500 index tumbling by over 6% for the day. The reaction in the currency markets was not quite as aggressive, although we did witness sell-offs in high beta currencies such as the Australian and New Zealand dollars and an appreciation in the safe-havens.

Fears regarding an increase in virus infection in a handful of US states was largely to blame for the decreased appetite for risk. Florida, Texas and Arizona all registered their highest number of new daily cases of the virus, with a total of 19 states still seeing an upward trend in reported cases right at a time when restrictions are beginning to be eased. Ongoing widespread protests in the US and beyond provide further reason for concern and have many onlookers fearing a second wave of infection that could cripple the global economic recovery.

Fed Chair Jerome Powell warned over such a possibility during the central bank’s meeting on Wednesday, stating that another wave of infection could harm the US recovery and lead to an increase in joblessness. Should this uptick in new cases continue as a result of the mass gatherings in the coming days, then this trend of a strengthening dollar and deprecation in risk assets could remain the key theme in markets for a little while yet.

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FX Market Report - 11/06/20

Thu, 11 Jun 2020 11:39:39 GMT

How did Wednesday’s FOMC meeting impact the dollar?

Chair of the Federal Reserve, Jerome Powell, struck a dovish tone during yesterday’s FOMC announcement, warning about the downside risks posed by the COVID-19 pandemic and stating that rates will likely stay at current levels for the foreseeable future.

Going into Wednesday’s meeting ourselves, and indeed the market, had thought that there was a possibility Powell may sound an optimistic note, stating that last week’s remarkably strong US payrolls report was the sign of a faster-than-expected economic recovery. There was, however, no such optimism from either Powell’s press conference or the Fed’s accompanying communications. Instead, Powell noted that the risks posed by the virus remained elevated and that there was a greater likelihood than not that the central bank would take additional action to support the economy.

One of the key things that we noted to look out for ahead of the meeting was the Fed’s updated economic and interest rate projections. Regarding the former, the bank stated that it now expects the US economy to shrink by 6.5% in 2020 with unemployment to ease, albeit remain elevated, at 9.3% by year-end. These are of course consensus estimates - the actual views among the committee are wide-ranging, envisaging GDP contraction of anything between 4% to 10% this year.

Then there is the small matter of the Fed’ ‘dot plot’, which shows where each member of the committee expects rates to be in the years ahead. As we anticipated prior to the meeting, this was revised sharply lower to show the vast majority of rate-setters expect interest rates to remain unchanged through the forecast horizon (i.e between now and the end of 2022). Some economists had thought a handful of FOMC members may have thought higher rates were likely in the year after next. In the end, only two members thought that rates would be hiked in 2022, with the remaining fifteen seeing no change.

The reaction in the currency markets was, however, rather limited, despite both the downbeat tone of communications and the dovish ‘dot plot’, with EUR/USD opening trading this morning lower than where it was prior to the announcement.

Sterling ends winning streak versus US dollar

With the Fed meeting now out of the way, investors’ attention will turn back to economic data, namely this afternoon’s US initial jobless claims data and Friday’s Euro Area industrial production numbers.

Tomorrow will also see the release of the April UK GDP and industrial production numbers, although these are unlikely to provide much assistance to the pound. Sterling ended a 10-day run of gains versus the US dollar yesterday, perhaps due to the ongoing uncertainty surrounding Brexit - the deadline for the UK to ask for an extension to the transition period is now a matter of less than three weeks away.

It appears increasingly likely that this deadline will come and go with no clear signs that a resolution to the impasse is in the offing. The EU’s chief negotiator Michel Barnier warned yesterday the UK needed to soften its demands. With that appearing unlikely before the end of the month, we think that we may be in for a temporary period of sterling underperformance.

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FX Market Report - 10/06/20

Wed, 10 Jun 2020 09:59:04 GMT

EUR/USD advances ahead of FOMC announcement

The US dollar was back on the defensive again yesterday, selling off relatively sharply during afternoon trading and ending the day lower against most of its major peers.

There was no real catalyst for the move lower in the greenback, other than perhaps a few market jitters going into this evening’s Federal Reserve meeting. As we noted yesterday, no change in policy is expected from the Fed, although there has been speculation that the bank could introduce a form of yield curve control to push down US rates, although we see this as unlikely at this juncture.

The main uncertainty ahead of the announcement surrounds the Fed’s view on how it sees both the recovery in the US economy post-crisis and where the committee believes the bank’s main base rate will be over the forecast horizon. Regarding the former, should the Fed indicate that they see evidence of a faster-than-expected V-shaped economic recovery, then the dollar would likely rally. Should they downplay recent upbeat data and view it as nothing more than a minor correction, investors would likely view this as a bearish signal for the greenback.

Alongside its updated GDP projections the Fed will, for the first time since December, provide an updated ‘dot plot’ chart. We think that the dot plot will show this lack of appetite for a change in the status quo and indicate that the medium Fed member believes rates will remain at current levels throughout the forecast horizon. There is, however, a possibility that a handful of members see rates being increased before the end of 2022. Should this be the case, then we may see a bit of a recovery in the dollar this evening.

Sterling rallies to three-month highs

The pound continues to benefit from broad US dollar weakness, extending its gains to almost 6% since mid-May, now trading just shy of the 1.28 level.

We attribute almost all of this move to fragility in the dollar, rather than any positive news out of the UK. News out of Britain has actually been largely negative. The fourth round of Brexit negotiations have ended, with boths sides stating that little progress had been made. The UK’s decision to impose a 14-day quarantine period for foreign visitors has also come under fire, raising concerns that a wave of job losses in the travel sector could be in the offing. Meanwhile, investors are bracing for a horrific set of April GDP and industrial production data on Friday, expected to show record levels of contraction.

One positive for sterling is, however, the apparent lack of consensus among the Bank of England regarding the implementation of negative interest rates. BoE rate-setter Jon Cunliffe spoke yesterday, raising concerns that lowering rates below zero could have a damaging impact on the UK financial sector.

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FX Market Report - 09/06/20

Tue, 09 Jun 2020 10:08:26 GMT

US dollar firms ahead of tomorrow’s FOMC meeting

The dollar posted some rare gains against the euro this morning, having snapped one of its worst consecutive run of losses versus the common currency in a number of years on Friday.

Ongoing trade concerns have been back at the forefront of investors’ minds once again, sending the safe-haven currencies, particularly the Japanese yen, higher against their peers. The market has also had one eye on this week’s main event risk, Wednesday’s FOMC meeting, which investors believe could yield a more upbeat tone than expected prior to last week’s remarkably good nonfarm payrolls report. Given the unprecedented measures already announced by the central bank and the turn for the better in US labour data, we are not expecting any policy changes at this Wednesday’s FOMC meeting. Investors will, however, be closely watching the Fed’s accompanying communications for clues on officials’ outlook.

We think that the key to the reaction in the currency markets will be both the Fed’s fresh economic projections and its updated ‘dot plot’. Regarding the former, Chair Jerome Powell may warn over the risks of a prolonged period of high unemployment and the possibility of a retightening in restrictions should the US experience a second wave of infections. An important takeaway from the meeting will be how the Fed views the recent rebound in equity, commodity and credit markets, as well as last Friday’s impressive nonfarm payrolls report. Should the Fed indicate that they see this report as evidence of a faster-than-expected V-shaped economic recovery, then the dollar would likely rally.

Alongside its updated GDP projections the Fed will, for the first time since December, provide an updated ‘dot plot’ chart, showing where each member of the committee expects interest rates to be in the years ahead. Chair Jerome Powell has already stated that officials are ‘not going to be in any hurry’ to unwind their easing measures. We are, of course, facing the biggest hit to the global economy in decades, with conditions that would warrant an increase in rates a considerably long way off. We think that the dot plot will show this lack of appetite for a change in the status quo and indicate that the medium Fed member believes rates will remain at current levels throughout the forecast horizon. We would expect the market to be bracing for much of the same, with a dot plot showing anything other than rock-bottom rates through to the end of 2022 likely to catch investors off guard.

As is customary, the Fed’s interest rate decision will be announced at 7 p.m. BST on Wednesday, with Powell’s press conference to follow half an hour later.

Euro Area GDP revised higher, US inflation eyed

Elsewhere in the markets, this week is an important one in terms of economic data. This morning’s first quarter GDP for the Euro Area was revised upwards from the initial estimate (-3.6% QoQ versus -3.8%), although given that this runs on a significant time lag it was largely overlooked by the market. Yesterday’s Sentix investor confidence index for the bloc also posted an encouraging bounce back in June, although still remained at a lowly -24.8.

Tomorrow’s US inflation data could receive a bit of attention. We will be paying close attention to see whether decreased spending activity is having a downward impact on price growth. Then on Friday, we’ll receive a barrage of UK economic data, notably April GDP data, which is expected to show comfortably the largest monthly contraction on record (-18.4%).

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FX Market Report - 05/06/20

Fri, 05 Jun 2020 12:03:03 GMT

Euro surges higher as ECB increases PEPP by additional €600Bln

The euro leapt above the 1.13 mark versus the US dollar yesterday for the first time in almost three months after the European Central Bank surprised the market with a larger-than-expected stimulus announcement.

The ECB dug deep into its monetary stimulus toolbox again on Thursday, increasing its pandemic emergency purchase programme (PEPP) by €600 billion, bringing the total envelope of purchases in the scheme up to a mammoth €1.35 trillion. As we expected, the end date of the programme was also extended. The scheme will now run until at least the end of June 2021, versus the original end of 2020 end date. The bank announced it will also reinvest proceeds from maturing bonds in the scheme at least until the end of 2022.

We think these decisions make it clear that the ECB has little tolerance for any increase in European bond yields. Even following the massive stimulus announcement during the height of the pandemic in March, yields among many countries in the bloc, particularly in the periphery (notably Italy), have remained elevated compared to pre-crisis levels. This is a real issue for those countries, such as Italy, that are already struggling with high debt burdens. Lower yields across the Euro Area should, we believe, therefore provide additional room for regional governments to ramp up fiscal spending in order to support their domestic economies.

The bank’s GDP projection for this year was revised sharply lower to -8.7%, with a partial rebound to follow in 2021. The market did, however, focus entirely on the hefty PEPP increase. Investors reacted favourably to the announcement, sending the euro over one percent higher for the day. In a divergence from the norm, currencies have rallied on the promise of additional stimulus during the current crisis, with the market taking an optimistic view that greater action from the ECB should allow the Euro Area economy to bounce back quicker once the worst of the downturn is over.

Investors eye another dismal US payrolls report

Another big test for EUR/USD comes in the form of this afternoon’s US nonfarm payrolls report. Another dismal reading here is expected, with investors bracing for an 8 million decline in net jobs and a near 20% unemployment rate. A surprise to the downside in this number would be a telling indication as to just how poorly the US labour market is holding up during the crisis period and could well trigger another move higher in the EUR/USD pair.

Recent employment data does, however, suggest that this afternoon’s payrolls report may not be as bad as first feared. Of all the employment data out since the last labour report, most have shown encouraging signs of improvement, notably continuing and initial jobless claims. The employment components of the ISM indices have also edged higher, suggesting that the worst may be over.

The market will be keen to find out when this month’s payrolls report is released at 13:30 BST today.

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FX Market Update - 26/05/20

Tue, 26 May 2020 11:06:21 GMT

US Dollar pulls back as major Bond market sell-off continues

The general rebound in the key PMIs of business activity, from catastrophic to still very low levels, and the continued easing of lockdown measures, reassured markets and lifted risk assets worldwide last week, led by equities.

Currencies were no exception, and the dollar sold-off against every major peer except the usual safe-haven suspects, the yen and the Swiss franc. Emerging market currencies that had sold-off the most during the crises led the gains, like the Brazilian real and the Mexican peso. Ominously, the Turkish lira failed to join the party and ended the week flat against the dollar and down against the euro.

Late last week, a new risk factor emerged as US-China tensions took a turn for the worse, as the Trump administration upped its rhetoric against the new National Security bill for its Hong Kong territory. The US Memorial Day holiday yesterday and the absence of any specific retaliatory measures from the US so far means that risk assets and emerging market currencies start the week well supported. The most important data point, in our view, will be flash May inflation data out of the Eurozone on Friday, which will shed light on the relative damage wreaked on the supply vs. the demand side of the Eurozone economy.

GBP

April data showed a record jump in unemployment claims, but the data was not sufficiently bad to fulfil the worst expectations. Retail sales also fell by a record amount in April, over 22%. The poor data, combined with the Bank of England’s refusal to rule out the possibility of negative interest rates in the future, capped the rally in sterling.

With most indices of economic activity showing a rebound since late-April equal to about half of the losses sustained, we think that short-term downside for the pound is limited from these depressed levels. The continued sharp easing in new daily deaths caused by the virus, which is not getting the attention we think it deserves given the Dominic Cummins

scandal, and the potential for a further easing in lockdown measures this week, both provide additional reason for optimism.

EUR

The Franco-German proposal of a €500 billion programme to finance the recovery from the pandemic, in addition to the measures already taken by the ECB, has provided good support for the euro.

It’s still very early, but the significant rebound in Eurozone PMI indicators of business activity (to a still dismally low level) is a positive early read on the impact of the various state support programmes and the lifting of the harshest lockdown measures. The German IFO index of business expectations, in particular, came out considerably higher-than- expected. This measure was one of the first in signalling a bottom in the 2008 recession.

USD

The US labour market has yet to hit a bottom. Both the new and continuing weekly jobless claims numbers increased once again above expectations and are consistent with an unemployment rate of roughly 20%. Congress ensured that jobless benefits will remain quite generous over the short term, which should protect aggregate demand. However, the damage to businesses will be substantial.

The key data point this week will again be the jobless data. Economists are forecasting a relative stabilisation in the continuing number, as the job churn becomes more bidirectional and some businesses start to rehire laid off workers. We continue to expect the dollar to suffer over the medium term, due to the poorer response to the crisis in the US and the higher likelihood of medium-term damage to the labour market vs Europe.

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FX Market Update - 21/05/20

Thu, 21 May 2020 11:55:18 GMT

European business activity picks up as lockdowns eased

The euro continued to remain well bid against its major peers on Thursday morning amid a solid rebound in European PMI data and a dovish set of FOMC minutes.

Last night’s Federal Reserve meeting minutes didn’t unveil too much that the market didn’t already know. Policymakers did, however, voice deep concerns over the state of the US economy, while warn about a second wave of infection and its impact on low-income households. The minutes noted “a second wave of the coronavirus outbreak, with another round of strict restrictions on social interactions and business operations, was assumed to begin around year-end, inducing a decrease in real GDP, a jump in the unemployment rate, and renewed downward pressure on inflation next year”.

By contrast, this morning’s Euro Area PMI data provided reason to be slightly more optimistic regarding the outlook for Europe. As we thought it might, the data rebounded more-than-expected, particularly the services index, which leapt back up to 28.7 in May from April’s record low 12.0. This helped lift the composite index, a weighted average of both the services and manufacturing sectors, to a more respectable 30.5 from April’s 13.6.

The aforementioned rebound clearly reflects the gradual easing of lockdown measures in Europe, with a range of industries across the continent now beginning to resume at least partial operations. While the move higher in the euro off the back of the data was limited, we believe we are seeing the beginning of a more sustained move higher in the common currency. With new cases and deaths caused by the virus easing at a much slower rate in the US than in Europe, it seems likely that the lifting of lockdown measures and a return to normalcy will occur at a much more gradual pace in the States than in the Euro Area. Should this begin to be reflected in upcoming macroeconomic prints, then the aforementioned more sustained move higher in EUR/USD may start to begin in earnest.

UK PMIs rebound, April retail sales eyed

This morning’s UK PMI data similarly beat expectations. The services index jumped back up to 27.8 in May from April’s record low 13.4, while the manufacturing index also rose to 40.6 versus last month’s 32.6 reading.

The fact that the data came in remarkably similar to that in Euro Area is an encouraging sign, given that the UK has run on a lag to most of its European counterparts in both imposing and gradually unwinding lockdown measures. Investors will now turn their attention to tomorrow’s retail sales data for April, which is expected to show a record contraction in activity. Sterling has underperformed its peers this month and is in need of a bit of a boost - an upside surprise here could provide just the lift that the currency is looking for.

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FX Market Update - 20/05/20

Wed, 20 May 2020 10:07:19 GMT

News of €500 billion EU fund pushes Euro higher

The euro appears to have turned a corner in the past 24 hours, rallying to just shy of the 1.10 level versus the US dollar yesterday afternoon.

A number of factors have been behind the move higher in the single currency this week, most notably news of a proposal between France and Germany for a EU common fund that would support smaller countries through the current crisis. This fund would provide around 500 billion euros of regional-wide fiscal support for those countries hardest hit by the pandemic, an encouraging sign of unity that has helped sentiment towards the euro.

Macroeconomic data has also tentatively begun to show signs of recovery. May’s ZEW economic sentiment index for the Eurozone leapt back up to 46, a marked improvement from the -49.5 registered in March. There now appears general optimism in the bloc that activity will begin the pick up pace in the coming weeks as new cases of the virus ease and economies begin to unwind lockdown measures.

Attention will now turn to this Thursday’s business activity PMI data for May, which is expected to show a rebound off April’s record lows. We are optimistic that the data could surprise to the upside, which may provide some additional impetus for the euro this week.

Powell cautious on recovery, UK inflation falls sharply

The dollar remained broadly on the back foot against most of its major peers on Tuesday, with positive news regarding progress towards a virus vaccine leading to an unwinding in safe-haven flows. Some rather cautious comments from Fed chair Jerome Powell were largely overlooked by the market. He stated that a full recovery in the US economy would not take place until the health crisis was resolved, stating again that both the Fed and the US government may need to provide additional support to carry households through the crisis.

While sterling has benefitted from the weaker dollar so far this week, its rally has been limited by the ongoing negativity surrounding the UK currency that has seen it be the worst performing G10 currency so far this month. Brexit headlines have once again reared their ugly head, with officials from both sides of the negotiations claiming that little progress had been made towards a full agreement. Should this continue to remain the case up until the end of June deadline to ask for an extension to the transition period, then additional losses could be on the cards for the pound, in our view.

Meanwhile, this morning’s UK inflation data slumped to just 0.8% in April from 1.5%, its lowest level since April 2016. This was, however, widely expected, with the lack of spending activity during the lockdown forcing retail outlets to slash prices at an aggressive pace. Next up will be a speech by BoE Governor Andrew Bailey later this afternoon.

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FX Market Update - 19/05/20

Tue, 19 May 2020 09:22:20 GMT

UK unemployment claims jump by most on record

This morning’s UK labour report did little to boost optimism, as the April claimant count change number came in worse-than-expected. The number, which represents the monthly change in the number of people claiming unemployment benefits, spiked to a record high 856,500 last month, with the virus-induced lockdowns leading to mass layoffs across a range of sectors.

The labour market has, however, been spared from a complete meltdown by the UK’s Job Retention Scheme, which has enabled around 7.5 million employees to remain in formally employed that would otherwise have been laid off. As it stands, only around 2.6% of all UK jobs were lost in March and April combined. While this would be an extraordinarily high number under normal circumstances, it is nowhere near as catasphoic as the 20%+ levels of jobs lost in the US. This heavy focus on job retention in the UK is one of the main reasons why we think the UK economy will bounce back sharper than its US counterpart once the lockdowns are lifted.

The pound also benefited from the broad rally in riskier currencies on Monday, soaring more than one percent higher to back above the 1.22 mark versus the dollar.

Investors brushed aside comments over the weekend from Bank of England chief economist Andy Haldane that the bank was considering the possibility of lowering rates into negative territory. This may be due to the fact that this is merely the opinion of one of the committee members - governor Andrew Bailey appeared opposed to such a move during his remarks earlier in the week. Currency traders have instead been encouraged by the fairly sharp decline in UK virus deaths, which fell to a near two month low 160 on Monday.

Safe haven dollar falters, equities rally on hopes of virus vaccine

A ‘risk on’ mode prevailed in financial markets on Monday, sending the safe-haven US dollar lower and global equity markets sharply higher.

EUR/USD leapt around one percent higher to just above the 1.09 level yesterday afternoon amid positive headlines surrounding the global quest to find a vaccine for the COVID-19 virus. Human trials conducted in March by Massachusetts-based biotech firm Moderna Inc yielded positive results, with all 45 people that were injected with the experimental drug producing covid antibodies. While the firm claimed that this may not yet provide sufficient protection against the virus, it is a very encouraging step in the right direction.

It is clear that the mass production of a vaccine is absolutely key to enabling the global economy to bounce back to pre-crisis levels. Until that time, the recovery will be gradual, as some form of social distancing will likely remain in place. Fed Chair Jerome Powell warned over the weekend that the US economy could shrink by 20-30% due to the virus, although he ruled out negative rates and reassured investors that the economy would return back to pre-crisis levels.

Attention in the markets today will remain on Mr Powell, who will be speaking at the Senate Banking, Housing, and Urban Affairs Committee later this afternoon.

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FX Market Update - 15/05/20

Fri, 15 May 2020 09:37:27 GMT

GBP hovers around April lows on virus & Brexit woes

The major currencies spent much of Thursday stuck in a relatively narrow range ahead of a dump of economic data out later today.

Sterling continued to hobble around its lowest level since late-March yesterday, with the rather negative headlines surrounding the spread of COVID-19 in the UK and ongoing Brexit woes weighing on the pound. Regarding the latter, the UK government has once again flat out refused to extend the Brexit transition period beyond the end of December, despite the disruption caused by the virus. This will really come into sharper focus when the extension deadline approaches at the end of June, though it seems unlikely at this point that Johnson will engage in a drastic 180 change in stance.

Comments this week from Bank of England Governor Andrew Bailey have also pressured the pound somewhat lower. Bailey appeared to have little interest in entertaining the possibility of negative interest rates in the UK, although did leave the door open to additional stimulus measures in the coming months. We think that much like in the US, negative rates in the UK are highly unlikely to actually come to pass. Not only is their actual effectiveness questionable, but we also think that they would probably do more harm than good in the current environment.

With no UK data out today, investors will await Tuesday’s labour report, particularly the claimant count number for April.

US jobless claims top 36 million since onset of crisis

EUR/USD has been stuck trading within the 1.08-1.09 range throughout much of trading thus far this week.

There has been no real dramatic headlines to speak of in the past few days from either side of the Atlantic that would jolt the pair in either direction. Yesterday’s US jobless claims data was slightly worse-than-expected, with another 3 million or so Americans filing for unemployment benefits last week. This takes the total since the start of the crisis to a whopping 36 million, approximately 22% or so of the total labour force. As we have mentioned on a number of times in the past few weeks, we think that the weak job retention schemes in the US presents itself as one of the biggest risks to the US dollar in the medium-term.

Today looks set to be a fairly busy one for the main pair. This afternoon’s US retail sales and industrial production numbers both have potential to shift the dollar. This morning’s revised first quarter growth from the Euro Area is not expected to rock the boat, particularly given that it only covers a fraction of the lockdown period.

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FX Market Update - 14/05/20

Thu, 14 May 2020 10:27:22 GMT

USD rallies as Powell rules out negative rates

Another wave of risk aversion swept through the foreign exchange market again on Wednesday, causing investors to favour the safe-haven US dollar at the expense of most other major currencies.

Chair of the Federal Reserve Jerome Powell had very little positives to say regarding the US economy during his speech yesterday. As we had anticipated, Powell ruled out the possibility of the Fed cutting interest rates into negative territory, although he did warn that additional measures may have to be taken in the coming months to shield the economy. He warned the market about significant downside risks and long-term economic harm caused by the virus outbreak, noting that the recovery would be a gradual one.

We’ll continue to receive evidence of this aforementioned hit to the US economy in this afternoon’s initial jobless claims data, which remains one of the most important releases on the economic calendar. While we are seeing an easing in the number of new weekly jobs shed, the pace at which new claims has slowed has been a much more gradual one than hoped. With no real job protection schemes in the US to speak of this is likely to remain the case in the coming weeks - a development that is unlikely to help the dollar’s cause, in our view.

Aside from today’s jobless claims, we look ahead to tomorrow’s US retail sales data for April. An avoidance of sales falling by a fresh record amount would be a major surprise.

Pound falls to new lows after UK GDP data

The pound ended around half a percent lower versus the US dollar during the London trading hours yesterday, although we attribute this largely to a broadly stronger greenback. Wednesday’s GDP data, which showed the UK economy contracted by a record 5.8% in March, was merely a taste of things to come. It is abundantly obvious that the UK economy is heading for a recession, the real question is just how significant this recession will be. Next week’s PMI data for May and retail sales figures for April could give us at least some indication as to the magnitude of the downturn.

Meanwhile, the euro held up better than most amid the broad rally in the dollar. Eurozone industrial production data came in slightly better-than-expected, although given this was for the month of March it was somewhat overlooked. There instead appears growing optimism that the Euro Area economy will be back up and running much quicker than its US counterpart. New cases of the virus continue to ease in the main economic areas of the bloc and are now around their lowest level since early-March. With some industrial production beginning to resume, we think that we may begin to see a slight dichotomy in economic data between the US and Euro Area once released for the May and April months. This would, we believe, be supportive of the euro in the more medium-term.

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FX Market Update - 13/05/20

Wed, 13 May 2020 09:38:05 GMT

Jitters ahead of Powell speech and possibility of negative rates

The US dollar eased against its major peers yesterday amid a decline in inflation data and jitters ahead of a speech by Federal Reserve Chair Jerome Powell later today.

Powell will be speaking on the topic of ‘current economic issues’ via a webcast today, with investors eager to hear his view on how the US economy is holding up since the Fed’s last meeting earlier this month. We think that he will continue to strike a cautious tone, noting that the return to normalcy and reopening of the US economy will be a very gradual one.

There is now real speculation in the markets that Powell could hint at the possibility of the Fed cutting rates into negative territory in response to the crisis - we believe that this reaction is unfounded and do not expect Powell to entertain such a notion when he speaks at 2pm BST today. This could provide a bit of a boost to the dollar, which spent almost all of Tuesday on the back foot versus the euro. The dollar was particularly fragile after data showed that US inflation dropped by its largest amount since 2008 in April. While the magnitude of the drop was larger than expected, this comes as no real surprise given the inevitable sharp drop in spending activity triggered by the lockdown.

In the meantime, this morning’s Euro Area industrial production data could shift EUR/USD today, although it may be overlooked given that it runs on a bit of a lag. Of more importance to the common currency will be German inflation data (Thursday) and the revised Q1 GDP figures (Friday).

UK economy contracts at fastest pace since 2008

Sterling fell for the second straight session yesterday, even ending the day lower against the broadly weaker US dollar.

Tuesday’s announcement from Chancellor Rishi Sunak that the UK’s furlough scheme will be extended by another four months is an encouraging development and should, in our view, help Britain’s labour market emerge from the crisis less scathed than many of its peers. While we think the scheme should help the UK economy get back on its feet at a much switfter pace than it would have otherwise, the programme clearly comes at a very high price. Public sector net borrowing is expected to hit its highest level relative to GDP since WW2 this year. Combined with the UK’s sizeable current account deficit, this leaves the UK and the pound particularly exposed to outflows of capital during times of heightened uncertainty.

The lack of understanding regarding Boris Johnson’s lockdown announcement among some sections of society has far from helped Sterling’s cause so far this week, nor has the reemergence of fears that the UK will be unable to strike a Brexit deal by the end of the year. A slightly better-than-expected set of GDP numbers out today provided little comfort for the UK currency, with the economy still contracting by its largest amount since 2008 in Q1, -2% quarter-on-quarter.

With the lockdown measures not in place until very late in the quarter, it doesn’t take any expert analysis to realise that the Q2 number will be significantly worse.

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FX Market Update - 12/05/20

Tue, 12 May 2020 10:56:46 GMT

GBP slides after PM announces easing of lockdown

Sterling slipped briefly back below the 1.23 mark versus the US dollar on Monday, down over one percent for the day following Boris Johnson’s speech on Sunday evening.

The Prime Minister’s announcement that lockdown measures will begin to be easing in the UK as of Wednesday provided only temporary support for the pound during Asian trading. The currency instead fell sharply during London trading on Monday amid apparent confusion among some sections of the population regarding the extent of the measures and criticism aimed at the government’s handling of the situation. While the number of new daily cases of the virus remains relatively high in the UK, it's worth noting that this can at least in part be attributed to the increased levels of testing being conducted in Britain relative to the early stages of the outbreak. A better metric would be the number of new deaths, which yesterday reached its lowest level since 26th March.

The next two or three weeks or so could prove vitally important for the pound. With the lockdown beginning to be eased, investors will be closely watching the latest virus contagion numbers for any signs of a meaningful increase in the rate of spread. Should this be the case, then the path to normalcy will be a slower one, and sterling could be under pressure again.

Aside from the latest virus stats, tomorrow bodes to be an important one in terms of UK economic data, with March industrial production and Q1 growth data set for release. The UK economy is expected to have contracted by 2.5% QoQ in the first three months of the year, despite the lockdown not being implemented until late in the quarter. While this data does of course run on a lag and may be largely overlooked, it should give us a decent indication as to how the economy may perform in Q2 and the height of the crisis period.

Fears of virus second wave keep dollar well bid

Fears regarding a second wave of infections in those Asian countries that have already begun easing their lockdown measures kept the safe-haven currencies, including the dollar, well bid on Monday.

The reemergence of the virus in some small areas of China and South Korea has spooked the market somewhat in the past 24 hours or so, raising fears regarding a second wave of infections and slower rate of recovery in the global economy. While these new pockets of infection are currently small, it has been enough to keep EUR/USD pinned around the 1.08 level so far this week.

With no European data out this morning, the next item on the agenda will be this afternoon’s US inflation data, expected to show a sharp easing in price growth in April amid the lack of consumer spending activity. While ordinarily one of the more important data releases on the economic calendar, this may go largely unnoticed given its now near irrelevance on impacting Federal Reserve monetary policy.

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FX Market Update - 05/05/20

Tue, 05 May 2020 10:38:32 GMT

US dollar rallies despite easing European lockdowns

Investors continued to favour the safe-haven US dollar on Monday, as heightened global trade concerns overshadowed optimism regarding an easing in European lockdowns.

President Trump’s comments on Friday regarding possible sanctions on China spooked the market at the end of last week, refueling concerns pertaining to an escalation in the trade war that dominated trading throughout much of last year. EUR/USD lost another half a percent or so during London trading yesterday, briefly edging back below the 1.09 level on this aforementioned broad US dollar strength.

The rally in the greenback in the past couple of session would likely have been more pronounced had it not been for the continued encouraging news out of Europe. New daily cases of the COVID-19 virus have continued to ease sharply in the Euro Area, with cases for Italy, Spain and France now at their lowest levels in almost two months. Lockdown measures are also now beginning to be unwound - non-essential shops throughout most of the EU are now either already open or set to re-open within the next week.

As of yet, this trend of easing cases in Europe and still sky-high daily cases in the US has not translated into a meaningful move higher in EUR/USD. Should it become clear, however, that the US is lagging considerably behind the Euro Area in lifting their containment measures, then that uptrend in the common currency may begin to become more evident, in our view.

Will the BoE hint at a QE increase this week?

Sterling edged modestly higher against the US dollar this morning, consolidating some of its sharp losses from Friday. Attention in the UK this week will, of course, remain firmly on the latest daily contagion numbers and announcements from the UK government regarding a possible easing of the lockdown restrictions. The UK government will be holding its three-week review of the lockdown this coming Thursday, although PM Johnson is not expected to make a formal address to the nation until Sunday, which may involve an outline of the exit strategy.

In the meantime, investors will be looking to this Thursday’s Bank of England meeting for any market moving information. The key to the reaction in the FX market is likely to be the bank’s updated macroeconomic projections and comments regarding an increase in the QE programme. Regarding the former, we expect them to dispel the idea of a quick ‘V-shaped’ recovery and instead stress that the path to normalcy will be a gradual one. On the topic of QE, we think that the bank’s communications will keep open the possibility of an increase in the programme at a later date, particularly should the current lockdown remain in place longer than anticipated. A downbeat set of economic projections, combined with no hint of further stimulus, would be the worst-case scenario for the pound and could send the currency sharply lower this week.

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FX Market Update - 04/05/20

Mon, 04 May 2020 11:14:29 GMT

The Dollar sold off last week as central bank responses began to show

World currencies rallied against the dollar last week as a number of hard hit markets showed signs of stabilisation, particularly oil.

Investors were in a buoyant mood until Friday, when Trump's lashing out against China combined with thin holiday markets in most of the world sent global equities lower. World currencies mostly held their own, and the dollar ended down against every G10 currency and most emerging market ones.

The focus this week will be squarely on the US payrolls report for April, out on Friday afternoon. This data will allow us to gauge precisely the damaged wrought on the US labour market by the pandemic, after a series of dismal but perhaps less accurate weekly jobs reports. The other key question will be to see whether the rally in risk assets has got ahead of itself, given the dreadfulness of the economic data so far.

GBP

Soft retail sales data out of the UK did little to move sterling last week, which mostly tracked closely the euro moves against the dollar.

The main event this week is the Bank of England meeting on Thursday, where the MPC is universally expected to hold rates at the de facto zero bound. The market will be looking to the minutes of the meeting to measure members expectations for the depth of the economic contraction. Beyond that, further details on PM Boris Johnson's’ plans to reopen the economy gradually after 7th May will be key. Given the still relatively high number of new daily cases of the virus in the UK, this unwinding of lockdown measures is likely to be a very gradual one.

EUR

Eurozone economic growth in the first quarter came out at a truly dismal -16.8% in annualised terms. This rate of contraction dwarfs so far the US equivalent, which came out at -4.8%. We think this is mostly due to the late timing of the US confinement orders relative to Europe during the month of March, and expect that the gap will close in the second quarter. The good news is that unemployment ticked up only slightly, as various state schemes to support employment in spite of low activity kicked in.

The ECB announced a new financing program, PELTRO, intended to support banks through loans that have even lower interest rates and more attractive terms than the existing TLTROS. The euro put in a surprisingly good performance, and it seems the market is coming around to our view that the programmes put in place by the ECB are sufficient to ensure no systemic euro risks arise while individual states deal with the crisis.

USD

The U.S. Federal Reserve announced some tweaks to its recently announced lending programmes, and Chair Powell committed to keeping extraordinary measures in place as long as necessary. Aside from that, however, no market-moving news came out of the Fed meeting last week.

We now turn our attention to Friday's payrolls report, which is expected to show eye-popping jumps in job loss and unemployment. We are more negative than the consensus, expecting a 20% number reflecting the brutal losses in jobs over the past few weeks. With attention now shifting to reopening plans for the different economies, the stubbornly high contagion and death numbers out of the US lead us to expect that the US rebound will lag the Eurozone, putting a floor under the euro.

CHF

The Swiss franc ended last week slightly lower against the euro, although was actually the best-performing safe-haven currency, with the EUR/CHF pair crossing the 1.06 level on two occasions for the first time since early-April. Recent franc weakness can be linked to both improved global sentiment as well as the SNB’s actions. The SNB’s sight deposits increased sharply again last week by 13.1 bn CHF versus 13.4 bn CHF the week prior. This suggests that the SNB recently stepped up its interventions to limit franc strength as the EUR/CHF pair started approaching the 1.05 level.

Economic data from Switzerland hasn’t been particularly good of late, unsurprising given the measures in place to limit the spread of the coronavirus. Retail sales dropped by a record 5.6% YoY in March. Economic sentiment also turned sour: the KOF leading indicator posted its largest monthly drop on record, coming in at 63.5, very close to the 2009 low.

While they may not influence the exchange rate in the short term, this week will bring a host of economic readings, which will allow us assess the scale of the damage to the Swiss economy as a result of the pandemic. In addition to April’s manufacturing PMI, which dropped less-than-expected to 40.7, we’ll receive inflation and unemployment data for the same month. The CPI print is expected to show a big drop, dragged down by lower oil prices, while unemployment is set to jump - economists’ expect an increase from 2.9% in March to 3.4% in April.

AUD

Last week’s worst performing major currency was the Australian dollar, in large part due to the eruption of US-China trade tensions.

Focus this week will be squarely on Tuesday’s RBA meeting. We don’t expect too many surprises, with interest rates to remain at the bank’s effective lower bound 0.25%. We don’t foresee negative rates in Australia and expect Governor Lowe to reaffirm the bank’s pledge to keep the cash rate unchanged until progress is made towards full employment and on-target inflation, i.e for the foreseeable future.

The main point of contention will be regarding the bank’s recently introduced quantitative easing programme. We expect it to remain unchanged, although there is a chance that they indicate a smaller and less frequent pace of asset purchases. This would be a hawkish surprise that could support AUD this week.

CAD

The Canadian dollar had a rather topsy-turvy week, rallying sharply in the first half of the week before falling just as violently in the second half to end it as the second-worst performing G10 currency. President Trump’s threat of more tariffs on China has negative implications for CAD, given China’s hefty oil consumption and the Canadian economy’s heavy reliance on the production of the commodity. The currency also felt the full force of last week’s much worse-than-expected manufacturing PMI, which fell to its lowest level on record (33 versus 41.5 expected).

We think that the Canadian economy will suffer from a similar problem to that of the US - a much sharper increase in unemployment than much of the rest of the developed world. We expect the country’s weaker job retention schemes to be reflected in a worse-than-expected jobs report for April, out this Friday. Should this be confirmed, we may see a bit of weakness in CAD towards the end of the week.

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FX Market Update - 01/05/20

Fri, 01 May 2020 09:45:04 GMT

Euro jumps to two-week high after ECB meeting

The euro jumped to its strongest position in a fortnight versus the US dollar on Thursday evening, buoyed by comments from Christine Lagarde following the ECB’s April monetary policy meeting.

In a slight disappointment to the markets, the ECB failed to announce an immediate increase to its Pandemic Emergency Purchase Programme (PEPP), although it did indicate that it was prepared to do so at a later date. The bank instead laid out plans to reduce the interest rate it offers to commercial banks as part of its long-term loans programme, TLTRO III.

Policymakers also announced a new loans programme known as the Pandemic Emergency Long Term Refinancing Operation, PELTRO for short. This will provide loans to banks at ultra-low interest rates of -1%. While this is not quite as big of a headline stealing announcement as many market participants had expected, investors were suitably satisfied that the bank has enough tools at its disposal to continue supporting the Euro Area economy in the coming months. This, combined with the typical volatility induced by month-end flows, sent the euro around one percent higher during the course of trading yesterday.

Last month was probably the worst month for the global economy ever, with widespread lockdowns bringing activity to a screeching halt. This was reflected in the Q1 GDP data for the Euro Area released yesterday, which showed that the bloc contracted by 3.8% quarter-on-quarter, its fastest pace of contraction on record. Italy and France have now both officially entered into recession, with it merely a matter of time before the rest of Europe follows suit.

As mentioned yesterday following the US data, this is but the tip of the iceberg, given that lockdown measures were not put in place until relatively late in the quarter. Data for Q2 is likely to be much worse, with the ECB warning yesterday that the bloc’s economy could contract by anywhere between 5 to 12% this year.

US jobless claims top 30 million since start of crisis

The situation in the US labour market continued to go from bad to worse yesterday, perhaps another factor behind the move higher in the euro and sterling yesterday and broad sell-off in the greenback.

Initial claims for US unemployment benefits rose by another 3.84 million last week. While the number of new weekly cases eased once again, it remains sky-high, pushing the overall number of claims since the onset of the crisis to north of 30 million. Remarkably, this translates into around 19% of the US labour force becoming newly unemployment in the past six weeks alone.

We now await the April nonfarm payrolls report, due out next Friday. We expect this to show record levels of job losses and post-WW2 high unemployment levels. In the meantime, this afternoon’s US PMI data from ISM could prove a market mover, although volatility may be limited by the fact that this will only show activity in the country’s relatively small manufacturing sector.

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FX Market Update - 29/04/20

Wed, 29 Apr 2020 10:30:24 GMT

US Dollar trades lower leading up to key central bank meetings

The US dollar traded lower against its major peers on Tuesday, with renewed appetite for risk among investors leading to a broad unwinding in safe-haven flows.

Continued optimism surrounding the news that some countries in Europe are moving towards partly easing their lockdown measures has buoyed markets so far this week. France and Spain were the latest countries to outline their plans to gradually roll back some of their containment measures. This has induced a general move higher in risk assets in the past few days, including in sterling, despite the fact that there are as of yet no real signs of a meaningful move lower in new daily cases of the virus in the UK. Should this downtrend not materialise quickly, and an easing in the lockdown measures lag considerably that of Europe, then we may see the pound retrace some of these gains in the next couple of weeks.

With very little economic data releases on tap in the UK during the rest of the week, sterling will likely continue to be driven by the latest contagion numbers and news elsewhere.

How will the Fed impact the dollar this evening?

The next couple of trading session are shaping up to be very busy ones for EUR/USD.

First up will be this afternoon’s US first quarter growth number. While the strict containment measures designed to halt the spread of the COVID-19 virus were not introduced until the last two weeks or so of the quarter, its impact is still expected to be hard felt, with a sharp contraction in GDP eyed by investors. A 4% annualised decline has been pencilled in by economists. This seems slightly pessimistic given how little of the quarter covers the crisis period, although we are in uncharted territory and its almost impossible to have an accurate read on activity.

We will then await the April FOMC meeting later this evening. As we mentioned in our Fed preview report, no change in policy is expected, with investors instead awaiting Jerome Powell’s comments on the state of the US economy and whether the Fed has any more ammunition to continue easing monetary policy. Should he manage to convince the market that more stimulus could be on the way at upcoming meetings, then the US dollar may sell-off amid an increased appetite for risk and an unwinding in safe-haven flows.

Aside from that, investors will have one eye on tomorrow’s ECB meeting. We think that an increase in the bank’s emergency bond buying programme is possible tomorrow. Somewhat counterintuitively, we think that this could provide a boost to the euro.

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FX Market Update - 28/04/20

Tue, 28 Apr 2020 09:58:36 GMT

GBP and EUR rally on signs of lockdown easing

Risk appetite returned to the currency markets on Tuesday morning, with a sense of optimism among traders leading to relief rallies in both the euro and sterling.

News reports suggesting that lockdown exit strategies are beginning to be devised around the world has caused investors to unwind some of their safe-haven flows in the past 24 hours or so. Some of the worst affected countries in Europe, including Italy, Spain and Germany, have either already begun unwinding some of their measures or plan to do so in the coming week. While the removal of containment measures will be a very gradual and incremental process, this is at least a positive sign in the right direction.

There has been no such joy thus far in the UK, although Britain is of course running on a couple of weeks or so lag with much of the rest of Europe. Deaths in the UK caused by the virus fell to its lowest level since 30th March yesterday, which provides some cause for optimism. It is, however, worth noting that this is likely to be revised upwards in the coming days given that deaths over the weekend tend to be reported with a bit of a lag.

The next couple of weeks could prove absolutely vital for the pound. Should the UK experience a similar downtrend in cases and deaths caused by the virus as witnessed in Europe, then we may see a bit of a relief rally in the UK currency. Yet, should the daily numbers remain high and not show signs of a downtrend, a sell-off in the pound would likely ensue.

Fed and ECB meetings key for EUR/USD this week

Attention in the markets this week will, of course, remain centered on government’s ability to contain the spread of the COVID-19 pandemic in the key economic areas. Aside from that, however, both the Federal Reserve and European Central Bank will be meeting on Wednesday and Thursday respectively to decide on their next monetary policy move.

As far as the Fed is concerned, we think that another very dovish set of communications is highly likely. The big question will, in our view, be whether Powell can convince the market that the Fed has additional tools at its disposal should it need to inject further stimulus into the US economy. Should he manage to do so, then we could see a relief rally in the markets. Conversely, should the market believe that the Fed has run out of ammunition, then we may see renewed support for the safe-haven currencies, the US dollar included. Updated economic and interest rate projections may also be released, having been skipped in March, and could prove key.

The ECB, on the other hand, may spring somewhat of a surprise and announce an expansion of its Pandemic Emergency Purchasing Programme (PEPP) this week, although we think this is more likely to come at a later date. In the event that no new policy changes are unveiled, investors will be looking for clues from the bank as to whether more easing can be expected at upcoming meetings.

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FX Market Update - 27/04/20

Mon, 27 Apr 2020 13:44:30 GMT

Oil-dependent currencies hammered by market crash

Most major currencies moved in relatively tight price ranges last week, at least by the standards of the past few weeks.

The main exceptions were those exposed to oil prices, like the Norwegian krona and the Mexican and Colombian pesos, which dropped sharply in reaction to the mayhem in the oil market that ended with much lower oil prices across the board. Elsewhere, a generally negative tone in risk assets was supportive of the US dollar, which rose against most of its peers.

Central banks will be the key focus of currency traders this week. The Federal Reserve meets on Wednesday and the ECB does on Thursday. We expect relatively little news out of the former, given how active and aggressive it has already been in announcing various stimulus and support programmes. As for the ECB, we expect to see an expansion of existing measures, particularly the PEPP asset purchase programme announced right at the beginning of the crisis. We think that this will be increased in size to a point where it can absorb all the expected issuance from peripheral sovereigns through at least the end of 2020.

GBP

Data out of the UK last week was dreadful, as expected. Retail sales posted the largest drop on record last month, while the business activity PMIs also fell to all-time low levels. The exception was the March claimant count number, but this was roundly ignored by the market given that it only covers the period up to 12th March, and therefore does not yet reflect the surge in layoffs late in the month.

The reemergence of hard Brexit concerns was also not kind to sterling, which had the second worst performance among G10 currencies. This week, data out of the UK will be sparse and we expect the pound to trade mostly off of news elsewhere.

EUR

Markets appeared to have been somewhat disappointed by the EU's aid package to the countries more affected by the pandemic. We take a more positive view. Between the €540 billion agreed last week and the existing arsenal of tools, more critically the €750 billion PEPP ECB programme, there is sufficient firepower for member states to run the deficits they need to to finance the response to the crisis and the recovery from it.

As mentioned, we think that an increase in the PEPP is likely at Thursday’s ECB meeting, which should drive the point home to markets and be supportive of the euro over the next few weeks.

USD

The US dollar has withstood quite well the steady drumbeat of disastrous economic data. Last week jobless claims numbers reflected the loss of another 4.4 million jobs, supporting our view that casual labour relations in the US are likely to maximize the damage from the enforced shutdown of the economy. It is likely that the actual unemployment rate in the US is close to 20% by now, a much faster pace of job destruction than we have seen almost everywhere elsewhere.

The Federal Reserve has been appropriately aggressive in deploying programmes to support the economy, and therefore we expect relatively little news to come out of Wednesday’s FOMC meeting.

CHF

The Swiss franc ended last week not far from where it started against the euro, with the EUR/CHF pair continuing to hover above the 1.05 level. The franc was actually the worst-performing safe-haven currency last week. This is likely, at least in part, related to the interventions undertaken by the Swiss National Bank. SNB data released today shows the most timely measure of those efforts - sight deposits increased by 13.4 bn CHF last week, the biggest jump since early-2015. Such a big spike after a much more limited increase in the week prior (+3.1 bn CHF) could potentially mean that the EUR/CHF level that the central bank is trying to defend is now 1.05.

This week we’ll receive the country’s March retail sales data. Given the lack of more up-to-date hard data releases, the April sentiment indicators will also be worth watching. The Bloomberg consensus expects that the KOF leading indicator, which is set to show the direction in which the country’s economy is headed, will drop to its lowest level since 2009 on Thursday.

AUD

The Australian dollar comfortably outperformed the rest of the G10 currencies last week, rallying sharply by over one-and-a-half percent to its strongest position in around six weeks. The main rationale behind the sharp move higher in AUD is the remarkably contained nature of the virus spread in Australia. Confirmed new cases of the virus have topped out at around the twenty mark in the past seven days, an almost complete evaporation that has allowed some states and territories to begin lifting lockdown restrictions. This is an encouraging development for AUD given that it suggests the Australian economy is likely to get back on its feet quicker than much of the rest of the developed world.

Macroeconomic data out of Australia was similarly bleak to that witnessed across the rest of the developed world. The business activity PMIs both fell short of expectations for April. While the manufacturing index is holding up well at around the 45 level, the services index fell to a record low 19.6, comfortably below the level of 50 and representing a very sharp contraction. First quarter inflation data will be out of Wednesday, although this won’t tell us a great deal given it barely covers the crisis period and is unlikely to have any bearing at all on upcoming RBA policy decisions.

CAD

The collapse in global brent crude oil prices to around $20 a barrel has kept gains for the Canadian dollar at a minimum in the past week or so, with the USD/CAD cross ending trading last week roughly where it began it.

The bleak prospects for oil prices amid the mass lockdowns and collapse in demand for the commodity looms large over CAD, given the Canadian economies heavy dependence on its production of oil. We expect this mounting pressure on the economy to be reflected in a big way on Friday’s manufacturing PMI, which is likely to fall to a record low.

Aside from that, investors will be keeping tabs on any announcements from the Bank of Canada, scheduled or otherwise, regarding a possible increase in its stimulus measures. We think that an increase in the bank’s asset purchasing programme is possible in the next few weeks as the central bank looks to protect the economy from the mounting COVID-19 risks.

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FX Market Update - 24/04/20

Fri, 24 Apr 2020 10:14:53 GMT

Euro slides to fresh April low as EU stimulus underwhelms

Thursday’s highly anticipated European Council meeting failed to live up the market’s rather lofty expectations yesterday, sending the euro sharply lower to its weakest position in a month versus the dollar.

After a number of weeks of squabbling, European Union leaders were able to agree on a more than half a trillion euro immediate stimulus package designed to protect the European economy from the devastation caused by the COVID-19 lockdowns. Investors were, however, left disappointed by the lack of detail surrounding how the funds will be made available, with leaders still at odds over whether this should be in the form of loans or direct grants. There were also arguments among the committee over its size, with leaders from some of the harder hit counties, such as Italy, calling for a greater amount of funds to be made available.

The result of the generally underwhelming reception to the announcement was to send the euro lower, down just over half a percent versus the dollar from Thursday’s London open. This sell-off may have been even more pronounced if it wasn’t for another worrisome US jobless claims number. Another 4.4 million new Americans filed for unemployment benefits last week, taking the total since the start of the crisis to in excess of 26 million, around 16% of the total labour force.

While the weekly number of claims appears to be easing it remains sky-high, suggesting that the actual US jobless rate may currently be close to its highest level since the Great Depression of the 1930s. Inadequate job retention policies in the US compared to much of the rest of the developed world are to blame, in our view.

UK retail sales post record decline in March

While yesterday’s dismal PMI numbers were not enough to halt the pound in its tracks, the UK currency was greeted with a bout of weakness this morning following a dire set of retail sales figures.

Sales in UK retail stores fell by the most on record in March, down 5.1% from February’s levels. No real surprises here given the unprecedented imposition of the national lockdown that has closed stores and forced consumers to remain in-doors. The concerning point here is that this is merely the tip of the iceberg, with the situation set to get much worse in April and May at before it gets better. It is worth nothing that the UK lockdown was not implemented until mid-way through the month of March, and is therefore not fully reflected in this morning’s data.

We’ll have more macroeconomic data out this afternoon that covers the crisis period in the form of the March US durable goods orders figures. Aside from that, currency traders are likely to continue focusing on the daily coronavirus numbers and any signs that countries in Europe are closer to finalising plans on how best to gradually begin exiting from their current lockdowns.

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FX Market Update - 23/04/20

Thu, 23 Apr 2020 12:21:12 GMT

April PMI data points to sharp economic downturn

The April PMI data made for very grim reading indeed this morning, providing further evidence that the global economy is on course for a very sharp contraction this year.

As was inevitable, the business activity PMIs for the Euro Area tumbled to fresh record lows in April, no surprises here given that almost the entirety of the bloc will be spending the full month under strict lockdown measures designed to halt the spread of the COVID-19 virus. The dramatic drop in the PMIs is alarming. Services activity in the bloc, in particular, fell well short of even the most pessimistic of expectations, declining to a quite unbelievable 11.7 in April from last month’s 26.4. Manufacturing activity held up slightly better, given that it relies less on consumer demand, although the composite index was still dragged to just 13.5 this month, well short of the 25.7 consensus.

If it wasn’t already blatantly obvious, the Eurozone economy is set to take a massive hit following authorities efforts to contain the virus, with businesses closed and people forced to remain indoors. According to Markit, the body that releases the monthly PMI data, this month’s composite index is in line with quarter-on-quarter contraction of a quite incredible 7.5%. There is, however, some light at the end of the tunnel, with governments in Italy and Spain looking likely to begin easing lockdown measures next month. This could potentially mean that the data has bottomed out.

EUR/USD lost some ground in response to the release of the data this morning, although the move lower was largely contained to less than half a percent, with the common currency finding a bit of support around the 1.08 level.

Sterling unfazed despite dramatic PMI decline

Today’s UK PMI numbers were equally as depressing, also falling to fresh record low levels.

Much like in the Euro Area, the services index collapsed to just 12.3 this month after investors had eyed a reading of 29.0 - way too optimistic given that last month’s data was saved by the fact that the lockdown didn’t begin until mid-way through the month.

Comments from Markit’s chief business economist Chris Williamson read as follows:

“The UK economy has been hit by the COVID-19 outbreak in April to a degree far surpassing anything seen in the PMI survey’s 22-year history. Business closures and social distancing measures have caused business activity to collapse at a rate vastly exceeding that seen even during the global financial crisis, confirming fears that GDP will slump to a degree previously thought unimaginable in the second quarter”

It's clear that a big contraction in activity in the UK due to the lockdowns is inevitable, with these numbers in line with an approximate 7% quarter-on-quarter decline in GDP. The issue is, however, that this data just covers just business activity and doesn’t include either the retail sector or those self-employed, which may be hit even worse. Again, the pound was little moved following the data, we think largely due to the fact that we are in uncharted territory with no historical precedent to compare against. Even those PMI forecasts from the top economists were little more than wild guesses.

Going forward, we think that the key to how the currency market performs in the medium-term may not necessarily be how severe each economy contracts during the height of the lockdowns, but how quickly they get back on their feet once the worst of the virus is over. This will, of course, depend heavily on how successful regional governments are in getting their domestic rate of contagion under control as quickly as possible.

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FX Market Update - 22/04/20

Wed, 22 Apr 2020 10:01:07 GMT

Sterling hits two-week low as market sentiment sours

The pound was fragile to a shift in global sentiment on Tuesday, falling to its lowest level in two weeks against the dollar amid the collapse in oil prices and sell-off in stock markets.

Sterling slipped below the 1.23 mark yesterday, a move lower of almost one-and-a-half percent at its peak. Moves in the UK currency have mirrored shifts in investor sentiment since the onset of the COVID-19 pandemic, with the pound rallying during times of market calm and selling off during renewed investor anxiety.

The dramatic move lower in oil prices this week has certainly triggered a period of the latter. US oil prices fell to minus $40 a barrel on Monday, although have since recovered dramatically to back above +$11 at the time of writing. Global oil prices have, however, continue to tumble in the past couple of days, with Brent crude oil now trading at a two decade low around $17 a barrel.

UK labour data out yesterday was better-than-expected, with only 12.2k people claiming unemployment benefits in March versus the more than 170k consensus. The issue here is that this number only covers the period up to 12th March, i.e. well before the lockdown was put in place, and is therefore largely irrelevant. Tomorrow’s April PMI data, expected to fall to a fresh record low, and Friday’s retail sales data for March, should be much more noteworthy.

Euro holds its own as European virus cases ease

The euro has been relatively rangebound in the past four or five session or so, despite the dramatic moves witnessed in oil prices so far this week.

While the euro would ordinarily sell-off versus the dollar during such times of market turmoil, a stabilisation in European virus cases appears to be preventing any meaningful moves lower in the common currency. New daily cases of the virus in both Spain and Italy, the two worst affected countries outside of the US, have continued to ease in the past week, suggesting that the worst of the virus may now be over in the Euro Area. Cases in the US do, however, continue to remain sky-high, with no signs yet of any meaningful move lower. Should this trend continue in the coming week, then we may start seeing a more substantial move higher in EUR/USD.

A dump of economic data will be released on Thursday. We will be paying close attention to the April PMIs out of both the Euro Area and the US, both of which are almost certain to fall to new record lows given the previous months data covered a period pre-lockdown. Aside from that, investors will be paying close attention to the weekly US jobless claims data covering the period up to 17th April. Another giant week of unemployment benefit claims are expected, with the market bracing for another reading in excess of 4 million.

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FX Market Update - 17/04/20

Fri, 17 Apr 2020 09:31:53 GMT

US jobless claims top 20 million; why did the dollar rally?

The US dollar traded higher against pretty much every major currency on Thursday, despite another batch of troublesome data out of the world’s largest economy.

Weekly initial jobless claims remained sky-high for a fourth week, although have eased from their peak. Another 5.2 million Americans filed for new unemployment benefits in the week to 11th April, taking that number of those claiming such benefits since the start of the crisis up to an eye-watering 22 million - around 13% of the total labour force. While this was slightly less than economists’ median expectation, the damage being done to the US jobs market is catastrophic. The number of jobs lost in the last four weeks is now roughly equivalent to the number of jobs gained in the decade since the 08/09 crisis, a whole ten years of new jobs effectively wiped out.

To put the above data into some perspective, the number of new claims in the past month is approximately equivalent to the population of the eight largest cities in America combined. Using a few rudimentary calculations, this would put the actual unemployment rate to around 15% or so, which would be its highest level since World War II. More bad news came in the form of US housing starts data yesterday, which fell by the largest amount in three decades, and the Philly Fed manufacturing index, which hit a 45-year low -56.6.

While yesterday’s data was mostly better-than-expected, this is not the reason why the dollar rallied. In fact, the confirmation that things are as bad as they are was met with another wave of risk-aversion, sending the safe-havens higher and allowing the dollar to end London trading stronger against both the euro and the pound.

Chinese economy contracts by most on record

Another indication of just how severe the downturn is set to be came in the form of the overnight GDP figures out of China, which made for grim reading. The Chinese economy contracted by 9.8% quarter-on-quarter and 6.8% year-on-year in the first quarter of 2020, the largest contraction since the official figures were first introduced in 1992. While comparable data for the rest of the developed world will, of course, not be as bad for the same period given the lag between the spread of the virus in China and everywhere else, it is an indication of how the global economy may be set to fare not too far down the road.

Elsewhere in the markets, sterling remained on the back foot yesterday, briefly falling to its lowest level in a little over a week amid the UK government’s announcement that it would be extending the lockdown period for at least another three weeks. While the number of deaths caused by the virus increased to a five-day high yesterday, the containment measures do appear to be having at least some impact, with new daily cases plateauing in a similar fashion to that witnessed in the likes of Italy a couple of weeks ago. With various lockdown measures beginning to be eased in Europe, there is a faint light at the end of the tunnel for the UK - a light that could help spark a recovery in the pound in the immediate-term should new domestic cases continue to fall and the trend of increased deaths caused by the virus in the US continue.

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FX Market Update - 16/04/20

Thu, 16 Apr 2020 11:04:32 GMT

Horrendous US data points to big economic downturn

There’s now no question that the global economy is set to take a hit from the disruption caused by the COVID-19 virus, with a host of economic data out yesterday suggesting that this downturn is likely to be an extraordinarily significant one.

Data out of the US on Wednesday was horrendous, to say the least. Retail sales for March declined by 8.7% month-on-month (Figure 1), its largest drop on record. This is a worrying sign given that lockdown measures were not in place in the US until the middle of the month. Industrial production similarly fell short of analysts’ pessimistic expectations, with output in the sector falling by 5.4%, its worst month since 1946 and the immediate aftermath of World War II. The Federal Reserve’s beige book, which gathers anecdotal information about current economic conditions, also made for grim reading, highlighting that activity had contracted sharply and that conditions were set to worsen in the coming months.

While the severity of the downturn in the above data would have been impossible to envisage a couple of months ago, it is hardly a surprise given the dramatic and unprecedented containment measures put in place across much of the globe in the past few weeks. With investors already bracing for the worst, the dollar continued unperturbed, actually rallying briefly in the immediate aftermath of the data releases - perhaps largely a result of safe-haven flows into the greenback. Economic conditions in the US are, of course, plainly awful at present. Yet, with a lack of data out of Europe so far to compare it to, investors are not committing to meaningful positions either way.

Three-week extension to UK lockdown expected today

Both the euro and sterling ended London trading around half a percent lower versus the dollar yesterday. While talks remain ongoing as to how best to relax some of the containment measures in many European countries, the new daily virus numbers suggest that there is reason to remain cautious. New cases in Spain for instance, the second worst affected country in the world behind the US, jumped back up to almost 6,600 on Wednesday - the highest number of cases recorded in eleven days.

In the UK, new cases and indeed deaths appear to be plateauing, although it remains too soon to judge whether or not the worst of the virus is indeed behind us. Foreign Secretary Dominic Raab will lead an emergency Cobra committee meeting later today in Boris Johnson’s absence, with the length of an extension to the lockdown period to be top of the agenda. Another three-week extension in widely expected, which would make sense given that the UK currently appears to be running on around a two-week lag to the likes of Italy and Spain that still have most lockdown measures in place.

Aside from the latest virus case numbers and government announcements, investors will be eying up this afternoon’s US jobless claims number for any signs of an easing in the number of fresh claims for unemployment benefits.

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FX Market Update - 15/04/20

Wed, 15 Apr 2020 13:56:41 GMT

US dollar roars back as investors fear large economic hit

The last 24 hours has proved just how unpredictable currency trading can be during periods of intense market uncertainty.

Risk assets outperformed yesterday, rallying against the safe-havens as a wave of optimism swept through financial markets following the long Easter break. While the number of confirmed cases of the COVID-19 virus has now passed 2 million people worldwide, the latest data out of some of the major economic areas around the world continues to show an easing in new daily cases of the virus.

Both new cases and deaths caused by the virus have eased sharply in Spain and Italy, Europe’s two worst affected countries. While it is unclear whether the US and UK have passed their respective peaks, there are also at least some signs that the containment measures are working. There appears light at the end of the tunnel, with investors buoyed by the fact that many countries in Europe are now either gradually lifting some of their containment measures or, in other cases, in discussions regarding possible exit strategies.

Optimism has, however, quickly receded so far today, with traders turning their attention to the economic damage the virus is set to cause. There is a general feeling in the market that the recovery will not mirror a sharp V-shaped bounce back, but will be slightly more gradual as economies start to get back on their feet over the course of a number of months, rather than a number of weeks. As far as economic news is concerned, things are set to get much worse before they get better. This has sapped appetite for risk again, causing investors to favour the US dollar and send both the euro and the pound sharply lower this morning - both of which have already erased all of yesterday’s gains.

US data set to show devastation caused by lockdown

Attention in the next couple of days in the FX market will be largely on economic data out of the US. So far, the only macroeconomic prints that have covered the crisis period have been almost exclusively contained to the business activity PMIs and US weekly jobless claims. This afternoon’s US retail sales figures will therefore give the first real indication as to how the average consumer has responded to the pandemic. While we don’t expect a total collapse in spending just yet, given that the lockdown measures were not in place until later in the month, the data will not make for pretty reading either way. Investors are bracing for an 8% month-on-month contraction, which would comfortably be the worst reading on record and a taste of things to come for the inevitable even worse April number.

Aside from that, US industrial production data for March will also be closely scrutinised. A post-WW2 high contraction is possible, although with the market just about prepared for the worst, we’re unlikely to see any significant reaction in the dollar to its release. Investors will also have one eye on tomorrow’s weekly jobless claims and housing data.

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FX Market Update - 09/04/20

Thu, 09 Apr 2020 10:18:16 GMT

Sterling rallies to one-week high as European cases ease

Sterling rallied to its strongest position in around a week against the US dollar during Asian trading this morning, briefly moving back above the 1.24 mark.

News that PM Boris Johnson is ‘clinically stable’ in intensive care, and both breathing unassisted and sitting up in his bed, has provided some relief for currency traders. The move higher in the pound has also been helped by a general uptick in risk appetite fuelled by optimism that cases of the COVID-19 virus appear to be easing in Europe. Other than a sharp spike witnessed in cases on 3rd April, which was driven entirely by a change in reporting standards in France, new daily cases of the COVID-19 virus in the big four European countries (also including Germany, Italy and Spain) have clearly levelled off in the past week or so - an encouraging sign.

US cases, meanwhile, continue to arise at an aggressive pace, with the number of deaths spiking to new highs near 2,000 a day in the past two days. While there are some signs that the containment measures are working, it is far too soon to say whether or not a peak in cases has been reached - it is highly likely that it hasn’t given the ongoing ramping up of testing being conducted.

This trend of rising cases in the US and easing cases in Europe has also been broadly supportive of the common currency, which has been trading comfortably around the 1.08-1.09 range in the past few days. Should this trend continue in the coming days then we may see a bit more sustained support for the euro in the immediate-term.

Will today’s jobless claims data shift the US dollar?

Activity in the markets is expected to be high today leading up to the long Easter weekend. A number of US economic data releases will be in the spotlight this afternoon, including the now all-important jobless claims data. This data point has gone from being one of the more obscure economic prints on the calendar to just about the most vital, given that it provides the most timely measure as to how the US labour market is performing during the crisis. Following the last two weeks of data, another sky-high reading into the millions is expected. Whether we see another fresh record high is almost anyone's guess - the market is pencilling in a reading just north of 5 million, although these estimates have proved way off so far. Any number significantly above this would be another big warning sign that the impact of the virus on the US labour market will be a catastrophic one.

Other than that, we will be paying close attention to the March producer inflation numbers and the Michigan consumer sentiment index, both of which cover to crisis period.

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FX Market Update - 08/04/20

Wed, 08 Apr 2020 13:37:18 GMT

Risk assets retreat as virus cases continue to accelerate

The dollar firmed slightly against its major peers on Wednesday morning, including both the pound and euro, as optimsm surrounding the spread of the coronavirus began to wane.

Most higher risk currencies had bounced back versus the safe-havens on Tuesday on signs that the worst of the virus may be over in Europe. The number of new daily cases of the virus in both Spain and Italy, the second and third worst affected countries in the world, have continued to slow in the past few days, albeit they remain very high. While this is undoubtedly encouraging, the same cannot be said for just yet for France and Germany, both of which saw jumps in the number of deaths recorded yesterday, the former reporting its highest daily death count thus far (1,417).

In the rest of the world, the US continues to be ravaged by the virus. Almost 2,000 deaths were reported due to the virus in the States on Tuesday alone, by far its largest number yet. The state of New York has been a hotspot, having seen a disproportionate number of cases there - it now accounts for 35% of all US cases despite only accounting for 6% of the total US population. Meanwhile in the UK, there are slightly more tentative signs that the containment measures are working thus far, with the number of new cases falling to its lowest level in a week. New deaths did spike to a new high 786 yesterday, although this may be down to the timing of reporting - the past 3-day average is actually less than the 3 days prior.

The result in financial markets to the ongoing uncertainty has been for investors to again flock to safety, with the yen and dollar gaining and stocks retreating. As long as the virus is yet to peak in key economic areas, particularly the US, we think that the safe-havens may continue to be well bid in the immediate-term.

US jobless claims eyed, OPEC set to meet tomorrow

There’s been very little macroeconomic news for investors to digest so far this week that covers the crisis period, with market’s squarely focused on the latest contagion numbers.

The issue with economic data is that it tends to run on a bit of a lag, with much of the prints we’ve had in the last few days covering the month of February, i.e the pre-crisis period. That will change on Thursday and Friday with the release of the latest US jobless claims and inflation data. Given the data out in the last couple of weeks, tomorrow’s jobs number is almost anyone’s guess, although the market is eying up a sky-high number of claims in excess of the 5 million mark. This would be around 3% of the total US labour which, if confirmed, would take the effective unemployment rate to in excess of 12% by our calculations - its highest level since WW2.

Elsewhere, tomorrow’s OPEC meeting will be in the spotlight. A historic production cut is eyed, which should help support oil prices and those currencies most heavily dependent on its production.

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FX Market Update - 07/04/20

Tue, 07 Apr 2020 12:11:36 GMT

Sterling hits ten days low as UK awaits news on Johnson

The pound briefly slipped to its lowest level in ten days against the US dollar yesterday evening on the worrisome news that UK Prime Minister Boris Johnson’s health condition had deteriorated.

News that Johnson had been moved into intensive care early-Monday evening, a little over a week after being diagnosed with the COVID-19 virus, triggered a sell-off in sterling of approximately 1% or so at its peak. Investors do not like uncertainty, with the incapacitation of Britain’s leader and his replacement by a deputy certainly falling under this category.

Sterling has, however, since recouped all of its losses, likely given that the temporary appointment of Dominic Raab as Johnson’s standby will not likely materially change the UK’s exit strategy from the virus. This strategy appears driven almost entirely by the scientific and medical advice. It goes without saying that hopefully the PM’s move into intensive care is just a precaution and that he can make a swift recovery in the coming days.

Risk appetite returns as virus cases ease in Europe

Elsewhere, an apparent easing in the number of new confirmed cases of the virus over in Europe has brought a sense of hope to the markets, leading to a rebound in stocks and a move higher in the common currency.

The latest data seems to suggest that the worst may be over in Spain, Italy and Germany, the three countries worst affected by the virus outside of the US. Spain recorded its lowest number of daily cases since 23rd March yesterday, with new confirmed cases in Italy also at its lowest level since 17th March. Optimism that the peak of the virus may now be behind us in those countries has brought about a general improvement in risk appetite, sending the euro to its strongest position since last Thursday versus the dollar. Should the trend of easing cases in Europe and a continued acceleration in cases in the US continue, then we may see a bit more strength in the euro in the coming days.

The relief rally has not been exclusive to FX, with stocks worldwide staging a move higher in the past 24 hours - the S&P 500 index for instance is up over 7% from Friday’s close. While lockdown measures so far appear to be doing their job in most major economic areas, there is no way of knowing whether this downtrend is sustainable. Japan, Singapore and South Korea have all been tightening measures in the past few days to control the virus spread after tentative signs of a second wave in confirmed cases. There has, however, been good news in China, with the number of deaths there at zero yesterday for the first time since the outbreak. Whether this data can be entirely trusted is another question, but hopefully this is a sign of things to come around the rest of the world.

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FX Market Update - 06/04/20

Mon, 06 Apr 2020 13:09:46 GMT

US dollar rallies as stock market rebound falters

The Federal Reserve’s efforts to fill the world's need for dollars by flooding markets with liquidity has so far been only partially successful.

While measures of stress in the interbank lending markets have come down to less worrisome levels, the US dollar rallied hard last week as the greenback remains for now the preeminent safe haven. The currency rose against every other major currency in the world, with the sole exception of the Russian ruble. The latter was buoyed by the sharp rebound in oil prices from multi-decade lows, prompted by news that oil producers were moving closer to cuts in production levels.

Economic data worldwide varied from bad to dreadful, depending on the exact time that it was collected in the past month. The most timely numbers, US jobless claims and Eurozone PMIs of business activity, all posted the worst levels on record by some distance, although this was largely expected.

Most economic data out this week will be fairly out-of-date. The exception will be the weekly jobless claims out of the US, where another record is expected, and combined with the previous two will enable us to paint a complete picture of the damage wreaked on the US jobs market. The Eurogroup meeting on Tuesday will be another point of focus for traders, as public responses to the crisis have become the main driver of market moves.

GBP

Last week’s PMIs of business activity in the UK were terrible, though not quite as dismal as elsewhere in Europe. The March composite PMI was revised down to a fresh all-time low 36.0, which is roughly in line with quarter-on-quarter GDP contraction of between 1.5-2.0%. This relative outperformance is, however, cold comfort, as it likely reflects the fact that the UK lagged much of the rest of Europe in imposing shutdown measures. We expect the April numbers, the preliminary estimate of which is set for release on 23rd March, to be significantly worse.

Economic news out this week will be of limited use. More important will be news regarding the roll out of the SME and income support programmes by both the UK government and the Bank of England.

EUR

The PMI numbers out of the Eurozone were as dismal as could be expected, given the early adoption of lockdown measures in most countries. The Italian number, at 17, was probably the lowest number ever recorded in this series in any country.

Amid the awful numbers, we see reason for cautious optimism. The size of the state response from the individual countries and the Eurozone as a whole is enormous, matching the size of the 08/09 crisis. Contagion numbers in both Spain and Italy also seem to suggest that the worst of the crisis has now passed. Both the number of confirmed cases and deaths caused by the virus have shown encouraging signs of slowing in these countries, a contrast to both the UK and the US that remain very much within the ‘high growth phase’ of the virus.

USD

The carnage in the US jobs market was highlighted by the new record setting weekly jobless claims, 6.6 million to be exact. The payrolls report for March, while not as bad, is less meaningful as the survey was taking in mid-march, before most US states decreed various degrees of lockdown.

The massive job destruction points to a weakness of the US economy during a temporary shutdown: the absence of job protections and mechanisms to regulate and slow the dismissal of workers means the hit to US employment will likely be larger. At some point in the next few weeks, we expect that markets will realise this and it will result in a rebound of the euro vs. the US dollar.

CHF

The Swiss franc solf-off heavily against a broadly stronger US dollar last week, a sell-off that would have been more pronounced if not for SNB intervention. We saw another significant increase in total sight deposits, suggesting that the central bank is ramping up its efforts to mitigate franc strength. Sight deposits surged by 6.7 bn CHF, its second-largest increase since early-2015.

Last week’s macroeconomic data painted a rather bleak picture. Inflation dropped further into negative territory, largely due to a sharp drop in oil prices, coming in at -0.5% in March, its lowest level since early-2016. While this resembled similar declines witnessed in other economies, it is still not an encouraging sign. More negative news came in the form of the March manufacturing PMI, which dropped deeper into contraction and its lowest level since 2009. This is likely to deteriorate further in April given the overall situation in Europe is unlikely to be managed within the coming weeks.

This week we’ll receive the data on the country’s FX reserves (Tuesday), which will be a nice addition to the weekly sight deposits data and should paint a clearer picture of the SNB’s March intervention. We’ll also receive unemployment data for the same month (Wednesday), which is expected to show an uptick from the previous month’s reading.

AUD

In line with the broadly stronger US dollar, AUD eased back last week, although the currency is still currently trading around 10% higher than March’s multi-decade lows. In our view, the sell-off witnessed in AUD last month was slightly excessive and driven more by market panic than anything else. While there remains a long way to go, the number of cases of the virus in Australia has not, as of yet, followed the same exponential growth trend witnessed in other countries around the world, which may be behind some of the currency’s rebound. Should this comparatively less aggressive spread continue than we may see some support for AUD in the short-term, although this remains a big if.

Attention this week will be back on the Reserve Bank of Australia, which is set to meet on Tuesday. With rates already at the bank’s effective lower bound, there will be no rate cut, with focus to instead be on policymakers’ comments on the impact of the COVID-19 virus on the Australian economy. The question for investors will not be ‘if’ the economy will enter into a recession, but how long it will last and to what magnitude.

CAD

The Canadian dollar outperformed almost all of its major peers last week, holding its own against the broadly stronger USD. The rationale for this is the sharp move higher witnessed in oil prices last week that were buoyed by hopes that Russia and Saudi Arabia may be close to ending their oil price feud.

This week’s main focal point will be Thursday’s March labour report, expected to show a sharp number of net jobs lost and jump higher in unemployment. While the survey will not cover the entirety of the month, the fact that shutdowns were implemented in Canada prior to much of the US suggests that the report is likely to be comparatively worse than last week’s US data. A 250k contraction in net jobs is expected, which would take the jobless rate to around 6.6% and its highest level since early-2017. Similarly to the US, we think that this would be just the tip of the iceberg, with the worst yet to come.

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FX Market Update - 03/04/20

Fri, 03 Apr 2020 10:11:05 GMT

US payrolls eyed as global virus cases top 1 million

The euro slipped by around one percent against a broadly stronger US dollar on Thursday amid a surge higher in oil prices and investors once again seeking the safety of the low-risk currencies.

The COVID-19 virus continues to spread at an alarming rate, with global cases surpassing 1 million yesterday, around double the number recorded last week. A total of 245,000 or so cases have now been reported in the US alone. There is now a general feeling that the economic recovery from the virus will take longer than initially anticipated, particularly given the exponential growth in cases in the key economic areas around the world in the past two weeks, namely the US and Europe.

Macroeconomic data that we have had so far has made for very grim reading. As we mentioned in yesterday’s afternoon note, Thursday’s US initial jobless claims data suggested that the country’s labour market was already being significantly impacted by the virus. Claims surged to 6.6 million in the week to 27th March, well above the 3.5 million consensus and around tenfold the previous peaks recorded in the early-1980s and the 08/09 financial crisis. This is the equivalent of around 6% of the entire US labour force losing their employment in a fortnight.

We will not, however, see that reflected in full in this afternoon’s labour report, which only covers the period up to 12th March, i.e. before the strict containment measures were put in place across much of the US. Both the nonfarm payrolls figure and the unemployment rate will underestimate the virus’ true impact thus far and will therefore be largely dated and mostly irrelevant. The market is bracing for a -100k decline in net jobs lost and a modest 0.3 percentage point uptick in the jobless rate. This afternoon’s March PMI data from ISM will also be eagerly anticipated, with a sharp decline into contractionary territory assured.

Already record low Euro Area PMIs revised lower

Data out of Europe this morning also made for ugly reading, with the monthly Euro Area PMIs revised lower from the already rock-bottom initial estimates. The key services index was revised to 26.4 for March, down on the initial 28.4 reading, a fresh record low. This dragged the composite index below the level of 30 to 29.7. It is clear that the bloc’s economy is heading for a sharp recession in the coming months, with the key question not whether this will happen, but how deep the contraction will be.

Sterling also fell foul of the broad rally in the dollar this morning, although its sell-off was limited to around half a percent. So far the spread of the virus has not been as aggressive in the UK as some of its major peers in Europe, although it merely seems a matter of time before it catches up. Britain appears on a similar trajectory to Italy, just on around a 15-day or so lag. Should we see another sharp acceleration in UK cases in the coming few days, then the pound could be in for a rough few days when trading opens for the week on Monday.

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FX Market (Afternoon) Report -02/04/20

Thu, 02 Apr 2020 13:44:57 GMT

US jobless claims double to record high 6.6 million

Fresh labour data out of the US economy this afternoon showed just how significant of an impact the COVID-19 virus was already having on the country’s labour market.

Initial jobless claims, weekly data that represents the number of new Americans filing for unemployment benefits, surged to 6.6 million in the week to 27th March, well above the 3.5 million consensus. This marks over double the pace of last week’s record high and by far and away eclipses any level recorded in its history - for context the peak during the 08/09 financial crisis was around one-tenth of the number of jobs lost last week.

We compared the spike in jobless claims in the previous week to the equivalent of the entire population of both Chicago and Las Vegas claiming unemployment benefits in just seven days. In the last two weeks, 10 million people have filled for such benefits, roughly the population of New York city and Philadelphia combined. This is the equivalent of around 6% of the entire US labour force losing their employment in a fortnight. If we were to take into account those already unemployed prior to the crisis and assume zero hiring during that time, this would already take the overall jobless rate to north of 9% - just shy of the 08/09 peak.

The reaction in the FX market was limited to a modest and temporary rally in the safe-haven yen. There is already a general feeling that there is now a good chance the jobless rate could rise to post-WW2 highs in the next couple of months and that it is now just a question of how long it will take to reach those highs. Judging by today’s data, it may not take long at all.

Attention will now turn to tomorrow’s nonfarm payrolls report. The issue here is that the data will only cover the period up to 12th March. Given that this was prior to the implementation of the large-scale containment measures across much of the US it will be largely outdated and somewhat irrelevant. We’ll get the first true indication of the impact on the overall unemployment rate at the following labour report for April, scheduled for release in the first Friday of May.

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FX Market Update - 02/04/20

Thu, 02 Apr 2020 09:28:38 GMT

UK universal credit claims jump to almost 1 million

Sterling has spent much of the last 24 hours trading around the 1.24 mark versus the dollar.

Following the outright panic we have witnessed in the market in the past couple of weeks or so, a relative sense of calm has returned to trading, perhaps the result of the large-scale injections of liquidity into the market by major central banks around the world. Measures of implied volatility in the pound are now roughly back to where they were when the market began pricing in a ‘no deal’ Brexit in the third quarter of last year, having jumped to above the June 2016 referendum levels in mid-March.

Similarly to the US, we’re beginning to see the first few pieces of economic data out of the UK labour market that show the true extent of the impact of the virus. Universal credit unemployment claims jumped almost tenfold in the final two-weeks of March versus the usual average, up to 950,000. We now look ahead to tomorrow morning’s revised services PMI for March, with a modest downward revision on the initial estimate expected.

What to expect from this Friday’s US labour report

The dollar advanced against its major peers on Thursday following some slightly better-than-expected data out of the US economy.

Thursday’s ADP employment change number came in above consensus, boding well for Friday’s more meaningful nonfarm payrolls report. The private sector of the US labour market shed 27,000 jobs in March. While this marks a sharp decline from the near 200k recent average and the lowest level since September 2017, it was far from the 150k that investors had priced in. The rationale for this upside surprise is that the data only covered those who were active on each company’s payroll through to 12th March, i.e. before the strict containment measures designed to halt the spread of the COVID-19 pandemic were put in place across much of the US.

Attention now turns to additional labour market data out of the US economy in the next couple of days. First up will by this afternoon’s weekly jobless claims number. Investors are bracing for another elevated reading following last week’s record high. Projections are understandably wide-ranging, anywhere between around 1.5 to 5 million. Any number in the top half of this range would be a big warning sign that the US labour market is in for a very rocky ride that could see unemployment spike to double digits in the coming months.

Then, on Friday, the big one - the monthly nonfarm payrolls figures. At present, the market is pencilling in 100,000 net jobs to be lost in March, which would be the largest contraction in jobs since mid-2010. However, given that yesterday’s ADP number beat expectations, there is a good chance that Friday’s nonfarm figure does the same. It's worth noting that the data will again only cover approximately the first half of the month, again before the strict containment measures were imposed. This would not only underestimate the March number, but ensure that we are likely to see an even more exaggerated decline in the April data.

Euro slides on fears of deep recession

A broad increase in appetite for the dollar caused the euro to fall around one percent on Wednesday. As noted yesterday, a general sense in the market that the Euro Area economy will likely be one of the hardest hit during the pending global recession may be behind much of the fragility in the common currency that we have seen in the past few days.

Mercifully, the number of confirmed cases of the virus has shown some early signs of easing in some of the key countries in the bloc, particularly Italy, which recorded its lowest number of daily deaths in six days yesterday. Daily confirmed cases also appear to be on a downward trajectory - hopefully a sign of things to come. Should the trend of easing cases in Europe and an acceleration in cases in the US continue, then we may see a bit of support for EUR/USD in the immediate-term.

FX Market Update - 01/04/20

Wed, 01 Apr 2020 10:09:37 GMT

US stocks suffer worst first quarter performance ever

The first quarter of the year is now behind us and its safe to say that it was a particularly eventful one in financial markets.

US stocks markets put in their worst Q1 performance in an over one-hundred year history, as investors fled higher risk assets in favour of the safe-havens. The COVID-19 virus has also wreaked havoc in the FX market in the past three months. Emerging market currencies have witnessed violent sell-offs akin to the financial crisis, many shedding one-fifth of their value against the US dollar. The safe-havens have unsurprisingly outperformed, with the higher risk major currencies such as the Aussie and New Zealand dollars and the Norwegian krone falling violently.

The dollar had retraced much of its gains last week as action from central banks and governments calmed the markets. It has been back on the front foot again so far this week though, with investors begin to turn their attention to what kind of impact the strict containment measures will have on the global economy. We are already beginning to see the impact on the flash PMI survey figures across the globe, with today’s manufacturing indices in Asia all showing sharp contractions in March.

Best case scenario is that we get a V-shaped recovery, in which the incoming sharp downturn is followed by a swift bounce back once the worst is over. This is, however, optimistic given the likelihood that the containment measures will probably be unwound gradually for risk of making the situation worse.

US employment data key for the dollar this week

We’ll get the next big data release that covers the crisis period this afternoon - the March US ADP employment change number. This number, which represents net jobs created, or in this case lost, in the US private sector, is generally seen as a precursor and decent gauge as to the strength of the more important nonfarm payrolls report. The market consensus suggests a reading of negative 150k, which would be the most jobs shed since 2009. Given last week’s much worse-than-expected jobless claims number, we think that there is a good chance this surprises to the downside.

This afternoon’s US ISM manufacturing data is also on tap, although given that the sector contributes only a fraction to overall output we expect its release to go somewhat under the radar. Markets will then be fully focused on Thursday’s initial jobless claims and Friday afternoon’s nonfarm payrolls report.

Sterling holds firm after tumultuous month of March

Of all the major currencies, March was one of the most tumultuous for the pound. The currency suffered from a violent sell-off of historic proportions in the first three weeks of the month, before rebounding sharply last week and recovering around half of its losses.

Sterling has spent much of the past 24 hours or so relatively rangebound, by recent standards at least. This morning’s manufacturing PMI for March was revised lower, although not as much as expected, coming in at 47.8 versus the initial 48.0 estimate. Output and new orders both fell by the most since 2012, while the rate of hiring in the sector declined to its lowest level since July 2009. Manufacturing is, however, so far holding up much better than services, which relies far more heavily on consumer demand that has, of course, collapsed in the past two weeks. That being said, we think that the worst is yet to come given that the tighter containment measures have not yet been in place long enough to be reflected in a full months worth of data.

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FX Market Update - 31/03/20

Tue, 31 Mar 2020 10:14:27 GMT

Euro ends six-day winning streak ahead of inflation data

The euro broke out of its recent trend yesterday, ending a six-day rally and finishing the day around 1% lower versus the dollar, back below the psychological 1.10 level.

Much like in the past few days, there has been no real catalyst for the moves in either direction in the common currency, other than broad shifts in market sentiment that have impacted the demand for dollars. With dollar shortage issues now largely addressed by both the Federal Reserve and US government, attention among traders is beginning to turn to what kind of impact the COVID-19 virus may have on the global economy.

Given the rampant spread of the virus in mainland Europe, we think that the Euro Area economy looks set to be particularly hard hit, more so than the US or even Asia. While the US is now the worst affected country in the world with over 164,000 confirmed cases of the virus, as a percentage of the total populus this remains only a fraction of that recorded in the worst affected areas in Europe, namely Italy, Spain and France. The containment measures in these three countries in particular look set to be in place for a some time yet, which will of course act to worsen the economic blow.

We have already seen the scale of the downside impact on the Euro Area economy in the March PMI numbers, which will be revised this coming Wednesday. In the meantime, investors will be looking to this morning’s March inflation data to see whether the sharp decline in spending activity has had any impact on price pressure - we think that it almost certainly will have done. Should upcoming data prints in the coming days point to continued weakness in the common currency bloc, we think that further losses for the euro from current levels may be possible.

Investors largely ignore UK credit rating downgrade

Similarly to the euro, the pound was on the back foot this morning, although the extent of the sell-off was relatively limited.

Investors completely looked passed Fitch’s decision to cut the UK’s credit rating to AA- on Friday evening. According to the rating agency, the downgrade was a reflection of the ‘significant weakening of the UK’s public finances caused by the impact of the COVID-19 outbreak ad fiscal loosening stance that was instigated before the scale of the crisis became apparent’. While the massive supportive measures announced by the UK government should help soften the economic blow, it will inevitably dramatically increase the UK’s debt-to-GDP ratio, a development that is likely to be deemed by investors as placing a higher risk premium on British assets. Fitch expect this ratio to rise to around 94% this year, a sizeable 10% increase on 2019.

In the absence of any significant new announcements from the UK government or any irregular shifts in the daily virus case numbers, revised PMI data out this week could receive some attention.

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FX Market Update - 30/03/20

Mon, 30 Mar 2020 12:12:05 GMT

Dollar falls as global response to crisis buoys markets

The enormous volatility in financial markets continues, but at least now it comes in the form of two-way moves, rather than the relentless falls of the previous week.

Stocks and credit rebounded worldwide as gargantuan programmes of monetary and fiscal stimulus were announced on both sides of the Atlantic. As a safe-haven, the dollar moved in the opposite direction, falling sharply against every other G10 currency and most emerging market ones.

This week, markets will be driven by three main factors. First, the evolution of the coronavirus infection in the different countries, particularly the US, where the infection is gathering speed. Second, the extent of the damage apparent in the leading economic indicators. Third, the announcement of economic support measures for individuals and businesses from the various affected US states. All in all, we see scope for a continuation of the euro rally, as US news takes a turn for the worse while early signs emerge that the epidemic in Europe is no longer growing exponentially.

GBP

Sterling was the best-performing major currency last week. Somewhat surprisingly, it is now up against the US dollar over the past two weeks. This is partly the result of the general volatility and near-dislocated markets, but also a warm market reception to the economic support programmes for SMEs (from Johnson's government) and large companies (Bank of England). The Bank of England didn’t announce any fresh stimulus measures at its meeting on Thursday, although it did suggest that it stands ready to act further, should conditions in the market or UK economy warrant.

We'll get little news that will reflect the impact of the crisis this week, but clearly the drop to record lows of two weeks ago has cleared out most speculative longs and we expect sterling to be relatively resilient in the next couple of weeks.

EUR

The sharp rebound of the common currency last week owed little to any news from the Eurozone and was mostly a reflection of the general rebound in risk aversion. The economic news we did have out of the Euro Area was unsurprisingly disastrous, with the March PMI numbers falling to record low levels. While this was also the case in both the UK and the US, the Eurozone economy has, so far, appeared the most exposed of the three to the crisis.

This week we will see an important data point that is receiving little attention. The inflation numbers for March will already reflect the impact of the crisis. It will be interesting to see whether the collapse in demand or the contraction of supply brought about by the lockdowns have the largest impact in prices. We will also remain focused on the details of support programs for individuals and SMEs, as these will be key to the shape of any future rebound from the upcoming recession.

USD

The coronavirus crisis has now hit the US with full force. The US is now presenting the largest amount of new cases every day, in spite of still limited testing. The chaotic response by federal and some state authorities has certainly not helped. In addition, the crisis has now spread to the economy, as the lockdowns sent weekly claims for unemployment benefits to its highest ever level by far, well over three million, up from just a couple of hundred thousand two weeks ago.

We are likely to receive another eye-popping number when the number of jobs lost by the economy in March are published in the monthly payroll report this coming Friday. There is a good chance that the relative worsening of the crisis in the US, compared to the tentative stabilisation we are seeing on the new contagion numbers in Europe, will prove a headwind for the US dollar next week.

CHF

Similarly to most other currencies, the Swiss franc rebounded against the dollar last week, although depreciated against the euro, ending the week at the now key 1.06 level. Part of this depreciation can be linked to improving global sentiment, which hurt the safe-havens and enabled a rebound of those perceived as more ‘risky’.

As in the past few weeks, we have also observed an increase in the sight deposits in the weekly SNB data, which suggests the central bank once again stepped in to prevent franc strength. This time the increase in total sight deposits was 11.6 bln CHF, roughly twice the size of the increase from the previous week and the largest jump since early-2015, suggesting that the central bank is getting serious about limiting the upside for the franc.

In terms of the economic readings, since the ‘hard data’ is mostly outdated, it’s worth keeping an eye on the survey and activity indicators. Last week we received the CS-CFA index describing economic expectations, which fell to the lowest level in 5 years in March. This week, in addition to today’s KOF leading economic sentiment indicator (which dropped sharply, but turned out better-than-expected) we’ll receive the March manufacturing PMI on Wednesday. On Thursday, we’ll also get the CPI reading for March, expected to drop to -0.5% from -0.1%, which would bring the price gauge to its lowest level since early-2016. Nonetheless, we think that the franc should react more to shifts in global sentiment than domestic news.

AUD

As one of the more sensitive currencies to the recent sell-off, the Aussie dollar has subsequently been one of the best performers amid the increase in appetite for risk. The currency rebounded approximately 6% last week and is now back trading around its highest level in a fortnight.

Similarly to many of its major peers, there wasn’t much in terms of domestic news that drove the currency higher, with the rally having more to do with broad US dollar weakness. We did, however, have the first real sign of the economic impact on the Australian economy from the current crisis in the form of the March services PMI. In line with the rest of the developed world thus far, the index tanked to an all-time low level, falling to 39.8 this month from February’s 49.0.

The Australian economy was, somewhat remarkably, one of the few economies in the world to emerge from the 08/09 crisis without having tipped into recession. It appears the world’s longest boom soon be coming to an end, particularly if the aforementioned PMI data is anything to go by.

CAD

Another sharp decline in oil prices, down over a third in value in just one week, didn’t stop the Canadian dollar in its tracks last week, nor did the Bank of Canada’s Friday rate cut. CAD ended the week near a two-week high, although the aforementioned developments did somewhat limit the extent of the currency’s rally.

The main headline out last week was the BoC’s emergency rate cut on Friday. Policymakers voted to slash rates by another 50 basis points, taking the main rate to 0.25%, the level they deem as the effective lower bound. Similarly to many of its major peers, the bank also launched their QE programme and will begin purchasing a ‘minimum’ of $5 billion per week until the crisis is over. Governor Poloz stated ‘we want to make sure that we've got a great market function and indeed that the economy has a great foundation for growth when activity resumes.’ He also stated that there were tools available in the central banks toolkit. This, we think, could include an increase in the pace of asset purchases, given the now limited room for further rate cuts.

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FX Market Update - 27/03/20

Fri, 27 Mar 2020 10:43:28 GMT

Dollar crumbles as US coronavirus tally surpasses China

The dollar retreated against almost all of its major peers on Thursday following another sharp increase in COVID-19 cases in the US and some worrisome economic data out of the country’s labour market.

As covered in our afternoon note on Thursday, claims for unemployment benefits went through the proverbial roof in the US last week, far exceeding even some of the most pessimistic of expectations. New claims for unemployment benefits soared to an eye watering 3.3 million, an almost 1100% week-on-week increase. This eclipses any level reached during the 2008/09 financial crisis and suggests that a giant leap in unemployment and a sharp net contraction in jobs created are assured at next week’s labour report. The ordinarily second or third-tier release became front page news.

In an unusual step, Fed Chair Jerome Powell took to national television stating that the Fed was ‘not going to run out of ammunition’ and that the bank still has ‘policy room in other dimensions to support the economy’. This is a clear move to assure employers to hang onto their staff during this difficult period when many have little choice but to shed workers left, right and centre.

Despite Powell’s reassuring comments, the dollar lost around one-and-a-half percent versus the euro yesterday, with the pair trading back above the 1.10 mark this morning. Another leap in confirmed COVID-19 cases in the US is partly to blame, particularly now that the country has overtaken China as the worst affected country in the world.

Euro above 1.10 as new virus cases in Italy stabilise

The aforementioned rally in the euro can be attributed almost solely to broad dollar weakness. There has been no real catalyst for common currency strength, although the number of new daily cases of the virus does appear to be stabilising in Italy, which is reassuring. Hopefully this is a sign of things to come and that the virus is close to peaking there. Even still, Italy, is also now almost certain to follow the US in overtaking China in terms of confirmed cases of COVID-19 in the next 24 hours.

The numbers out of Spain are also worrisome, with the death toll there already far outstripping that recorded in China. Economic ramifications will be severe, particularly so in these worst affected areas that will need to keep at least some degree of containment measures in place for a considerable amount of time. This mounting economic cost could begin to weigh on the euro in the coming days, although for now investors are mostly focused on the US, which seems to be acting in the single currency’s favour.

Sterling leaps higher, BoE ready to act if necessary

In line with a broadly weaker dollar, sterling jumped over 2% yesterday. Given the high risk premium placed on the pound due to Brexit and the UK’s large external deficit, moves in both directions in the GBP/USD cross have been exacerbated in the past few weeks, with large sell-offs commonly followed by sharp rallies, such as that witnessed yesterday.

There were no big bombastic announcements out of yesterday’s Bank of England meeting, which went mostly under the radar. Rates were kept unchanged at 0.1%, with policymakers voting to maintain the QE programme at £645bn, having increased it by £200bn last week. New governor Andrew Bailey warned that the virus could cause long-term damage to the UK economy and that it stands ready to act if necessary.

On the data front, retail sales figures for February were soft, although this was pre-coronavirus, so the data is largely irrelevant. The March numbers due out next month will take on far more importance and are almost certain to show a significant contraction.

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FX Market Update - 26/03/20

Thu, 26 Mar 2020 15:18:16 GMT

US jobless claims surge above 3 million amid virus layoffs

This afternoon’s jobless claims data gave the first real glimpse at just how significant of an impact the COVID-19 virus is set to have on the US labour market in the coming months.

The report did not make for pretty ready, to say the least. New claims for unemployment benefits soared in the week to 20th March, increasing to an eye watering 3.3 million from just 282k a week previous (an almost 1100% week-on-week increase). This by far and away eclipses any level reached during the 2008/09 financial crisis. Peak jobless claims hit around 650k in early-2009, a mere bump in the road compared to today’s number that came in at almost five times that peak (Figure 1). To put that into context, that works out as roughly the equivalent of the entire population of Chicago, the US’s third largest city, plus an extra 600,000 people or so - Las Vegas for argument sake.

It is clear that the strict containment measures now in place across the US designed to halt the spread of the virus are going to have a monumental impact on employee layoffs, despite the massive stimulus measures launched by both the US government and Federal Reserve. The March unemployment numbers are due out next Friday (03/04), as is the monthly nonfarm payrolls data. With restaurants, cafes, gyms, hotels etc. all either closed or massively down on people through the door, a giant leap in unemployment and a sharp net contraction in jobs created are to be expected. As mentioned in previous posts, we think that measures from monetary authorities cannot prevent a US recession this year, merely ease its severity.

The dollar didn’t reaction in any real fashion to the data, suggesting that such a reading was mostly priced in. Given the unprecedented nature of the current situation, estimates for today’s reading were so wide-ranging that they became almost irrelevant. At in excess of 3 million, this was certainly towards the upper end of those expectations.

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FX Market Update - 26/03/20

Thu, 26 Mar 2020 13:40:19 GMT

US virus cases jump, historic jump in jobless claims eyed

The US dollar eased back against its major peers again on Thursday morning, falling to its lowest level in a week against the euro.

This week passing of the Trump administration's’ massive $2 trillion stimulus package has brought a sense of relief and calm to the market, and taken pressure of dollar funding that was apparent after investors rushed to buy the safe-haven greenback. While the package will, in our view, not be enough to prevent a sharp recession in the US this year it may at least soften the blow, providing consumers and businesses in the States with at least some cause for optimism.

The number of cases of the COVID-19 virus continues to increase at an alarming rate around the globe, particularly so in the US, which is now close to overtaking Italy as the worst affected country in the world, outside China. Over 13,000 new cases of the virus were reported in the States yesterday alone, taking the total number to almost 70,000. It now appears a matter of time before the country overtakes China as the most rampant hotspot for the pandemic. This worrisome acceleration in the virus, combined with President Trump’s apparent laxed response to its severity, has undoubtedly contributed to at least some of the weakness in the dollar in the past couple of days.

An economic data release that usually goes completely under the radar will take centre stage today. US initial jobless claims, the most timely measure of health in the US labour market, is expected to show a massive increase of historic proportions when released this afternoon. The indicator, which represents the number of new Americans filing for unemployment benefits in a one week period, is projected to come in around the 1 million mark for the week to 20/03 according to a Reuters poll. Not only would this be a near four-fold increase on the week prior, but it would by far and away eclipse the 665k peak hit during the financial crisis.

We think that a confirmation of the above could trigger a fresh bout of weakness in the dollar when the data is released at 12:30 GMT today.

Will the BoE announce any new easing measures today?

The new Bank of England governor Andrew Bailey will take charge of his first ever scheduled MPC meeting today.

After last week’s interest rate cut and following the emergency liquidity measures announced earlier in the week, it is unclear whether any new measures will be announced today intended to support the UK economy. We will, however, receive the latest meeting minutes, which will likely state that the bank stands ready to act further, should conditions in financial markets or the UK economy warrant more stimulus.

While the pound has rallied against the dollar this week it has found gains harder to come by against its other major peers on concerns that the NHS may be ill-prepared to deal with the incoming flurry of COVID-19 cases in Britain. The number of cases are set to pass 10,000 in the UK today, with the death toll now over double that in Germany. As the UK enters into the sharp growth phase of the virus sterling could prove fragile, particularly should the market deem Boris Johnson’s containment measures as insufficient to material halt the virus’ spread.

Euro rises despite no signs of virus slowdown in Europe

The euro rallied for the fourth day in a row versus the dollar this morning. This is, however, entirely due to a retracement in the greenback, in our view. Cases of the virus continue to accelerate in mainland Europe, with no signs yet that it has peaked in any of the major countries in the bloc. Shortages of medical supplies and equipment are becoming a real issue, and it seems that the situation is likely to get worse before it gets better.

Given the severity of the spread of the virus in Europe, we think that the Euro Area economy will be just about the worst affected of all the majors in the coming months. Aside from this week’s disastrous PMI data, there have been no real timely data releases that show the true extent of the downturn. Next Monday’s consumer and business confidence data for March could, however, be very telling.

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FX Market Update - 25/03/20

Wed, 25 Mar 2020 12:37:41 GMT

Dollar eases as massive US stimulus package agreed

Investors have breathed a sigh of relief in the past couple of days, with action from US monetary authorities returning a modicum of calm to financial markets.

As expected, the Trump administration and US senators yesterday reached an agreement on the giant $2 billion stimulus package designed to allay the impact of the COVID-19 virus on the US economy. The package will include direct payments up to as much as $1,200 to most US Americans, an increase in unemployment insurance and a $367 billion allowance for smaller businesses worst affected by the crisis. Congress is expected to vote on the bill later today.

A big issue in the market at the moment is that with investors aggressively buying the greenback due to its safe-haven status, there has been a dire shortage of US dollars. We think that the aforementioned package should ease the pressure on hard dollars following a recent flurry in demand for cash. The Federal Reserve’s ‘big bazooka’ of stimulus measures announced on Monday has already begun to have a similar effect, with the dollar retracing much of its gains against its major peers so far this week, most notably the pound. We’ve also seen a near 2% move higher in EUR/USD, with the main pair now trading back above the 1.08 level. Whether this trend is sustainable in the coming days is incredibly difficult to judge.

Speculation that the Fed could also be set to intervene in the market in order to weaker the rampant US dollar has also caused investors to reverse some of their long bets in favour of the greenback. Despite easing back in the past few days, the US dollar index remains around multi-year highs. There is chance that further gains for the dollar could encourage the Fed to begin selling its domestic currency holdings in order to weaken the exchange rate. While we think that this is unlikely at this stage, the mere mention of such action has already spooked some investors and caused them to reallocate their funds elsewhere. It's worth noting that FX intervention is used sparingly among major central banks, including the Fed, which has only engaged in such activities on a handful of occasions in the past few decades.

Pound recovers ground, BoE unveils more stimulus

Sterling has seen a remarkable resurgence in the past few sessions, extending its gains versus the dollar so far for the week to over 4% this morning.

The rationale behind the move has been mostly due to the retracement in the dollar. The pound was one of the harder hit major currencies following the broad dollar rally, we think due to the high risk premium placed on sterling by the UK’s large external deficit and Brexit. This dramatic drop has provided even greater scope for a rebound, such as what we have witnessed in the past 24 hours or so. We said at the time that the sell-off in the pound was slightly overdone. This move higher somewhat justifies that call.

Investors will now have one eye on tomorrow’s Bank of England meeting. Following last week’s big intermeeting stimulus announcement, we are not expecting too much new information. The BoE already announced on Tuesday that it would be activating emergency liquidity measures known as its Contingent Term Repo Facility (CTRF). We may get more information on this on Thursday.

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FX Market Update - 24/03/20

Tue, 24 Mar 2020 13:22:11 GMT

PMI data points to deep European recession

For the first time in a number of weeks, investors had a handful of relevant macroeconomic data releases out of the major economies to digest this morning.

So far, there has been very little data out that shows the full extent of the coronavirus containment measures on any economic area outside of China, given the time lag that the data tends to run on. This morning’s Euro Area and UK PMI data provided the first such instance. Unsurprisingly, business activity has fallen off the proverbial cliff this month according to the survey indices.

The Euro Area’s services index capitulated to 31.4 in March, by far and away its largest drop on record and below the levels witnessed during the height of the financial crisis. Manufacturing was less severely impacted, with the index for the sector falling to 44.8, which was actually above expectations. According to Markit’s chief business economist Chris Williamson, these numbers suggest that the economy is on course to contract by 2% quarter-on-quarter, although we think that there is scope for an even sharper contraction.

While the magnitude of the drop in overall activity was slightly more violent than the market had priced in, it comes as very little surprise. A number of countries in the bloc are now on full-blown lockdown mode, while in others travel is restricted and people's way of life is severely disrupted. We had already stated that a Euro Area recession is inevitable. These numbers merely confirm our suspicion.

As for the euro, the currency has actually rallied in the past 24 hours and is now back above the 1.08 level. This has more to do with the jump in the number of virus cases in the US over the weekend, which leapfrogged Spain to be the third worst affected country in the world. Should this sharp acceleration in confirmed cases in the US continue, we could see a continued retracement in the dollar in the coming few days. The Federal Reserve also unveiling additional monetary stimulus on Monday - more on that in our afternoon note later today.

Sterling claws back ground, UK PMIs fall sharply

The aforementioned UK PMI data was similarly suppressed this morning, albeit not quite to the extent of the Euro Area given the two or three week lag that the virus is running in the UK. Services activity, which relies much more on individual consumer demand than manufacturing, slumped to a record low 35.7 this month, well below the level of 50 that denotes contraction.

Mr Williamson’s comments regarding the numbers read as follows:

“The surveys highlight how the COVID-19 outbreak has already dealt the UK economy an initial blow even greater than that seen at the height of the global financial crisis. With additional measures to contain the spread of the virus set to further paralyse large parts of the economy in the coming months, such as business closures and potential lockdowns, a recession of a scale we have not seen in modern history is looking increasingly likely.”

The pound largely ignored the numbers this morning, continuing on its upward trend versus the broadly weaker US dollar. Sterling is now well and truly trading like an emerging market currency, with volatility in the GBP/USD cross reaching levels undreamt of a matter of weeks ago. At the time of writing, the pound is up 2% from yesterday afternoon’s lows. We expect such intense and unpredictable volatility to continue in the coming days, particularly following Boris Johnson’s announcement yesterday evening that the UK is effectively now on lockdown in all but name.

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FX Market Update - 23/03/20

Mon, 23 Mar 2020 13:28:09 GMT

Investors flock to dollar as pandemic sends market reeling

The spread of the coronavirus and the extreme measures taken to control the pandemic have wreaked havoc in financial markets worldwide.

In currency markets, the reaction has been a headlong flight into the supposed safety of the US dollar. Every major currency worldwide fell sharply against the greenback last week, even the Japanese yen. The worst punishment was meted out to oil-dependent currencies, as the crash in oil prices was added to the general atmosphere of fear.

Economic data out this week should begin to reflect the enormous damage wreaked by the pandemic. Eurozone and UK PMIs of business activity out on Tuesday, and US weekly jobless claims on Thursday will likely post the worst numbers in history by some distance. More important for currency markets will be the evolution of the infection in the various countries either already in lockdown or those considering it. The durability of the dollar rally may come into question in the face of far worsening contagion numbers in the US, particularly if the Italian and Spanish numbers cease to worsen.

An unprecedented economic crisis is now upon us. There is reason for hope, however. Monetary and fiscal authorities worldwide are preparing an unprecedented response. Fiscal spending, credit guarantees and liquidity injections on a massive scale are being announced daily. With governments ready to do whatever it takes, the goal of returning to an almost intact economic structure as soon as the epidemic is brought under control may be a reasonable one.

GBP

Sterling was hit harder than the euro last week, in part due to the sudden turnaround of Boris Johnson’s government in admitting that lockdowns may be necessary to contain the virus. The UK currency fell to its weakest position versus the US dollar since 1985 at one stage, with measures of implied volatility in the pair hitting just shy of the levels witnessed following the Brexit vote. We attribute the extent of the sell-off to investors unwinding their long GBP positions put in place following the UK election in December, and the pound’s higher risk premium due to Brexit and the country’s large external deficit.

The Bank of England cut interest rates again, and announced £200 billion of extra quantitative easing, as well as programs to provide direct funding to small- and medium-sized enterprises (SMEs). While the PMI numbers on Tuesday will reflect the worst of the crisis, more important will be the announcements during the BoE’s monetary policy meeting on Thursday, which remains on the agenda in spite of last week's dramatic measures. In its statement last week, the bank noted that it will issue further guidance ‘in due course’. This to us suggests that even more stimulus is on the way on, or before, the next scheduled meeting on 26th March.

EUR

With Spain and Italy on full lockdown and other Eurozone economies subject to increasing restraints, there is no doubt that a sharp recession is coming. However, the aggressive ECB announcement of 750 billion euros to support sovereign debt means that the affected countries will be able to finance enormous fiscal deficits without fear of the markets. Indeed, the collapse in spreads over the last three days is one ray of hope amid the bleak news.

For now, we will be paying close attention to the epidemic numbers out of the different countries and hope that the drastic measures begin to "bend the curve" and ease the pressures on domestic healthcare systems as soon as possible.

USD

The most basic instinct among currency traders in a global crisis is to flee to the safety of the US dollar, and this pandemic has been no exception thus far. This has seen the US Dollar Index rally to its highest level in three years (Figure 1). The US rally has been fueled by the fact that Europe has been the worst hit so far, but this may be related to the very limited testing that the US has conducted. In fact, as this is written the US has now become the country with the largest number of new daily cases, ahead of Italy.

As testing ramps up, the numbers will get worse, limiting dollar upside from these levels. More immediately, we await an announcement of the US fiscal stimulus package in response to the crisis, and expect to see the worst number ever of weekly claims for unemployment on Thursday.

CHF

EUR/CHF spent much of last week close to the 1.055 level, ending slightly higher against the euro. The franc was once again one of the best performers in the G10, although still sold-off heavily against the dollar.

As expected, the Swiss National Bank did not cut rates last week. The bank didn’t offer too much, although it did increase its exemption threshold factor from 25 to 30 as of next month, which should limit the effect of negative rates on commercial bank profitability. The bank lowered its conditional inflation forecast and now expects price growth to fall into negative territory in H1 2020 and remain there throughout 2020. The SNB also suggested that growth this year will likely turn negative, although could rebound strongly next year. Importantly, in its statement, the bank said that ‘the SNB is intervening more strongly in the foreign exchange market to contribute to the stabilisation of the situation’. This, alongside the reference to the franc as ‘even more highly valued’, tells us that the SNB will do whatever it can to allay buying pressure on the Swiss currency, which should limit the scale of its potential appreciation against the euro.

Most recent data of on sight deposits seem to confirm that the SNB is not all words, but indeed action. Total sight deposits rose by 5.8 bln CHF in the past week compared to 4.4 bln and 2.8 bln respectively in the previous two weeks. This was its biggest weekly rise since mid-2016, suggesting that the central bank stepped-up its market interventions.

AUD

The quite remarkable move lower that we’ve witnessed in the Australian dollar since the beginning of the crisis ramped up a notch or two last week. AUD went into freefall during the middle of the week, plummeting to its weakest position in almost two-decades. The currency did, at one stage, extend its losses for the week to almost 10% as investors flocked to the safe-havens and fled those currencies deemed as high-risk. While the currency recovered some of its losses on Thursday and Friday, it is still trading around 6.5% lower than this time last week.

The main headline out last week was the Reserve Bank of Australia’s decision to slash interest rates by another 25 basis points to a fresh record low 0.25%. As expected, the RBA also unveiled details of its first-ever quantitative easing programme and a three-year funding facility to provide cheap loans to banks. Somewhat paradoxically, investors are now treating central bank easing as a positive development for currencies, on hopes that their proactiveness can allay some of the negative economic impact. This was, however, unable to save AUD last week, particularly after the imposition of Prime Minister Scott Morrison’s stricter containment measures on Australian nationals.

CAD

The sell-off in CAD last week was not quite as severe as some of its major peers, perhaps due the panic selling in the currency that has already seen it tumble to near its weakest position since the early-1990s. That being said, the currency did still shed over 3% versus the dollar as oil prices continued to tumble to multi-year lows.

The lack of a more pronounced sell-off in the currency in light of the dramatic oil price collapse can, at least in part, be attributed to the relatively low levels of contagion witnessed in Canada thus far. According to Worldometers, 1,470 cases of the virus have been confirmed in Canada, leading to 20 deaths. While this number is unfortunately set to accelerate, so far Canada has the lowest infections per 100 people of any of the top 20 worst affected countries, with the exception of Brazil. While this may be due to a lack of thorough testing, it is at least providing investors with some reason to favour CAD over other currencies whose infection rates are much higher.

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FX Market Update - 20/03/20

Fri, 20 Mar 2020 12:36:27 GMT

GBP volatility soars past Brexit levels on investor panic

Monetary authorities around the world are continuing to battle hard to combat the economic risk posed by the coronavirus pandemic.

As we mentioned in our afternoon note yesterday, the Bank of England cut interest rates to a record low 0.1%, an unprecedented 15 basis point rate cut, while also ramping up its QE programme by £200bn. Somewhat paradoxically, the initial reaction among investors was to send the Pound sharply higher, up 2% in the immediate aftermath versus the dollar. Investors are now treating central bank action as a positive development, on hopes that their proactiveness can, at least to some extent, allay the economic impact to their respective domestic economies. In its statement, the bank noted that it will issue further guidance ‘in due course’. This to us suggests that even more stimulus is on the way on, or before, the next scheduled meeting on 26th March.

But just as quickly as the Pound rallied, it was sent sharply lower again soon after. The GBP/USD cross erased all of its gains for the day in late-afternoon London trading, as investors recommenced their flock to the safety of the Dollar - briefly sending the Pound to fresh 1985 lows. In yet another twist, the currency was on the front foot again this morning, soaring from around the 1.145 level versus the dollar to 1.19 in a matter of hours. News out this morning that the UK chancellor was planning to announce employment and wage subsidy packages later today may have been behind the move, although at this stage it is very hard to tell.

It is clear that the market is now in full-on panic mode, with the uncertainty surrounding the virus causing some violent and unprecedented moves in almost every currency. Volatility levels remain sky-high, with almost every duration of GBP implied volatility, somewhat incredibly, rising above June 2016 Brexit levels in the past few days.

Euro hits April 2017 lows as US relief package signed

The moves witnessed in the other major currencies have been no less dramatic in the past 24 hours. The euro, for instance, ended London trading over 2% lower versus the dollar, briefly sent below the 1.07 level before stabilising just above 1.08. This marked the common currency’s weakest position since April 2017. Unsurprisingly, yesterday German IFO sentiment index far from helped, with the measure tumbling to its lowest level since August 2009 in March.

Yesterday’s rally in the US dollar can, at least in part, be attributed to the signing off of the US’s Families First Coronavirus Response Act by President Trump. The stimulus measures will see $1 trillion pumped into the US economy, including $1,000 cash handouts to American citizens. This, we think, should be more effective in supporting households than a simple interest rate cut. It is, however, still unlikely to be enough, particularly for those families who lose one, or even both, income streams due to the pending jump in unemployment that the crisis is set to trigger.

Elsewhere, the RBA cut rates again as expected by 25 bp to 0.25%, a fresh record low. They also unveiled their QE programme, which will last for three years. The Swiss National Bank, as we thought they would, kept rates on hold, but instead reaffirmed their intention to continue intervening in the FX market to stem franc appreciation. The Swiss franc has been one of the best performers this month as investors continue to flock to the safe-havens - we expect this trend to continue in the immediate-term.

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FX Market Update - 17/03/20

Tue, 17 Mar 2020 12:17:35 GMT

Markets tumble as investors brace for global recession

Stock markets continued to tumble on Monday, with the Federal Reserve’s giant-sized interest rate cut providing very little relief for risk assets.

The Fed cut rates be an unprecedented 100 basis points on Sunday, while announcing a host of additional unconventional methods designed to protect the US economy from the COVID-19 virus. Unfortunately, this failed to shore up equities, which continued to sell-off sharply. The Dow Jones index opened over 10% lower on Monday morning with stocks in Europe, including the FTSE 100, down around 7-8%.

The view in the market is that clearly there is only so much that central bank policy can do to alleviate the situation. Cutting rates and pumping liquidity into the market can’t offset the disruption caused by the strict containment measures now in place. All but essential travel has now effectively been banned across much of Europe. Schools, restaurants and cafes are closed, with a number of countries in the worst affected areas now in full-on lockdown mode - France was the latest to enforce such measures yesterday.

We think that it is now not a question of ‘if’ the global economy will enter into a recession, but how significant this downturn will be. Given the above containment measures, the answer to the latter is likely to be very, although there is hope among analysts that this could be a short, sharp contraction. We see no reason why the global economy can’t come roaring back once the worst is over in the few months time. The situation we’re facing now is totally different from the one witnessed in 2008, one which was triggered by deep systemic issues in the financial system. This is not the case this time around.

What is behind sterling’s sharp sell-off?

With news developing all the time, it’s difficult to know where to look in the currency markets at the moment. Among the majors, sterling was just about the worst performer yesterday, down another one percent versus the dollar. The pound is now trading over 4% lower versus the dollar and 6% down against the euro since the beginning of March alone. We outline below some of the factors that may be behind the currency’s recent downturn:

1) The UK’s large current account deficit. The UK garners a huge inflow of foreign investment, in part due to its thriving financial services industry. These inflows provide good support for sterling when everything is all good and well, but during times of stress these inflows unwind.

2) US dollar, euro acting as safe-havens. The dollar, and to a lesser extent the euro, are seen as safe investments during times of market uncertainty.

3) More stimulus from the Bank of England likely. Unlike the Fed, which has already reached its so-called ‘effective lower bound’, we think that another rate cut from the BoE cannot be ruled out, even if the size of the move is of an unconventional magnitude (i.e. less than 25 b.p). More likely would be an increase in the bank’s QE programme, which investors now see as very much on the cards.

EM currencies sell-off as investors favour the dollar

As mentioned, the dollar is continuing to act as a safe-haven of choice, even following the Fed’s big rate cut on Sunday. As is customary during times of intense uncertainty, investors are fleeing emerging markets and piling into the safe-havens. The Brazilian real and Mexican peso have been among the worst affected, down over 10% in the past couple of weeks alone.

The Aussie and New Zealand dollars are also being hit hard, particularly the latter after the RBNZ’s shock 75 basis point rate cut last week. As things stand, there are now only a handful of major central banks that have room to cut rates, the Bank of Canada (0.75%) and the Reserve Bank of Australia (0.5%) being the two clear standouts. The next major central bank meeting will be the Swiss National Bank of Thursday. While we don’t expect a rate cut here given how little room they have, additional easing measures are highly likely.

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FX Market Update - 16/03/20

Mon, 16 Mar 2020 12:39:55 GMT

Currency volatility explodes on pandemic fears

The sharp worsening of the coronavirus pandemic, which has led to nationwide lockdowns in Italy and Spain, has shaken world financial markets in the past week.

The initial reaction was to send the euro higher, as the US yield curve evaporated and markets priced in Federal Reserve cuts all the way to zero. However, the worsening news and sharp acceleration in the number of new confirmed cases in the Euro Area soon led to a reversal. In the end, the dollar reasserted itself as the safe-haven currency of choice, rising against every other major currency in the world. The euro, Swiss franc and the yen held up relatively well, though the relatively modest weekly changes in these currencies against the dollar are not reflective of the week's enormous volatility.

The focus this week will be on the extraordinary measures taken by governments and central banks to mitigate the blow to the world economy. The Federal Reserve has already cut interest rates to zero, lowering its fed funds rate by 100 basis points during an emergency meeting on Sunday. This, we believe, should be followed by all G10 central banks that still have positive rates. We also should see aggressive measures to support demand, employment, SMEs and household finances, particularly in the Eurozone that is bearing the brunt of the crisis right now. Economic data out this week will be hopelessly out-of-date and markets will likely ignore it.

GBP

The Bank of England cut rates by 50 basis points to 0.25% during an unscheduled meeting last week, while launching a series of initiatives to ease the credit flow, particularly to SMEs.

Sterling took little notice, having a rough week against both the dollar and the euro amid the stampede away from risk assets (sterling fell over 6% against the dollar last week alone). We do, however, think that the significant fiscal easing announced in the Budget is a significant medium-term positive, and that the pound is currently severely undervalued after last week's sharp falls. We attribute the move more to investors favouring the US dollar due to its safe-haven status and role as the world’s most liquid currency.

EUR

With Spain and Italy under lockdown, and France not far behind, a pall of uncertainty has descended over the Eurozone economy. The good news is that monetary and fiscal authorities are reacting quickly. The ECB corrected Lagarde’s miscommunication during the bank’s Thursday's meeting and has made it clear that it will ensure Eurozone sovereign bonds remain stable. European governments are preparing fiscal stimulus and various forms of support for households and businesses to ride out the lockdowns and consequent fall in demand. Germany's €500 billion pledge is particularly welcome here.

A combination of bank forbearance, extremely low rates and fiscal stimulus is a powerful antidote to the economic and financial consequences of the pandemic. We are optimistic that the Eurozone economy can rebound quickly after the lockdowns end.

USD

The dollar turned around mid-week and became the preferred currency for investors fleeing risk. The perception that the US is not as affected as Europe by the pandemic likely played a role. However, the numbers there are also worsening rapidly, in spite of the very limited testing.

With the Fed taking aggressive measures, including emergency cuts in rates and additional QE, it will be critical to see if the dollar rally continues as and when the US takes stronger measures of the kind we are seeing in Europe. The issue for the Federal Reserve is that it now has very limited additional room for manoeuvre, particularly on interest rates that are now at the effective lower bound - where they were in the aftermath of the financial crisis in ‘08.

CHF

EUR/CHF traded close to, but below the 1.06 level throughout much of last week. The franc was one of the better-performing G10 currencies amid the ‘flight to safety’, although still succumbed to the dollar’s strength. Looking at the weekly data on sight deposits, the Swiss National Bank seems to have again intervened in the market to stem the currency’s appreciation, even ramping up the pace of those interventions. Total sight deposits increased by 4.4 bln CHF compared to 2.8 and 3.5 bln respectively in the two weeks prior.

The SNB will meet later this week. Despite the as of yet relatively limited containment measures in place in Switzerland, the coronavirus outbreak only adds more downside risk to an already weak macroeconomic backdrop. The SNB will stress the above and may try to warn-off markets from buying-up the safe-haven franc. Policymakers are likely to suggest that the bank stands ready to support the economy and introduce measures aimed at alleviating the negative effects of the virus on Swiss businesses. There is, however, almost no room for rate cuts with the reference rate already at a record low -0.75%. We therefore don’t think that we’re going to see a cut from the SNB this week, although nothing at this stage can be entirely ruled out.

AUD

The Aussie dollar was battered again last week, far from spared from the rampant rally in the US dollar. The AUD/USD cross is now trading around the 0.62 mark, down a massive 7% in around a week.

Similarly to sterling, AUD has continued to suffer due to its characteristic as one of the higher risk currencies in the G10 and its exposure to the global economic cycle, particularly China. Exacerbating the move, investors are now braced for another RBA rate cut and the introduction of quantitative easing in the country this week. In a statement released on Monday, RBA governor Lowe stated that the bank ‘stands ready to purchase Australian government bonds in the secondary market to support the smooth functioning of that market’. This would be a significant move from the bank, given it would mark the first time that it has ever introduced QE.

We also think that an emergency rate cut from the RBA this week is possible, in line with a similar move from the RBNZ. Yet with this mostly priced in by the market we do not see a huge amount more downside in AUD in the immidiate-term and think that it is in fact slightly undervalued at current levels.

CAD

The Federal Reserve was not the only major central bank to surprise the market with a pre-emptive rate cut in the past few days, with the Bank of Canada also lowering its main base by 50 basis points in an emergency move on Friday. The BoC’s main rate was slashed to 0.75%, the second rate cut already by the bank this month. In its statement the bank noted ‘it is clear that the spread of the coronavirus is having serious consequences for Canadian families, and for Canada’s economy’. Similarly to measures seen around the globe, finance minister Morneau also announced last week that the government would be making $10bn available to businesses to ease the economic impact.

The reaction in the Canadian dollar has been a violent one, with the USD/CAD cross now trading around the 1.39 level - a near 4% move since the beginning of the month alone. The problem for CAD is that unlike many of its major peers, which now includes the Federal Reserve, there is still more room for the BoC to lower rates in order to protect the economy. We think that the BoC will have no choice but to continue lowering rates towards zero in the coming weeks, highly likely before the next scheduled meeting in April. This may continue to weigh on the Canadian dollar in the short-term.

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FX Market Update - 13/03/20

Fri, 13 Mar 2020 11:12:18 GMT

US dollar soars as virus concerns rips through markets

Financial markets remained volatile on Friday morning as investors continue to digest news of COVID-19 containment measures and their potential impact on the global economy.

Numerous countries are now in lockdown, with others inevitably to follow suit, public gatherings are restricted and sporting events are being either cancelled or postponed. A lack of confidence in authorities ability to contain the spread of the virus has caused investors to continue to flee risky asset classes. Equity markets took a complete and utter battering on Thursday. US stock indices were down over 10% for the day, as were those in Europe. The Dow Jones and S&P 500 indices have now shed almost 30% of their value in around three weeks, moves reminiscent of the great crash in ‘08.

In the FX world, emerging markets continue to suffer. The Mexican peso for instance was down more than 6% for the day at one stage, before reversing all of its losses. Investors appear to be viewing the dollar as the safe-haven of choice rather than the yen, given Japan’s greater exposure to the crisis. The dollar was just about the best performing currency yesterday, rallying by around 1.2% in trade-weighted terms. This was helped by the Federal Reserve’s announcement that it would be pumping $1.5 trillion of liquidity into US financial markets.

In what would ordinarily be front page news, sterling sold-off violently, down 2% for the day versus the broadly stronger dollar. This sell-off is somewhat puzzling given the huge fiscal stimulus measures announced in this week’s budget. We attribute it more with US dollar strength than sterling weakness.

Euro slides as ECB fails to reassure markets

Thursday’s European Central Bank stimulus announcement was viewed by the market as a complete misstep, sending the euro sharply lower (almost 2% at one stage). The bank announced a range of more unconventional methods designed to support the bloc’s economy. This included temporarily expanding its quantitative easing programme, introducing additional longer-term loans to banks and improving the terms of its TLTRO programme. There was, however, no interest rate cut, as we thought there might have been.

Asset purchases under the QE programme will be temporarily increased by 120 billion euros between now and the end of the year, with a special focus on private sector bonds. The TLTRO programme will also offer more favourable loans to commercial banks. Investors were, however, completely underwhelmed by Lagarde’s press conference, particularly her comment that the ECB was ‘not here to close spread’s. Her comments are an apparent admission that the bank has limited ability to support the bloc’s economy - she instead passed the buck to Euro Area governments by calling on them to adopt an ‘ambitious and coordinated fiscal stance’ to safeguard against downside risks.

The reaction in the market to her comments were violent, triggering a sell-off in Italian equities and bonds and a move lower in the euro briefly back below the 1.11 mark (although it has since recovered some of its losses).

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FX Market Report - 12/03/20

Thu, 12 Mar 2020 10:38:52 GMT

ECB set to cut rates as Trump slaps travel ban on Europe

The European Central Bank is expected to follow in the footsteps of the Federal Reserve, Bank of England and others today in ramping up easing measures intended to support the Euro Area economy from coronavirus risks.

With Italy in lockdown and much of Europe putting in place containment measures designed to prevent the spread of the virus, the bloc’s economy is on an incredibly fragile footing and almost destined for a recession. We’ve not yet heard anything yet from the ECB, unlike both the Fed and BoE that have cut rates at unscheduled meetings in the past week or so. Given the severity of the situation, which has seen President Trump slap a travel ban on European visitors, we think that sweeping easing measures will be announced by the bank today.

We are pencilling in the following to be announced this afternoon:

- A 10 basis point cut in the ECB’s deposit rate to -0.6%

- An increase in the QE programme by 10 billion euros to 30 billion euros a month.

- An expansion in the TLTRO programme, with a special focus on providing ample liquidity for

small- and medium-sized enterprises (SMEs). This would be similar in nature to that

announced by the Bank of England yesterday.

- Increased calls for European government to ramp up fiscal spending.

We are, however, of the view that policymakers will aim to not overdeliver. They are likely to instead do the minimum amount possible to meet market expectations, particularly given the lack of tools available at the bank’s disposal. Unlike the Fed, the ECB does not have the luxury to aggressively cut its main interest rate and will therefore need to use more unconventional methods.

Bank of England announces emergency interest rate cut

The Bank of England slashed interest rates by 50 basis points on Wednesday morning in an attempt to protect the UK economy from the downside risks posed by the COVID-19 virus.

Rates were lowered in a unanimous vote to 0.25%, its joint lowest in history, with rate-setters following in the footsteps of their US counterparts in announcing an emergency cut - two weeks ahead of the next scheduled MPC meeting. In addition to the cut, the BoE announced it was launching a new scheme that would support commercial bank lending to smaller businesses, particularly SMEs - something that we had pencilled in for the ECB to do at its meeting tomorrow.

According to the bank, the above measures should free up an additional £190bn for UK banks to lend. In a statement, the bank noted the easing measures would ‘help UK businesses and households bridge across the economic disruption that is likely to be associated with Covid-19’. It also stated that it would help ‘keep firms in business and people in jobs and help prevent a temporary disruption from causing longer-lasting economic harm’.

A 50 basis point cut was fully priced in for this month, although the hastiness of the move caught the market slightly off guard. It should, however, not come as a total surprise, particularly given there were rumours of such a move late last week. This does, at least, allow the bank to get ahead of the curve and provide adequate stimulus to the market before the growth in the number of cases of the virus begins to accelerate, as is expected. 382 people have now been confirmed to have contracted the virus in the UK, including the Health Minister Nadine Dorries.

Given the timing of the move, Sterling immediately shed around half a percent or so of its value versus the dollar in a knee-jerk sell-off this morning. We think that there is now a real possibility that the BoE could cut rates all the way down to zero when it meets for its next scheduled meeting on 26th March.

Sterling slides despite Sunak’s budget pledges

Recently appointed chancellor Rishi Sunak delivered a show-stealing budget announcement in the UK on Wednesday, much of it aimed at easing the impact of the COVID-19 virus.

Among other measures, including new rules on statutory sick pay and a £500 million ‘hardship fund’ for local authorities, a £1.2 billion ‘business interruption’ loan scheme was announced aimed at supporting small business in the UK. We think this could act as a crucial source of funding for UK SMEs during a period in which they are likely to be among the companies hardest hit from the virus disruption. Overall, £30bn worth of fiscal stimulus was announced, £12bn specifically set aside to allay the impact of the virus (£7bn for businesses and £5bn for the NHS).

The reaction in the pound was, however, to send it lower. There was no real catalyst or rationale for this move, particularly given the stimulus measures were relatively larger in size and more thorough than we have seen almost everywhere else. It may just be a result of investors once again favouring the safe-havens - the USD/JPY cross fell back below the 104 level this morning.

Trump underwhelms, market braces for more Fed cuts

The aforementioned travel restrictions slapped on Europe by President Trump underwhelmed the market this morning, sending the dollar around 0.5% lower versus the euro. The dollar has now reversed its losses and is trading higher on the day . The travel ban itself was not necessarily the reason for the market’s initial disappointment, more so the lack of additional details on how the US was planning to combat the outbreak. Public health measures, including sick pay and testing methods, were conspicuously absent.

Given the lack of action from the White House, investors are putting all the emphasis on additional policy measures from the Federal Reserve. Following its hefty 50bp interest rate reduction last week, the market is bracing for more cuts at its scheduled meeting next Wednesday. Futures markets are now already pricing in a further 0.75% cut, which would take the main Fed funds rate almost to zero.

It is worth noting that the dollar is still viewed as a safe haven by many investors and we would expect further flows into the worlds reserve currency to hedge against downside risk.

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FX Market Update - 11/03/20

Wed, 11 Mar 2020 10:11:15 GMT

Bank of England announces emergency interest rate cut

The Bank of England slashed interest rates by 50 basis points on Wednesday morning in an attempt to protect the UK economy from the downside risks posed by the COVID-19 virus.

Given the timing of the move, Sterling immediately shed around half a percent or so of its value versus the dollar in a knee-jerk sell-off this morning. It has, however, since retraced these losses at the time of writing. The limited nature of the move and the subsequent rebound can be attributed to the fact that the cut was already fully priced in for this month, it just came slightly sooner than investors had expected. We think that there is now a real possibility that the BoE could cut rates all the way down to zero when it meets for its next scheduled meeting on 26th March.

Financial markets stabilise following Black Monday rout

Financial markets stabilised across the globe yesterday, with the foreign exchange market returning to at least some sense of calm following the frantic moves of ‘Black Monday’. Equity markets rebounded from their lows for the most part, while bond yields crept higher. This came off the back of hopes that central banks and governments around the world would ramp up stimulus measures to protect the global economy from the downside risks stemming from the coronavirus outbreak.

Much of the recovery in risk appetite can also be attributed to positive news out of China, where the spread of the virus continues to abate. The number of new cases rose by just 19 in China on Monday, the lowest since the outbreak began. Even in Hubei, where the virus is said to have originated, there has been the return to some form of normalcy, with the most optimistic reports suggesting that the country could return to regular capacity by the end of the month. Remarkably, all of the 16 temporary hospitals opened to treat the virus have now been closed.

The virus has, however, continued to spread at an aggressive rate outside of China. The number of new daily cases excluding China increased to its highest yet on Monday (4,371). As long as this number continues to accelerate, which looks likely to be the case at least for the next few days, investors will continue to favour the safe-havens and steer clear of those assets deemed as higher risk, emerging market currencies being one such example.

Euro gives up gains, ECB meeting in focus

The euro gave up almost one percent versus the dollar on Tuesday, reversing all of its gains from the day previous. To some extent, the sell-off in the euro can be attributed to the extreme containment measures now in place in Italy. The country is currently under a complete lockdown in an attempt to control the virus that has now claimed 631 lives in the country, up from 431 a day previous. This will undoubtedly come at a seismic economic cost. We think it is now a certainty that the Italian economy will enter into a recession in the first quarter, with a Eurozone-wide recession in the first half of 2020 also now pretty much inevitable.

Currency traders are now fully focused on what kind of response we can expect to see from the major central banks. At present, futures markets are fully pricing in a 75 basis point rate reduction from the Fed at its March meeting next week. In the meantime, investors will be paying close attention to any measures announced by the ECB tomorrow. With very little room for them to follow suit, we think that the Governing Council will focus mostly on providing ample liquidity to the sectors that need it, with President Lagarde to call again on European governments to increase fiscal spending.

UK budget set to unveil historic spending increases

Following the BoE’s rate cut this morning, attention in the UK will be firmly on today’s budget from the new chancellor Rishi Sunak.

The budget is usually a non-event for the currency markets, although will take on much more importance this time around, for a number of reasons. Firstly, there was no budget at all in 2019, a direct result of the snap election. This will also be the first spending announcement since the UK officially left the European Union and comes right in the midst of the rapidly spreading coronavirus outbreak. Investors are bracing for announcements of massive increases in spending on infrastructure and the NHS. Given that this is, we believe, mostly priced in to the value of Sterling, we don’t expect too big of a reaction in the currency markets, although a knee-jerk move in either direction cannot be ruled out.

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FX Market Update - 10/03/20

Tue, 10 Mar 2020 10:18:08 GMT

How did ‘Black Monday’ impact the FX market?

Growing concerns surrounding the COVID-19 virus wreaked havoc in financial markets on Monday, arguably the most extraordinary day of trading during the crisis so far.

While the number of new daily cases of the virus inside China has eased almost to a halt (only 40 on Sunday), the number of cases continues to rise at an alarming rate around the rest of the world. South Korea, Iran and Italy now each have more than 7,000 cases of the virus, the latter reporting 460 deaths, the most outside of China. Containment measures remain in place across the globe in an attempt to control the spread of the virus, notably in Italy where approximately 16 million people remain in quarantine.

We outline below the pandemonium the virus is causing among some of the key financial markets around the world.

Commodities

The main headline in the markets was arguably in commodities, namely the sharp drop witnessed in global oil prices. Crude oil prices shed around 30% of value at one stage after a deal between Saudi Arabia and Russia collapsed. Concerns regarding a slowdown in demand induced by the virus and the increase in oil supply resulting from the breakdown in Saudi-Russia talks has hit the price of the commodity on two fronts, amplifying its sell-off to the largest daily drop since the early-1990’s.

Equity

Stock markets continued to collapse yesterday as investors fled higher risk investments in favour of safe-haven government bonds. The FTSE 100 index was down around 8% at one stage, with US equity indices losing a similar amount - the Dow Jones index shed almost 2,000 points at the open leading to a brief halt in trading. In mainland Europe, the Stoxx 600 extended its losses to more than 20% in just two weeks, led by a more than 10% drop in Italian stocks.

Fixed Income

As is customary during times of financial market stress or uncertainty, investors have fled higher risk investments and piled into lower risk strategies, including government bonds. As the demand for bonds pushes up their price, the yields on those bonds fall, given the inverse relationship between a bond’s price and its interest rate.

Notably, US Treasury yields have nose-dived, with the entire US yield curve now below 1%. The benchmark 10-year yield fell below 0.35% at one stage yesterday, a remarkable drop of around 60 basis points since the beginning of trading on Friday.

Foreign Exchange

Those currencies hardest hit so far have been the ones whose economies are heavily dependent on the production of oil, including the Canadian dollar, Norwegian krone and Colombian peso. The Russian ruble was, however, the hardest hit, down almost 10% at one stage to its lowest level in four years.

Among the major currencies, EUR/USD continued its march higher, rallying above the 1.145 level yesterday evening and extending its gains to an eye-watering 6% since late-February, before giving back some of its advances. The main rationale for the move is the expectations for a narrowing in US-Eurozone interest rate differentials - the market is now pricing in a 75 basis point cut from the FOMC at its meeting next week, while the ECB has almost no room whatsoever to ease policy. As we outlined in our ECB preview report, we expect the bank to lower its deposit rate by 10 bp on Thursday, combined with an increase in the QE programme. The Fed on the other hand looks almost destined to cut rates all the way down to zero in the coming months, a full one percent below current levels. This could provide room for more gains in the euro in the coming days.

The safe-havens also continued to rally. The chief among those, the Japanese yen, was down below 102 to the dollar at one point, although it has since retraced some of these panic moves. As far as sterling is concerned, the UK currency briefly rallied above the 1.31 mark versus the broadly weaker dollar, although has since given up some of these gains.

As we have mentioned in the past week or so, the big focus among FX traders is now on what kind of response we can expect from central banks around the world. Those that have space to cut interest rates, such as the Fed, Bank of Canada, Bank of England etc., will continue to do so, many we believe down to or just above zero. Others that are not so lucky, such as the ECB, SNB and Bank of Japan, will instead use alternative measures to support their domestic economies. This, we think, may include pumping liquidity into the sectors that need it, or relaxing lending rules. Look for the ECB on Thursday to also call for European governments to support its efforts by ramping up fiscal spending.

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FX Market Update - 05/03/20

Thu, 05 Mar 2020 10:10:32 GMT

Why the Fed’s emergency rate cut underwhelmed

The Fed cut interest rates by a giant 50 basis points on Tuesday, its first intermeeting rate cut since the depths of the financial crisis and collapse of Lehman Brothers in 2008, in a bid to combat the downside risks posed by the coronavirus outbreak.

Financial markets were, however, left totally underwhelmed by the announcement. US equity markets staged a small rally yesterday, although only a very minimal one - the Dow Jones and S&P 500 indices remain around 8% lower since mid-February. The reaction in the FX market was also pretty limited following a modest knee-jerk move. The dollar actually appreciated yesterday, ending London trading roughly where it was before the Fed’s surprise announcement.

But what was behind the lack of reaction in the market?

1) Rate cut can do nothing to stop the spread of a disease, only soften the economic impact.

2) Lower interest rates cannot affect the supply-side shock caused by the virus.

3) ‘Emergency’ cut headlines may spook the average consumer. It is conceivable that the Fed’s

unscheduled move may create panic among US consumers and have the opposite impact on domestic demand than intended.

The overriding view in the markets is that the Fed’s big cut was a bit of a damp squib. While policy easing can go a long way to softening the economic blow, it will not make the problem go away any time soon.

BoC slashes rates, other G10 banks to follow

We noted in our special report following the Fed’s rate cut that other central banks would be shortly following suit. This is exactly what we got yesterday, with the Bank of Canada announcing its own 0.5% rate reduction, taking its main policy rate from 1.75% to 1.25%.

Similarly to the Fed, the BoC warned over the risks posed by the virus, stating that lower rates were needed in order to partially offset the knock-on impact on consumer confidence and financial conditions. Governor Poloz also noted that the bank was ready to do more, which we think effectively tees up another rate cut at its next meeting in April.

The next major central bank meeting on the docket is next Thursday’s ECB meeting. Our view is that a 10 basis point rate cut here is highly likely, with an increase in the bank’s QE programme and increased loans to Euro Area banks also a possibility. The bank does, however, have very little room for manoeuvre, which should continue to be a positive for the euro.

Sterling rallies despite rampant rate cut bets

The pound, meanwhile, ended sharply higher for the day, opening the London trading session this morning around the 1.29 mark versus the dollar.

There were rumours floating around that the Bank of England could follow the Federal Reserve in announcing a pre-emptive rate cut on Wednesday, so the fact that they didn’t may have been behind some of the strength in sterling. Incoming governor of the BoE Andrew Bailey spoke yesterday, saying ‘it is quite reasonable to expect we are going to have to provide - collectively going to have to provide - some form of supply-chain finance in the not-very-distant future’.

Similarly to some of its major counterparts, the Fed, RBA and BoC, we think that market pressure is so high on the BoE that they may have no alternative but to cut rates on or before the next policy meeting, scheduled for 26th March. The real question will be, whether or not this will be a standard 25 basis point cut, or a more substantial 50 bp rate reduction.

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FX Market Update - 04/03/20

Wed, 04 Mar 2020 10:51:19 GMT

Fed slashes rates in first emergency cut since the crisis

Trading in the FX market yesterday was dominated by the Federal Reserve’s surprise interest rate announcement.

During an unscheduled meeting, the FOMC lowered its benchmark Fed funds rate by 50 basis points, double the standard 25 that it typically moves rates by, to a range of 1.00-1.25%. The decision among the committee was a unanimous one and came hot off the heels of a statement released by G7 central bankers and finance ministers that hinted widespread easing was on the way in order to tackle the downside risk triggered by the coronavirus outbreak.

In an accompanying statement, the central bank noted that the coronavirus poses ‘evolving risks to economic activity’, stating that additional stimulus was required in order to achieve the bank’s goals of maximum employment and price stability. FOMC Chair Jerome Powell stated that the bank would continue to use all its available tools, a nod to additional Fed cuts down the line, and that formal coordination from G7 monetary authorities was possible. The speed of the move, which comes two weeks before they were due to meet, suggests that the Fed is clearly keen to get ahead of the curve and act sooner rather than later in order to protect the US economy.

Financial markets were, however, on the whole relatively underwhelmed. We saw a slight sell-off in the US dollar, although the moves were largely contained given that a cut of this magnitude this month was already priced in. Equity markets actually ended the day lower once again despite the cut. This to us highlights the market’s concern that monetary policy can do nothing to solve the health crisis itself - central banks can’t print a vaccine. While the cut may help boost consumer demand, it’s likely to have very little effect on the supply-shock triggered by the virus. Recent data has shown that US companies are already beginning to run out of goods sourced from China, a direct consequence of the widespread shutdowns in Asia’s largest economy.

For now, EUR/USD continues to hover around the 1.1150 mark. Investors will quickly turn their attention to what kind of response markets can expect from the European Central Bank, which is scheduled to meet next Thursday. Don’t be surprised if we get some form of communication from the bank in the interim that could tee up a 10 basis point rate cut or additional stimulus in the form of a ramping up in its quantitative easing programme.

Sterling fails to rally as Bank of England cuts eyed

Despite the dramatic headlines across the pond, the pound was actually barely moved during London trading yesterday, with cable trading around the 1.28 mark this morning.

The lack of a rally in sterling following the announcement can largely be attributed to the fact that the Bank of England, unlike its Euro Area counterpart, has room to lower rates in response to the virus outbreak. Policymakers in the UK are scheduled to meet on 26th March. At this stage we see a rate cut at the end of the month as a near certainty. Money markets are now fully pricing in a cut this month, up from around the 80% implied probability prior to the Fed’s rate announcement. Governor Carney, who will be replaced prior to the meeting, effectively teed up such a move during his statement yesterday, saying that he expected a ‘powerful and timely’ response from central bankers to combat the downside risks posed by the virus.

In the meantime, investors will be keeping tabs on this afternoon’s Bank of Canada rate announcement (15:00 GMT). We expect a 25 basis points rate cut here, with Governor Poloz stressing a commitment to do more if needed. In our view, the Fed’s rate cut is very much a precursor to other central bank’s around the world following suit.

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FX Market Update - 03/03/20

Tue, 03 Mar 2020 13:07:06 GMT

G7 central banks set to band together in coronavirus fight

Trading in the FX market remained dominated by coronavirus concerns on Monday.

As the number of confirmed cases outside of China continues to rise at an accelerated rate, investors’ attention has turned to what kind of response markets can expect from central banks around the world. In an extraordinary move, central bankers among the G7 countries will be holding a rare conference call at 1pm UK time (14:00 CET) today in what appears to be a coordinated effort to tackle the potential negative economic repercussions triggered by the virus. A statement will follow soon after, which we expect will indicate a broad consensus among policymakers that aggressive rate cuts will be required in order to fight off the downside risk.

We said in Monday’s weekly report that the Reserve Bank of Australia’s policy meeting overnight could be a sign of things to come. As the market thought they might, the RBA slashed interest rates overnight by 25 basis points to 0.5%, with Governor Lowe citing coronavirus concerns, while keeping the door ajar to additional cuts. He also stated that he expected other major bank’s to follow suit, with the onus now squarely on the Federal Reserve. Fed fund futures are now pricing in a cut in the US as a certainty, with the real question likely to be whether or not this will be a standard 25 basis point rate reduction, or something more substantial.

Next up will the Bank of Canada’s policy meeting on Wednesday. We now think that there is a very good chance they will follow suit with the RBA, with a 25 bp rate reduction heavily priced in.

Euro continues to rally on ECB’s limited room to cut

As for the euro, the common currency continued to climb higher on Monday and is now trading back above the 1.11 mark versus the dollar.

The move higher witnessed in the euro versus the dollar in the past ten days or so goes back to the rationale that we’ve had for such a move in the past few months - that there's simply more room for policymakers at the Federal Reserve to cut interest rates than there is at the ECB. Futures pricing suggests that markets believe as many as four rate cuts from the Fed could be on the card this year in a bid to combat the downside risk posed by the virus. With rates in the Euro Area already in negative territory, the ECB doesn’t have such a luxury - we think that 10 basis points of cuts from the Governing Council is just about the limit as to how much lower rates can go there.

The ECB will be meeting next week (12th March). This promises to be one of the bigger event risks in the FX market in the next couple of weeks.

Brexit negotiations set to begin in Brussels

Away from virus fears, the pound was under pressure again, remaining pinned below the 1.28 mark versus the dollar this morning. This is partly due to investors fleeing higher risk assets and partly to uncertainty surrounding Brexit.

Approximately 100 UK officials are heading to Brussels this week as the first round of talks with the European Commission begin in earnest. Boris Johnson continues to take a hard-line stance, stating that the UK will not be bound by EU rules or the jurisdiction of its top court. Growing investor bets in favour of BoE rate cuts has also far from helped the pound. Investors are now pricing in around an 80% chance of a 25 basis point cut when the bank next meets on 26th March. We see a very good chance of this being the case, although the fact that almost every other major central bank will do the same, should limit the cuts downside impact on the pound.

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FX Market Update - 26/02/20

Wed, 26 Feb 2020 14:17:38 GMT

Euro recovery continues as US equity markets sink by almost 10%

The euro continued to claw back some of its recent losses on Wednesday morning, rallying back towards the 1.09 level versus the dollar.

The common currency looks a good bet to post its fourth straight day of gains today, despite the growing number of coronavirus cases reported in the Euro Area. A total of 322 cases of the virus have now been confirmed in Italy, raising concerns that the bloc’s third largest economy could be set to enter into a technical recession in the first quarter of 2020. The number of cases in both Germany and France have also ticked higher in the past couple of days, although these increases have been modest in nature. Europe's open borders presents a bit of a problem and could hinder containment measures.

As we noted earlier in the week, we think that the move higher in the euro in the past few days indicates that its sell-off was driven more by investors shorting the currency as part of the ‘carry trade’ strategy, rather than due to fears surrounding the virus. So far, European economic data has held up rather well, namely the February PMI figures that showed a move higher in both services and manufacturing activity.

The FX market on the whole has actually continued to evolve in a calm and orderly fashion. We’ve seen a move of around one percent in the yen and a sell-off in the South Korea won as the number of cases there passes the 1,000 mark. Other than that, the impact on most other currencies has been minimal, a far cry from the more than 9% move lower in US equities witnessed so far this week. The Dow Jones index is now trading at its lowest level since early-November.

Fed ‘closely watching’ coronavirus developments

Across the pond, Vice Chair of the Federal Reserve’s rate-setting committee, Richard Clarida, stated that it was too soon to gauge whether interest rates cuts would be required in order to protect the US economy from the coronavirus risks.

While the US economy is usually immune to uncertainties surrounding global growth, given its high low dependence on exports for overall GDP, investors are beginning to fret that even the US could feel the force of the virus’ impact. According to Clarida, the Fed are ‘closely monitoring’ the emergence of the virus, given that the disruption could ‘spill over to the rest of the global economy’. Money markets are now pricing in around a 60% chance of a Fed cut by the end of the year, up from around 40% last week.

Sterling edges higher as investors eye UK budget

News out of the UK continues to be few and far between so far this week.

The pound edged modestly higher yesterday, rallying back above the 1.30 mark versus the US dollar. We think that this is largely a result of a broadly weaker dollar, rather than any catalyst that would send sterling higher. That being said, investors still remain hopeful that increased fiscal spending could be on the way in new Chancellor Rishi Sunak’s first budget, which is due on 11th March. For now, no news regarding Brexit is also good news for the pound.

A GBP/USD exchange rate around the 1.30 level suggests to us that the market is not overly concerned by the possibility of a cliff-edge EU exit at the end of the year and that investors are confident a delay to the transition period is on the cards that would remove the ‘no deal’ scenario.

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FX Market Update - 25/02/20

Tue, 25 Feb 2020 09:46:39 GMT

Coronavirus cases jump outside of China

Headlines surrounding the coronavirus outbreak are back dominating the headlines again in the FX market.

Concerns surrounding the virus had unquestionably eased in the financial markets last week, with currency trading beginning to return to at least some sense of normalcy. In fact, the rate of growth in the number of overall confirmed cases, and indeed deaths, has eased fairly sharply in the past ten days or so. Approximately 80,000 cases of the virus have now been reported across the globe in a total of 30 countries at the time of writing, leading to the deaths of a little over 2,700 people.

The real cause for concern for investors is the jump in cases outside of the Chinese borders. As of 20th February, approximately 1,200 cases of the virus had been confirmed in countries other than China. This has since doubled (as of 25th February), with Italy, South Korea and Iran, among others, announcing a jump in both the number of confirmed cases and fatalities over the weekend. This brings the subtotal for coronavirus cases outside of China to 2,600, approximately 3.2% of the total number of global cases. This is a fairly sharp jump considering this figure had been contained to less than 1% throughout almost the entirety of the outbreak thus far.

The reaction in the FX market has actually not been as severe as many may have expected, certainty not as violent as the swings witnessed in equity markets. The yen strengthened again as investors once more favoured it as a safe-haven destination, while the South Korean won slumped around one percent due to the jump in the number of cases there. Other than that, the moves were largely contained, a sharp departure from the near 3% sell-off witnessed in US equity markets.

Euro rallies despite growing virus fears

Currency trading this week is likely to continue to be dominated by coronavirus headlines, rather than macroeconomic or central bank announcements.

One of the most notable developments so far this week has been the resilience of the euro, which had been one of the worst performers amid the ongoing virus headlines. As we mentioned in our weekly report yesterday, this to us indicates that the currency’s recent fall has more to do with the establishment of carry trades rather than virus fears, in which investors short (or borrow) the euro in order to take advantage of higher interest rates elsewhere.

The common currency was instead one of the best performers on Monday and is now back trading above the 1.08 level at the time of writing. Investors may also have been encouraged by Monday’s IFO sentiment data for February, which showed a modest improvement on the previous month. The rest of the week is fairly light in terms of EZ data. The lack of any more negative macroeconomic news could actually help the euro in the coming days.

EU negotiations, budget content to drive sterling

Sterling continues to chug along just above the 1.29 level versus the dollar. With no tier-one data in the UK whatsoever this week, sterling traders will instead be focusing on developments elsewhere and any Brexit related headlines that may happen to hit the newswires.

The two main domestic developments in the near-term are likely to be the state of the UK and EU negotiations and the content of the UK’s spring budget. In terms of the former, we expect both sides to continue to strike a hard line stance in the immediate-term, before the UK finally caves and asks for an extension to the transition deadline. Regarding the latter, the budget is now likely to be delayed, with any increase in fiscal stimulus already largely expected and mostly priced in to the market.

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FX Market Update -24/02/20

Mon, 24 Feb 2020 14:22:11 GMT

Coronavirus concerns dominate financial markets

Stock markets worldwide fell last week as fears about the impact of the coronavirus epidemic and its impact on the global economy slammed risk assets.

Stock markets fell for the first week in three, emerging market currencies were sold hard and safe-havens rallied, with the conspicuous exception of the Japanese yen. This is understandable as Japan's economy is relatively vulnerable to economic disruptions resulting from attempts to control the spread of the virus.

On the other hand, the euro appeared to stabilise amid the sell-off in financial markets, which seems to bolster the thesis that the currency’s recent falls are due to the establishment of "carry trades" to take advantage of the interest rate differentials, rather than any perceived deterioration of the Eurozone's prospects.

With relatively little news on the macroeconomic front, the market focus should remain on the daily figures of coronavirus infections inside and outside China, as well as measures to contain the outbreak. Only the PCE inflation report in the US, out on Friday, could generate some volatility, as this is the measure preferred by the Federal Reserve.

GBP

A slate of solid economic data out of the UK, in employment, house prices, wages and PMIs of business activity did little to support the pound, which remains driven by what little solid news there is of the trade negotiations with the European Union. This comes as somewhat of a surprise, given that most of the above data surprised to the upside. Most noteworthy was the move higher in UK inflation, which leapt to its highest level in six months and just shy of the Bank of England’s 2% target. We think that this all but rules out the possibility of a UK rate cut in the near-term.

Next week should provide ample news about the outlook for the negotiations. The EU punishes its negotiation mandate on Tuesday, and the UK should reveal details about its own position at some point this week as well, so there is potential for some sterling volatility, especially around the EU release.

EUR

The sharp and somewhat puzzling recent performance of the common currency stabilised this week, and the euro was able to post a small bounce against every major currency, save the Swiss franc. This is modest evidence in support of our view that this recent fall is due primarily to the establishment of "carry trade", which involves shorting the euro against other higher-yielding currencies to take advantage of the interest rate differentials. A risk-averse mood in markets tends to lead to a partial unwind of such trades.

The key PMIs of business activities all surprised to the upside last week, rising in spite of the coronavirus impact on the global supply chain. Details were slightly less positive, as longer supplier lead times caused by the disruption accounted for some of the increase - but far from all. At the margin, the PMIs are an important positive development for the Eurozone economy, though we are yet to see the full impact of the epidemic in the data.

USD

Positive second-tier data releases out of the US, mostly out of the housing market, were overshadowed by a negative PMI surprise on Friday. The dramatic miss, from over 53 expected to an actual number under 50, indicating contraction, should be taken with a grain of salt, given the shorter history of this index in the US, and the lack of established predictive value compared to the same index in the Eurozone, for instance.

The main news this week will be the PCE inflation report on Friday, where expectations are for another nudge upward to 1.7%, closer to the Fed comfort zone of 2%. Thursday will also see the release of the Q4 US growth data, although this is expected to remain unrevised from the preliminary 2.1% estimate.

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FX Market Update - 21/02/20

Fri, 21 Feb 2020 10:38:04 GMT

Pound claws off three-month lows on strong UK data

Sterling briefly slipped to its weakest position in three months against a broadly stronger US dollar on Thursday, although mounted a comeback on Friday following some impressive UK economic data.

The post-election bounce in UK economic activity that we had predicted following the Tory victory in December has been more evident than ever so far this week. On Wednesday, the latest inflation data showed that consumer prices grew at their fastest pace in six months in January and at a pace that is just shy of the Bank of England’s 2% target.

Then, on Thursday, the latest figures showed that retail sales bounced back strongly in January following a soft end to 2019. Sales jumped by 0.9% month-on-month, its largest increase since March 2019. While the year-on-year number remained modest at 0.8%, this has more to do with the weak end to last year than anything else.

We also had another solid set of UK PMI figures on Friday morning, Which provided a little assistance to the pound. While the services index come in just shy of expectations (53.3 versus 53.4 expected), the sharp bounce higher in the manufacturing PMI back into expansionary territory (51.9 versus 49.7 expected) more than made up for this shortfall.

As we have mentioned on a number of occasions in the past few weeks, we think that growth in the UK economy is set for a decent rebound in the first quarter as consumers and businesses breathe a sigh of relief at the removal of the short-term political and ‘no deal’ uncertainty following December’s general election.

Is the euro set for a much needed rebound?

Some similarly strong PMI data out of the Euro Area also helped the euro initiate a modest rally against the dollar, with the key EUR/USD pair edging off its lowest level in three years.

This morning’s business activity PMIs for February were stronger across the board, raising optimism that the recent downturn in European output could prove temporary. Both the services and manufacturing indices increased more than expected to 52.8 and 49.2 respectively, the latter leaping to its highest position in almost a year and just below the level of 50 that denotes contraction. This allowed the main composite index to jump back up to 51.6 this month, its highest level since August.

The aforementioned data comes in line with our view that recent concerns regarding the health of the Euro Area economy are slightly overblown and driven more by the coronavirus headlines rather than signs of underlying weakness in the bloc’s economy. We think that once this boom in the soft data starts translating itself into an improvement in hard data, we should begin the see a more sustained and meaningful uptrend in the euro, particularly versus the dollar.

The next big test for EUR/USD will be this morning’s Euro Area inflation numbers for January, expected to remain unrevised, and this afternoon’s US PMI figures.

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FX Market Update - 20/02/20

Thu, 20 Feb 2020 10:24:06 GMT

Investors dump yen as market fears Japan recession

Foreign exchange traders dumped the Japanese yen on Wednesday, flocking instead to the US dollar, which rallied across the board against almost all of its major counterparts.

The yen, which is the third most popular traded currency in the FX market, has shed almost 2% of its value in the past 24 hours, weighed down by fears over the economic impact of the coronavirus outbreak. The Japanese currency was one of the main beneficiaries following the virus’ outbreak as investors piled into the safe-haven currency. Investors are, however, now turning their attention to the potential long-term economic impact of the virus which, according to a Bloomberg report released yesterday, is expected to be among the most hardest felt in Japan.

The Japanese economy has already suffered in the past few months. The economy contracted by 1.6% quarter-on-quarter in the final three months of last year (an annualised pace of 6.3%), in large part due to the effect of October’s sales tax hike. With Japan now expected to be the hardest hit from the coronavirus economic repercussions (outside of China), it looks very possible that the country’s economy could tip into recession in the first quarter of this year.

Fed strikes optimistic note in January meeting minutes

Last night’s Federal Reserve minutes provided further impetus to the greenback, which posted sharp gains against the pound and modest ones versus the euro.

According to Wednesday’s FOMC minutes, the economy was proving stronger than they had expected, with indicators of recession risk no longer flashing concern. Policymakers noted their belief that the downside risks to the economy had abated, with rate-setters also voicing optimism that inflation would move towards the 2% target. The minutes noted ‘maintaining the current policy stance for a time could be helpful in supporting U.S. economic activity in the face of global developments that have been weighing on spending decisions’. This reinforces our view that the Fed will keep rates on hold throughout 2020.

EUR/USD touched a fresh three-year low this morning following the release of the Fed’s minutes. We think that much of this is, however, due to ongoing concerns regarding the recent weakness shown in European data. This afternoon’s ECB meeting accounts may shed some more light on this, although we expect Friday’s more timely PMI data to be of greater importance to currency traders.

Ongoing Brexit wrangling weighs on sterling

Sterling fell sharply on Wednesday, shedding over half a percent of its value versus the dollar to trade this morning back around the 1.29 mark.

The rationale for the above move can be attributed to both pound weakness and dollar strength. The former has benefitted from pressure on both the yen and the euro in the past few days, while the UK currency has been dragged lower by the ongoing political wrangling between the UK and the European Union. In an exchange on Twitter yesterday, the Prime Minister’s official media team questioned the European Commission’s stance towards the future trade relationship between the bloc and the UK, a stance that they believe has changed since 2017.

The ongoing political uncertainty was more than enough to offset Wednesday’s impressive UK inflation data, which has now pushed the date at which the market is pricing in a BoE rate cut to November. We think that the chance for an insurance rate cut has now passed, given our view for an improvement in UK data in the coming months.

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FX Market Update - 19/02/20

Wed, 19 Feb 2020 11:15:07 GMT

Euro slides below 1.08 level on soft ZEW sentiment data

The euro edged below the 1.08 level against the US dollar for the first time since April 2017 on Tuesday, dragged lower by more signs of weakness in the Euro Area economy.

Following on from recent underwhelming GDP growth, industrial production and retail sales data, yesterday’s ZEW sentiment indices all fell well short of expectations. The main economic sentiment index for the Eurozone slumped to just 10.4 in February, well short of the level of 30 that investors were expecting and its lowest level in three months. The German index fared just as badly, sliding to 8.7 in February, well short of January’s 26.7 reading.

According to ZEW President Achim Wambach, ‘the feared negative effects of the Coronavirus epidemic in China on world trade have been causing a considerable decline of the ZEW Indicator of Economic Sentiment for Germany’. As we have noted in the past few days, the Euro Area is one of the more exposed to uncertainty surrounding the virus than many of its peers, given the bloc’s high dependence on external demand, meaning that the recent weakness in the common currency is not all that surprising.

It is worth noting, however, that fears regarding the coronavirus outbreak are continuing to abate, which may start filtering its way through to a recovery in the euro. The death toll edged above 2,000 yesterday. That being said, the number of confirmed cases appears to be plateauing, with the ratio of those fully recovered to decreased now standing at almost 7.5:1. This supports our view that we think we’re likely to see a repeat of the SARS virus, in which we have lots of negative headlines, but no meaningful impact on financial markets or the global economy.

Jump in UK inflation cools BoE rate cut chances

A jump higher in UK inflation failed to support the pound this morning, which slipped back below the 1.30 mark.

UK headline inflation increased to 1.8% in January, its highest level in six months and a sharp increase on the multi-year low 1.3% notched in December. While much of the increase was due to a jump in fuel prices, the core inflation rate, which strips out volatile priced components such as fuel and energy, also increased back up to 1.6%. This increase in price growth to just shy of the BoE’s 2% target supports our view that lower rates from the Bank of England is unlikely in 2020.

Next up for the pound will be tomorrow’s retail sales data, followed by Friday’s business activity PMIs.

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FX Market Update - 18/02/20

Tue, 18 Feb 2020 09:38:51 GMT

Euro languishes around three-year lows; what’s next?
Will we see parity before the end of the year?

The foreign exchange market was eerily quiet on Monday, with investors choosing not to take any sizable positions in either direction ahead of a busy week of macroeconomic data and central bank announcements.

US markets were closed yesterday due to President’s Day, which can be attributed to much of the lack of action. There were no major data releases in any of the main economies, one of the primary reasons why EUR/USD spent almost the entire London and New York trading sessions pinned within the narrow 1.083-1.084 range. This ensures that the common currency is now perilously close to its weakest position in three years versus the dollar.

One of the three main reasons that we highlighted last week as to why we’re seeing so much weakness in the euro is the divergence in recent economic data between the Euro Area and the US. Investors will be looking closely at upcoming data prints to see if that trend continues this week. In the Eurozone, this morning's ZEW economic sentiment indices for February could be key. So far the weakness in the bloc’s economy has been almost exclusively in the hard data. Signs of weakness in this ‘soft’ survey indicator may therefore raise concerns that the slowdown is slightly more systemic.

Later on in the week, currency traders will then turn their attention to Friday’s PMI figures for the Euro Area, which give a timely snapshot as to how the bloc’s economy is performing. We’ll then have the same data from the US released a few hours later. More signs of divergence here could trigger a move in EUR/USD below the physiological 1.08 mark. For now, however, the pair appears to have found some support and is likely to need some sort of catalyst, such as the above, in order to post any more meaningful losses from current, in our view undervalued levels.

Pound edges lower ahead of crucial week of UK data

Sterling has been slightly more volatile than its peers in the past 24 hours or so, as it has tended to be in the past few years. The currency has given back some of its gains so far this week, falling back below the 1.30 mark this morning as investors digested last week’s resignation of Sajid Javid and its potential ramifications for the UK economy. The possibility of increased spending in the new chancellor’s budget, which may now be delayed according to a cabinet member yesterday, is for now overshadowing the ongoing uncertainty surrounding a possible cliff-edge exit from the European Union at the end of the year.

With news quiet on the UK-EU negotiations front, the outlook and performance of the UK economy is coming under a much closer microscope. We expect that to continue this week, with a host of data releases on tap. First up will be this morning’s labour report, expected to show wages decelerated modestly in December. Investors will then quickly turn their attention to inflation (Wednesday), retail sales (Thursday) and PMIs (Friday). It goes without saying that this week therefore bodes to be a very hectic and possibly highly volatile one for the pound.

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FX Market Update - 14/02/20

Fri, 14 Feb 2020 11:07:17 GMT

Pound rockets higher, what’s driving the euro’s sell-off?

The pound leapt back above the 1.30 level against the US dollar on Thursday, rallying by almost one percent versus the greenback, on the news that UK chancellor Sajid Javid had resigned from his post following Boris Johnson’s cabinet reshuffle.

Thursday was a hectic day as far as UK politics were concerned, with the Prime Minister sacking a number of key cabinet members and high profile names, including Andrea Leadsom and Esther McVey. While Javid was offered to remain the UK’s finance minister, it was under the proviso that he would himself sack all of his advisors - something that he was unwilling to do. His resignation is a fairly extraordinary move given that the annual budget is set to take place in less than a month (11th March).

The reaction in the pound can be attributed to the fact that Javid is known to have been at odds with Boris Johnson’s spending plans, instead favouring a more conservative, tighter fiscal policy stance. The PM has already replaced Javid with Rishi Sunak - a loyalist to Johnson that is said to be in support of a more fiscally expansive approach. The implications for the UK being that the budget, whether it comes next month or at a delayed date, is now likely to entail greater government spending plans, perceived by markets as a positive for UK economic growth.

Moreover, increased spending may have the effect of lessening the immediate need for the Bank of England to tighten policy by cutting interest rates. The perceived potential boost to growth and dimming possibility of lower central bank rates has buoyed sterling in the past 24 hours, enabling it to be one of the best performing major currencies on Thursday.

Euro extends losses, falls to fresh May 2017 lows

Thursday was another very poor day for the euro, which continued on its downward spiral, extending its losses to eight out of the previous nine trading sessions. EUR/USD is now trading around the 1.085 level, over 3% lower than the beginning of December and its weakest position since May 2017.

There are a number of factors at play behind the currency’s recent sharp downward trend. We outline below what we think are the main reasons for the euro’s sell-off:

1) Coronavirus concerns - The Euro Area economy is particularly sensitive to external uncertainties to growth given that it is much more reliant on demand from abroad than its US counterpart. A potential slowdown in Chinese growth therefore presents itself as a greater downside risk to the Eurozone economy than the US.

2) Divergence in US, EZ economic data - We have begun to see signs of a renewed divergence in economic performance between the US and the Euro Area. This has been most visible in last Friday’s strong US labour report and the Eurozone’s atrocious December Industrial production numbers.

3) Euro acting as a funding currency - The emerging market carry trade is presenting itself as an attractive proposition for investors at present. This is a tactic in which traders long (buy) currencies with high interest rates (typically emerging markets), funded by shorting (selling) those with low interest rates, in order to profit from the interest rate differentials. With rates at zero and unlikely to be changed anytime soon in the Euro Area, the common currency is becoming increasingly popular as the funding currency for this trading tactic.

The next big test for the euro will be this morning’s GDP figures for Q4, although even a positive surprise here may not help the currency too much given the data’s time lag. This afternoon also bodes to be an important one in the US, with a number of economic data releases on tap. We will be paying closest attention to the January industrial production numbers and retail sales figures, both of which could shift EUR/USD today.

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FX Market Update - 13/02/20

Thu, 13 Feb 2020 10:57:23 GMT

3 reasons for the limited FX moves to jump in virus deaths

A sharp jump in confirmed cases of the coronavirus (now officially named COVID-19) jolted the FX market during Asian trading again last night.

The number of cases of the deadly virus jumped from around 45k on Wednesday to 60k on Thursday, with the province of Hubei, where the virus originated, reporting 14,840 fresh cases alone. The total death haul also rose, increasing to 1,369 at the latest count, with the number of fatalities in Hubei also posting a daily record of 242.

FX markets reacted in a similar fashion to what we’ve witnessed in the past few weeks, with traders buying the safe-haven yen and selling the higher risk emerging market currencies. The magnitude of the moves were, however, relatively limited in nature and contained to a maximum of around one-quarter of a percent. We believe that the rationale for the lack of a more meaningful reaction in the market is the following:

1) The broader definition of the virus - Much of the increase in the number of confirmed cases can be attributed to the broader definition adopted to diagnose people.

2) Virus remains contained - The vast majority of new cases remain contained within China. The percentage of cases outside the border is now back at less than 1% of the overall number.

3) Recovery rate on the up - While the jump in the death toll is, of course, grabbing all the headlines, this increase is still being outstriped by the growth in the number of total recoveries. The ratio of those totally recovered to deceased now stands at around 4.5:1, up on the 4.33:1 recorded on Wednesday.

Ugly industrial production data weighs on euro

Among the main currencies, the main news story continues to be the seemingly relentless move lower in the euro against its major peers. The common currency extended its losses to over 1.5% versus the dollar in February alone on Wednesday on both concerns surrounding the coronavirus and some contrasting economic data across both sides of the Atlantic.

Industrial production data out of the Euro Area on Wednesday morning was ugly, with output in the sector contracting by 4.1% year-on-year in December. Not only was this the largest yearly drop in the measure since late-2018, but it extends a concerning downtrend over the last two years that has shown no signs of abating. Declines in activity were broad based, with Germany, France, Spain and Italy all notching sharp contractions in excess of 2%.

We do, however, think that the reaction in the market has been slightly exaggerated and, at current levels, the EUR/USD exchange rate looks oversold.

UK house prices jump in month after election

Elsewhere, Sterling was relatively range bound on Wednesday amid a lack of major market moving news on either the macroeconomic front or regarding Brexit.

We did, however, see a modest bounce in the pound this morning following data overnight that showed a sharp increase in UK house prices. The monthly house price index from Royal Institution of Chartered Surveyors’ (RICS) jumped to +17 in January, its highest reading since May 2017 and well above all expectations.

This provides further evidence that the removal of the short-term ‘no deal’ uncertainty is having a positive impact on domestic economic activity which, we believe, should begin to filter its way through to a modestly stronger pound in the coming months.

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FX Market Update - 11/02/20

Tue, 11 Feb 2020 10:36:00 GMT

Euro crashes to 4 month lows ahead of Powell testimony

The common currency was sent tumbling to its weakest position in four months against the US dollar on Tuesday morning, as investors continued to digest some contrasting economic data releases across the Atlantic.

Macroeconomic data out of the Euro Area has taken a slight turn for the worse in the past week or so. While the January PMIs held up relatively well, a rotten set of retail sales numbers and some fairly ugly German industrial production numbers have weighed on the outlook and offset much of the optimism surrounding the recent solid sentiment indicators. ECB President Lagarde’s more-dovish-than-expected comments on Thursday, in which she talked up the emergence of external downside risks and weak domestic inflation, have also far from helped.

Meanwhile, the latest data readings out of the US economy have been pretty impressive, particularly last Friday’s nonfarm payrolls report that showed a move higher in job creation and acceleration in earnings growth. Federal Reserve Chair Jerome Powell is likely to highlight the recent solid data during his highly anticipated two-day testimony to Congress this afternoon. As we noted yesterday, we think that Powell will continue to strike an upbeat tone, although there is a risk that he sounds a more-dovish-than-expected note on the coronavirus outbreak, which could weigh and the dollar and provide some much needed support for EUR/USD.

Powell is set to speak at around 15:00 UK time (16:00 CET).

Markets continue rebound on easing virus concerns

Ongoing concerns regarding the coronavirus outbreak are not really helping the euro’s cause, given the Euro Area’s greater dependence on external demand than the relatively isolated US economy.

We do, however, note that financial markets have remained remarkably stable, with many of the flows in the FX market induced by the virus now retracing. Emerging market currencies and equity markets have rebounded. The S&P 500 and Dow Jones indexes are now back trading higher year-to-date, while the Shanghai Composite index has at least stabilised following its sell-off.

Investors have been calmed somewhat by the fact that the virus has so far remained mostly contained within China. Creating a logarithmic chart of both the number of confirmed coronavirus cases and deaths caused by the virus, which removes the exponential nature of the early spreading, we can see that the rate of transmission also appears to be easing. This is a very encouraging sign that hopefully suggests both the financial market and economic impact of the virus will be slightly less severe than many had feared at the virus’ outbreak.

Pound edges off lows on December growth pick-up

Sterling edged higher this morning, rallying off near its lowest level in two-and-a-half months versus the greenback, following a slightly better-than-expected set of GDP growth figures.

The UK economy failed to grow at all quarter-on-quarter in the final three months of 2019, as expected, although the December numbers showed that the economy at least ended the year on a decent footing. Growth picked up to 0.3% month-on-month, up from the 0.2% that investors had priced in. This has provided investors with some optimism that the outcome of December’s election, and the subsequent removal of the short-term ‘no deal’ uncertainty, will be reflected in a sustained pick-up in UK growth in 2020.

The rest of the week is very light in terms of UK data, so attention will likely be on events elsewhere, namely Powell’s testimony and coronavirus headlines.

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FX Market Update - 06/02/20

Thu, 06 Feb 2020 10:20:27 GMT

Coronavirus fears ease, US dollar rallies on strong data

Nothing matters more in the financial markets right now than the coronavirus, which has continued to pull equity and FX markets one way and then the next.

A general sense of optimism regarding efforts to contain the virus has helped lift risk assets. While another 3,000 or so cases of the virus were confirmed on Wednesday, reports in a Chinese media outlet that a research team had found a cure brought about a general sense of calm, although this was quickly refuted by the World Health Organisation. The virus is said to be peaking soon, so investors will be hopeful that progress can be made in the not too distant future.

Should it become clear in the next few weeks that the virus is having a bigger-than-expected negative impact on the Chinese economy then we may see risk assets back under pressure again. But for now, the market is in a much more upbeat mood and central bankers around the world will not be jumping to ease policy just yet.

US non-manufacturing activity beats expectations

The US dollar has benefitted from some fairly solid economic data in the past couple of days.

Yesterday’s ADP employment change number was impressive, which would ordinarily bode well for this Friday’s more critical nonfarm payrolls figure, although the link between the two has proved unreliable in the past few months. Job creation in the US public sector jumped to 291,000 in January, much greater than the 156k consensus. We also had an impressive ISM non-manufacturing PMI number, which rose to a comfortably expansionary 55.5. The strength of the data out of the US of late gives further weight to our argument that the Federal Reserve will unlikely even consider cutting interest rates this year.

Next up for the greenback will, as mentioned by Friday payrolls report at 13:30 GMT (14:30 CET).

ECB’s Lagarde warns of coronavirus threat

The strong PMI data that we saw out of the Euro Area yesterday morning was offset by some fairly dour retail sales numbers. Sales contracted more than expected in December, falling by 1.6% month-on-month.

To make matters worse for the euro, ECB President Christine Lagarde struck a dovish tone during her speech yesterday. Lagarde stated that Euro Area growth had shown signs of stabilisation, although she did warn over the impact of the coronavirus, stating that it was a ‘renewed source of concern’. She also added that the bank was running out of room to protect the economy from global downside risks.

Wednesday’s soft retail sales data, combined with Lagarde’s comments, was enough to send EUR/USD back to around the 1.10 - just above its lowest level since the beginning of December.

Pound falls on EU negotiation headlines

Sterling, meanwhile, had another volatile ride of it during London trading yesterday. The currency jumped by around 30 pips versus the dollar following the release of the revised January services PMI, which came in at a much better-than-expected 53.9. It did, however, shed the entirety of these gains during the course of trading on the news that the European Union was planning on imposing tougher restrictions on the City of London after the UK’s Brexit transition period.

With no economic data of note out of the UK during the rest of the week, attention among traders will remain on news headlines regarding the EU negotiations.

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FX Market Update - 05/02/20

Wed, 05 Feb 2020 10:33:05 GMT

Equity markets, risk assets rally on easing virus fears

Receding concerns surrounding the outbreak of China’s coronavirus helped lift risk appetite throughout financial markets on Tuesday.

Equity markets in the US jumped higher yesterday, with the S&P 500 and Dow Jones both posting solid gains, the latter moving around 400 points higher intraday. Currency markets reacted in a similar fashion, with investors continuing to unwind recent safe-haven flows into the Japanese yen, Swiss franc and US dollar. The chief safe-haven among them, the yen, shed around three-quarters of a percent yesterday and is now trading back around its weakest level in almost two weeks.

Emerging markets also rose, while those higher risk major currencies most severely affected by the rout have rallied, the main beneficiary being the Australian dollar. AUD was also lifted higher following the RBA’s Tuesday meeting, in which the central bank left rates and its economic projections unchanged, noting that the coronavirus would only have a short-term impact on the global economy.

While the market has breathed a sigh of relief that the infection rate of the virus appears to be slowing and that the vast majority of cases are contained within China (more than 99%), concerns linger around the actually economic impact, which will not be felt for a little while yet. The People’s Bank of China has taken steps to allay the potential downside impact of the virus, cutting its seven day reverse repo rate by 10 basis points to 2.4% and injecting the equivalent of $175 billion liquidity into the banking sector.

Should it become clear in the next few weeks that the virus is having a bigger-than-expected negative impact on the Chinese economy then we may see risk assets back under pressure. But for now, the market is in a much more upbeat mood and central bankers around the world are not jumped to ease policy just yet.

Euro fails to benefit from stronger PMI data

It is perhaps somewhat surprising that the euro has not benefited a great deal from the recent easing in coronavirus fears and upbeat Euro Area data we’ve had so far this week.

Following on from Monday’s manufacturing PMI beat, this morning’s services index from Markit also trumped expectations. The index for January was revised higher to 52.5 from 52.2, lifting the composite index to a fairly comfortably expansionary 51.3. As we have noted frequently in the past few weeks, we are beginning to see signs of an uptrend and a bottoming out in European data that would suggest growth is more likely than not to surprise to the upside in the bloc in 2020. While this has not yet translated itself into a stronger euro, we think that it would do should recent surprises in the soft data filter their way through to an uptick in the hard data.

Sterling rallies on jump in UK services activity

As for the pound, the UK currency has managed to stabilise itself just above the 1.30 mark versus the dollar this morning, consolidating its losses from earlier in the week. This has been helped, in part, by this morning’s massive upward revision to the January services PMI, the preliminary estimate of which had already blown analysts’ expectations out of the water. The crucial index was revised up to 53.9 from 52.9, vindicating the Bank of England’s stance to keep interest rates unchanged at its meeting last week. This jump, we believe, is largely due to the removal of the short-term ‘no deal’ uncertainty following December’s general election.

Sterling had taken a pummeling on Monday after Boris Johnson warned that he would rather the UK walked away from the negotiating table with the EU than meet some of their demands. As mentioned yesterday, however, we think that this is largely another negotiating tactic from Johnson and given the recent stabilisation in the pound, much of the market appears to share the same view.

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FX Market Update - 04/02/20

Tue, 04 Feb 2020 10:01:26 GMT

What has been behind this week’s rally in the dollar?

The US dollar was broadly stronger against its major peers on Monday, recovering all of its losses from last Friday in trade-weighted terms.

But what was behind the move higher in the greenback?

Firstly, manufacturing data out of the US yesterday was much stronger than the market had expected. According to ISM, the latest manufacturing index jumped back into an expansionary 50.9 in January from an upwardly revised 47.8. A surge in new orders helped lift the index out of recessionary territory for the first time in five months, no doubt helped by an alleviation in trade concerns following the striking of the ‘phase 1’ US-China trade deal in December.

The past 24 hours has also seen a move higher in the USD/JPY cross off its lowest level in three weeks. Fears surrounding an escalation in the coronavirus outbreak have been somewhat allayed in the past few days, leading to an unwinding in Japanese yen safe-haven flows. The market has reacted positively to the response in China, and has been encouraged by the fact that the virus so far remains mostly contained within the country’s borders. While 150 cases have been reported outside of China, this only accounts for less than one percent of all those affected. Provided the virus remains contained, we think we could see another move higher in USD/JPY as investors continue to unwind safe-haven trades.

Pound tumbles on Johnson’s ‘no deal’ stance

The move higher in the dollar index can also, at least in part, be attributed to a fairly abrupt move lower in the pound in the past 24 hours or so. Sterling extended its slide to over one-and-a-half percent for this week alone on Tuesday morning following some more hardline comments from PM Boris Johnson.

Johnson has stated in the past few days that he would prefer a ‘no deal’ Brexit at the end of the year, rather than meeting some of the EU’s key demands. Lets not forget, however, that the prime minister insisted on keeping an October ‘no deal’ on the table when he was named Tory leader, only to ask for a delay and get a deal done through the commons in January. This rhetoric is again likely to be a negotiating tactic. Should the market come round to this idea, we would expect a recovery in sterling.

Yesterday also kicked off the latest string of business activity PMI numbers out of the UK. Monday’s manufacturing index modestly beat expectations, finally moving out of contractionary territory for the first time in nine months to the level of 50.0 that represents flat growth. Given its importance to the UK economy, Wednesday’s revised services PMI for January will likely be the biggest market mover. In the meantime, this morning will see the release of the construction index, with economists expecting a small move higher from the December number.

ECB President Lagarde to speak this week

The euro edged only modestly lower on Monday, with investors largely ignoring the marginally better-than-expected Euro Area PMIs. The manufacturing index for January was revised higher to 47.9 from 47.8, helped chiefly by a sharp upward revision to the Italian number.

A dump of Euro Area economic data should keep investors busy this week. The most noteworthy will be Wednesday’s services PMI and retail sales numbers, as well as Friday’s German industrial production numbers. We will be looking for continued signs that activity in the Eurozone economy is picking up steam from its recent lows. A speech from European Central Bank President Lagarde and the latest growth forecasts from the European Commission (both on Thursday) could also prove market movers.

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FX Market Update - 03/02/20

Mon, 03 Feb 2020 14:18:28 GMT

Coronavirus fears slam financial markets worldwide

Stocks worldwide fell sharply, though Chinese exchanges were shut for the Lunar Holiday. As this is written, Chinese markets are braced for the first market trading since the virus was declared a worldwide emergency. Chinese authorities have announced a raft of measures to support the markets, including a net 150 billion yuan in liquidity injection.

Fears over the impact on global supply chains have hammered commodity prices and emerging market currencies. Safe havens like the yen and the Swiss franc have rallied, and the euro and the pound have so far held up well against the US dollar, thanks partly to a perceived dovish message from the Federal Reserve in its January meeting.

This week the focus should remain squarely on the evolution of the coronavirus epidemic. Short positions on risk assets are getting stretched, so any news that the rate of contagion is levelling off, particularly outside China, could lead to a significant rebound. We will not see the impact on economic data for a while yet. Other market-moving news will come from the US. On Monday, the Democratic Party holds a highly contested primary in Iowa, with the left-wing contender Sanders leading the polls. The US payrolls report on Friday should bring more of the same healthy job growth and modest but steady real wage gains.

GBP

As we predicted, the Bank of England disappointed market expectations for a cut, sending Sterling higher in spite of the general flight from risk. The decision to hold had a clear 7-2 majority, with members Saunders and Haskel the only two members to vote for an immediate cut, as they did in December. Outgoing governor Carney struck an optimistic note regarding the recent stabilisation in global growth, although UK growth forecasts for the next three years were all revised down. As we noted in our BoE January meeting reaction report, we think that the chance for the bank to deliver an ‘insurance cut’ may now have passed, given UK economic data is expected to pick-up in the coming months.

Sterling is, however, suffering in early morning Asian trading after Boris Johnson suggested he’s ready to walk away from negotiations without a deal, but we think it is mere bluster and think any sell-off in the pound will be temporary.

EUR

Economic data out of the Eurozone disappointed expectations last week. GDP growth in the last quarter of 2019 surprised to the downside, printing an anaemic 0.4% annualised rate, as France's economy contracted slightly contrary to expectations of modest growth. Core inflation dropped back to 1.1%, and the ECB target of 2% looks as far away as ever.

The unwind of "carry trades" on the back of the coronavirus scare did help the common currency rise modestly for the week in spite of the disappointing data. Focus this week will be on speeches by ECB officials, especially President Lagarde on both Monday and Wednesday.

USD

The counterpart to disappointing European data across the Atlantic was a cautious message from the Federal Reserve. Communications from the Fed were optimistic on the prospects for US growth while expressing frustration with inflation that seems to be persistently below the central bank's target.

Fears over the coronavirus outbreak seem to have had a mixed effect on the US dollar, sending it higher against commodity and emerging market currencies while most European currencies hold their own. We expect the first Democratic primaries to have little effect on US dollar trading, while the US jobs report on Friday should be rather more important. As usual, we will be paying close attention to the annual wage increase numbers to see whether very low unemployment filters through to upward pressure on wages, which the Federal Reserve would be quite happy to see.

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FX Market Update - 31/01/20

Fri, 31 Jan 2020 10:26:38 GMT

Bank of England holds rates in Carney’s swansong

Governor of the Bank of England Mark Carney kept his tag as the ‘unreliable boyfriend’ during his final meeting at the central bank yesterday.

The pound leapt around half a percent higher against the US dollar on Thursday after the MPC voted in favour keeping interest rates unchanged during Carney’s final meeting. In the end, the vote on rates remained split 7-2 in favour of no change, as it was at the previous meeting in December. Messrs Saunders and Haskel were once again the only two members of the committee that voted for an immediate cut, surprising the market that had expected at least one other rate-setter to follow suit.

Carney struck a mostly upbeat tone, stating that UK economic activity data had picked up ‘sharply’ and that recoveries in both growth and inflation data had been ‘encouraging’. Growth forecasts for the next three years were, however, lowered, with expansion in 2020 projected to come in at 0.8% versus November’s 1.2% projection. That being said, Carney did state that ‘some modest tightening may be needed’ should the economy recover as forecast.

We think that the ship may now have sailed for the bank to deliver a Federal Reserve-like ‘insurance cut’ to protect the UK economy. Now that the uncertainty surrounding Brexit is out of the way, there is a general consensus among economists that domestic economic data is more likely than not to improve in the coming months.

The pound has reacted in a fashion that one would expect, rallying around half a percent higher during London trading yesterday. We expect gains for the currency to continue as investors further dial back bets for BoE rates cuts in 2020.

UK to leave EU; what happens next?

Today’s the day that the UK will finally leave the European Union after three-and-a-half years of toing and froing. In what was billed as a potential knife-edge exit is now largely a ceremonial date, with all the i’s dotted and t’s crossed a matter of weeks ago.

What happens next? Effectively everything will remain the same during the transition period, and we therefore don’t foresee any economic disruption during this time. The main issue will be whether or not a full agreement can be reached before the end of the transition period or whether an extension beyond the 31st December 2020 deadline is required to avoid a cliff-edge exit from the EU. While Johnson has insisted he will not be seeking an extension to the transition period, many political analysts are pretty sceptical as to whether this will provide enough time for negotiations to take place.

Regardless, we think that the avoidance of a ‘no deal’ Brexit at the end of January should begin to filter its way through to an improvement in domestic data, which is likely to provide assistance for sterling. We have already seen signs of a rebound in the key business activity PMIs and expect this trend to continue.

US Q4 growth steady, if not spectacular

Friday is also a busy day in Europe and the US, with a number of macroeconomic data releases on tap. First up will be this morning’s Euro-area wide inflation numbers. Yesterday’s German inflation numbers were mostly in line with expectations - the headline rate of price growth rose back to 1.7% from 1.5%. Signs for a rebound in the Eurozone number are therefore encouraging. Investors are eying a rebound in the main rate to 1.4% in January from December’s 1.3%.

This afternoon will then see the release of the PCE price index in the US. This inflation measure is the one most closely watched by the Federal Reserve when deciding on monetary policy, so we tend to give its release particular importance. Prior to that, Thursday’s US growth numbers largely went under the radar in the FX market, given it came in bang in line with expectations. According to the preliminary estimate, the US economy expanded by 2.1% annualised in the final three months of 2019. This is exactly the same pace as the third quarter - probably best described as steady, if not spectacular.

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FX Market Update - 30/01/20

Thu, 30 Jan 2020 10:50:11 GMT

USD falls as Powell warns of ‘substantial downside risk’ to US growth

The US dollar fell against its major peers following yesterday evening’s Federal Reserve monetary policy announcement, but what was the main rationale for the sell-off?

As expected by the entirety of the market, interest rates were left unchanged once again. While Chair Jerome Powell reiterated many of the lines from previous statements, there were a few notable changes to the communications that investors perceived as dovish. On the topic of the coronavirus, Powell warned that it was posing a ‘substantial downside risk’ that could negatively impact US growth. He also tweaked the wording regarding the health of the US consumer, stating that household spending was now ‘moderate’ versus the ‘strong’ that was used following previous meetings.

Powell also reaffirmed that the central bank had little appetite just yet to begin considering raising interest rates again after the three cuts that it delivered last year. The FOMC chair noted “we wanted to underscore our commitment to 2% not being a ceiling, to inflation running symmetrically around 2% and we’re not satisfied with inflation running below 2%.’ This continues to indicate the view that the Fed would continue to take a relaxed view of inflation above the 2% target, and that price growth modestly above this level would not necessarily immediately trigger policymakers to vote in favour of hikes.

The FX market did, however, take Powell’s dovish assessment mostly its in stride, with EUR/USD only edging very modestly higher. The rationale for the lack of a more significant move is likely due to the fact that the market is still not pricing in any change in Fed rates for some time yet. We remain of the opinion that rates will be held steady throughout the entirety of the year, a view held by most analysts and much of the market alike.

Bank of England could cut interest rates today

Focus in the FX market today will quickly shift to this afternoon’s Bank of England meeting at midday, which promises to be one of the closest calls we have seen from the central bank in a number of years.

Following a raft of weak inflation, retail sales and growth numbers, the market began feverishly pricing in the possibility of a rate cut at the beginning of 2020. Since then, however, we’ve had a bit of a recovery in UK data - earnings growth surprised to the upside, while the January PMI numbers showed signs of a solid rebound. While we think that at least one, of possibly even two, MPC members will join to the doves and vote for an immediate cut (Vlieghe and Tenreyro perhaps), we think that the committee will tilt towards unchanged rates in either a 6-3 or 5-4 vote.

Today’s meeting promises to be one of the most closely watched in the UK in a number of months, so expect a great deal of volatility around the rate decision at midday today.

Euro rises ahead of German inflation numbers

As noted, the euro managed to edge modestly higher versus the greenback yesterday following the Fed meeting. Another factor perhaps holding it back from more meaningful gains is the ongoing coronavirus situation that has sapped risk appetite and caused investors to favour the safe-havens.

Economic data out of the Euro Area has been pretty light on the ground so far this week, with not much at all to report on that front. Activity will begin to pick-up pace today, in what bodes to be a very hectic couples of days to end the working week. First up will be this morning’s consumer and business confidence data for January. Following positive news on US-China trade relations and the removal of the short-term ‘no deal’ Brexit risk we think that these indicators will surprise to the upside.

Then, investors will have this afternoon’s German inflation numbers to digest. Consensus is for a move higher in the headline number to 1.7% from December’s 1.5%. If confirmed, this would bode well for tomorrow’s Eurozone-wide number and could support the common currency today.

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FX Market Update - 29/01/20

Wed, 29 Jan 2020 11:39:45 GMT

Will the Fed hold rates despite coronavirus fears?

The US dollar was broadly stronger against its major peers on Wednesday morning as investors braced themselves for this evening’s Federal Reserve monetary policy announcement.

Despite the emergence of China’s coronavirus, we think that the Fed are all but certain to keep interest rates unchanged this evening, with FX traders instead interested to hear their comments on the strength of the US economy. Since the December meeting, where the Fed’s dot plot showed policymakers expected rates to be kept unchanged throughout 2020, economic data out of the US economy has come in mostly in line with expectations. There has been a modest slowdown in job creation and wages, although not to the extent that would warrant additional cuts. Inflation has accelerated, although given the Fed’s comments regarding the need for a ‘persistent’ move higher in price growth, we also do not think there will be much appetite to hike.

The move higher in inflation and alleviation in trade tensions ensures that we think the Fed will maintain an upbeat tone during its communications today. As mentioned yesterday, however, the emergence of the coronavirus and its potential negative impact on the Chinese economy could impact the Fed’s outlook. As always, the Fed’s interest rate decision will be announced at 19:00 GMT (20:00 CET), with Chair Powell’s press conference to follow half an hour later.

Pound edges lower ahead of knife-edge BoE meeting

Ahead of tomorrow’s Bank of England meeting, the pound shed around half a percent of its value against the USD, with investors nervous that Mark Carney could deliver a rate cut in his final meeting as BoE governor.

The decision itself is on a knife-edge and pretty much the toughest to call during Carney’s reign at the helm of the central bank. Analysts are divided as to whether rates will be cut, while the market is placing a 50/50 chance either way. As we noted in our Bank of England preview report, Carney himself may hold the deciding vote, should Vlighe and Tenreyro follow suit with the two MPC members that are already in favour of lower rates.

In the event of a cut, which we believe would be a ‘one and done’, we actually think that the sell-off in the pound could be relatively mild. This cut, we believe, would be of a similar ‘insurance’ nature to that conducted by the Federal Reserve and certainly not part of a sustained easing cycle. Currency traders also appear to be taking the prospect of lower rates in their stride. Should policymakers again vote in favour of stable rates, our base case scenario, we think a move higher in sterling would ensue given the relatively high market pricing for a cut. With UK economic data expected to improve in the coming months, January may prove to be the last opportunity the bank has to deliver its ‘insurance cut’ before domestic macroeconomic fundamentals simply do not warrant lower rates.

Chinese yuan sell-off continues on virus fears

Ongoing concerns surrounding the aforementioned coronavirus continued to sap risk appetite in the financial markets yesterday.

The Japanese yen consolidated some of its gains, although remained well supported around the 109 mark, while the Chinese yuan sold-off again and is now back above the 6.90 level versus the dollar. The death toll has continued to rise, now north of 130 in China alone, with the UK Foreign Office advising against all but essential travel into the country.

There is a growing agreement among those in the known that the worst of the virus is yet to come, with it expected to reach its peak in around ten days. There could, therefore, be more room for gains in the safe-havens and a continued sell-off in risk assets in the short-term, although we think that this will prove temporary.

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FX Market Update - 28/01/20

Tue, 28 Jan 2020 10:22:41 GMT

How is the coronavirus impacting the FX market?

Concerns surrounding the coronavirus outbreak have continued to rock the financial markets so far this week.

The death toll for the virus edged into triple figures yesterday, currently standing at 106 at the time of writing. More than 4,500 cases have now been reported in China - a big step up from the 2,835 that had been reported a day previous. While most of the deaths have been in the Hubei province, where the virus is said to have originated, it has now spread to at least sixteen different countries.

Amid the mounting death toll and heightened concerns over the economic impact of the virus, investors have sold-off hard their equity holdings - the S&P 500 index fell by over one-and-a-half percent on Monday. In the currency market, the safe-haven yen has strengthened sharply, with the USD/JPY cross edging back below the 109 level this morning.

EUR/USD has also been under heavy downward pressure, trading perilously close to the 1.10 mark as investors flock to the safety of the greenback. Yesterday’s disappointing IFO confidence data out of Germany also far from helped the common currency. The Aussie and New Zealand dollars, perceived as among the highest risk currencies within the G10, have also sold-off aggressive, the former’s losses being exacerbated by the country’s heavy dependence on demand from China.

That being said, the FX market has still not gone into full-blown panic mode just yet. So far the virus has been mostly contained within China, with the majority of deaths among the elderly or those with pre-existing respiratory issues. As we mentioned last week, should the spread of the virus become more aggressive, we would expect a continued flock to the safe-havens and a sell-off in emerging markets.

Federal Reserve set to keep rates unchanged

The rest of the week is expected to be an extremely busy one in the foreign exchange market, with no shortage of major announcements set to shift the major currencies. First up will be the Federal Reserve’s latest monetary policy announcement on Wednesday. Rates are almost certain to be kept unchanged, with no-one really expecting any move in rates either way for some time yet. The market will instead be paying close attention to the bank’s comments on the strength of the US economy and its external outlook. Given the easing in trade tensions since the last meeting, we expect the bank to maintain a mostly upbeat tone, although there is a risk that they sound a concerned note regarding the virus outbreak in China and its potential impact on the global economy.

In the meantime, this afternoon’s US durable goods orders could shift the dollar when released at 13:30 GMT (14:30 CET). We will also be paying close attention to the latest consumer confidence index at 15:00 GMT for signs of a pick-up induced by the easing trade concerns.

Will the BoE cut interest rates on Thursday?

With the UK’s exit from the European Union on Friday already signed and sealed, investors will instead by focusing on Thursday’s Bank of England meeting.

We think that the vote on rates will be a close one. As we noted in our Bank of England preview report: “At the December meeting, members Saunders and Haskel both dissented in support of an immediate cut, with the vote split 7-2 in favour of no change. Even following Friday’s strong PMI numbers, we think that there is a decent chance that Vlieghe and Tenreyro follow suit. On the other end of the spectrum, hawks Ramsden and Haldane are very unlikely to vote for a cut this time around, particularly given their recent arguments regarding the need for a more restrictive policy. Jon Cunliffe has recently warned that prolonged easing may risk financial instability. Ben Broadbent has also appeared to place a greater onus on UK labour data, which has actually remained pretty resilient of late. Governor Mark Carney himself appears to be the most on the fence, although we think he’s now more likely than not to side with the hawks at the January meeting.”

So while our base case is for rates to be left unchanged, there is a very reasonable chance that we see a 25 basis point reduction.

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FX Market Update - 27/01/20

Mon, 27 Jan 2020 13:30:54 GMT

Virus fears knock risk assets, emerging market currencies

The spread of the Coronavirus infection in China and abroad impacted financial marketing sentiment late last week, leading to sell-offs in equity markets and rallies in traditional safe-havens like G10 government bonds.

In currency markets, the effect was felt in emerging markets that sold-off against the US dollar, led on the way down by Latin American currencies, which have become quite sensitive to developments in China. The yen was the top performing G10 currency, buoyed by its traditional role as a safe-haven, while sterling also managed to outperform.

The focus this week should remain on the headlines regarding the Coronavirus infection. Past outbreaks, such as the SARS infection, had little long term impact on the financial and economic environment, and we are hopeful history will repeat itself here. The Federal Reserve meets Wednesday, but we expect it to remain on hold and essentially repeat its previous communications.

There is a lot more uncertainty about the Bank of England meeting on Thursday, with markets evenly split on the likelihood of a cut. We will also receive a raft of important macroeconomic releases on both the Eurozone and the US, including GDP growth Thursday, and inflation data out on Friday. We think that the Eurozone core inflation release on Friday is of particular importance for the common currency.

GBP

Stronger-than-expected data out of the UK last week is supportive of our base case scenario that the Bank of England will keep interest rates unchanged at its monetary policy meeting this Thursday, Mark Carney’s last as MPC governor.

The labour market report and, more critically, the timely PMI indices if business activity all surprised to the upside. We think that this will tip the scales in favour of unchanged interest rates, though the decision is finely balanced. We think that Carney himself could cast the crucial swing vote, given that members Tenreyro and Vlieghe have recently hinted they could vote for a cut. As we mentioned in our Bank of England preview report, should rates be kept unchanged, expect a strong rally in sterling.

This Friday also marks the UK’s official exit date from the European Union. This is, however, largely ceremonial, given that Johnson’s withdrawal agreement bill has already been passed into law.

EUR

The ECB meeting left interest rates unchanged last week, and there were minimal changes to the central bank’s communications to markets. The PMI surveys showed that the manufacturing recession is easing, while services activity was softer-than-expected; all in all, mixed news.

This week GDP data and, in particular, the early read on January inflation on Friday are quite critical. Markets are expecting a pullback in the core inflation reading, so an unchanged result at a 1.3% annual rate could provide the excuse for a euro rally.

USD

The holiday-shortened Martin Luther King week is usually a slow one in the US, with few key data releases and little policy news - last week was no exception.

This week the focus will be on the FOMC meeting on Wednesday. The US economy seems to be in a good spot right now, growing at around a 2% pace, generating employment in excess of the growth of the labour force, and with no signs of inflationary pressures. The Federal Reserve is likely to be content to stand pat and leave interest rates unchanged while this lasts. Economic data (GDP and inflation) later in the week should be supportive of that decision.

CHF

Aggressive safe-haven buying induced by the Coronavirus outbreak has provided good support for the Swiss franc in the past week or so, with the EUR/CHF cross trading at fresh 33-month lows below the 1.07 mark this morning.

Apparent intervention in the market by the Swiss National Bank designed to weaken the franc has so far had little impact on EUR/CHF. The SNB has tended to intervene in the market to prevent a meaningful appreciation below the 1.08 level in a bid to lift inflation and support Switzerland’s heavily export oriented economy. A rise in on sight deposits held at the central bank suggests that such intervention took place last week, although this appears to have been ineffective. We think that the SNB will step up efforts to weaken the currency this week should the current trend continue.

Sentiment to risk will continue to drive almost the entirety of the volatility in the Swiss franc this week. With expectations for any change in SNB policy very low, economic data should continue to take a back seat.

AUD

Concerns over the rapid spreading of China’s coronavirus has weighed heavily on the Australian dollar in the past week, with AUD just about the worst performing major currency during that time.

The Australian currency sank to a near two-month low below the 0.68 level versus the USD this morning on reports that confirmed cases of the virus has risen to nearly 3,000. The Australian economy is, of course, heavily exposed to demand from China, so any negative economic implications brought about by the travel restrictions and tourism disruption are also likely to be felt down under.

Trading is closed for the day in Australia on Monday due to Australia Day, with the lack of liquidity likely behind the magnitude of this morning’s move in AUD. On the data front, Wednesday’s fourth quarter inflation number could be key this week.

CAD

A sharp move lower in global oil prices and a dovish assessment from the Bank of Canada has dragged the Canadian dollar sharply lower in the past few days, with the USD/CAD cross opening London trading this morning just below the 1.32 mark.

CAD lost around three-quarters of a percent of its value on Wednesday last week after the BoC hinted at the possibility of an interest rate cut. Rate-setters left policy unchanged last week, although the bank noted ‘unexpectedly soft’ recent data, while sharply revising lower their fourth quarter growth projection from 1.3% annualised to just 0.3%. Governor Poloz stating ‘we’re not saying that the door is not open to an interest rate cut. Obviously it is - it is open’.

While the shift in tone from the BoC undoubtedly increases the possibility of a rate cut, potentially as soon as the April meeting, Poloz stressed that any move would remain data dependent. Upcoming growth, labour and inflation data will now, therefore, take on added importance.

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FX Market Update - 24/01/20

Fri, 24 Jan 2020 14:23:47 GMT

A Fundamental & Technical breakdown of markets by our Founder Patrick French.

Our Founder Patrick French discusses the UK PMI data released this morning (24/01/20), the likelihood of an Interest Rate cut next Thursday, Coronavirus and flows into safe havens and gives a technical breakdown of the G3 currency pairs.

Watch the video here: Fundamental & Technical market update.

FX Market Update - 23/01/20

Thu, 23 Jan 2020 10:19:50 GMT

Pound jumps as market tempers BoE rate cut chances

Sterling continues to brush aside the possibility that the Bank of England could cut interest rates at its monetary policy meeting next week.

The UK currency rallied by around three-quarters of a percent against the US dollar during London trading on Wednesday as futures market pricing for a January rate cut fell from closer to 70% to just above 50%. Economic reports out of the UK in the past few days have been behind some of this repricing, painting a slightly more rosier picture than thought as recently as last week. Unemployment and earnings data suggests that the UK labour market remains solid. While yesterday’s CBI industrial trends survey remained in negative territory, it is also at least trending in the right direction.

The vote among the MPC was split 7-2 in favour of no change at the last meeting in December. We think that chances are high that Vlieghe and Tenreyro join the dissenters. On the other end of the spectrum, hawks Ramsden and Haldane are unlikely to vote for a cut at this time around. Jon Cunliffe has also recently warned that prolonged easing may risk financial instability, while Ben Broadbent has also appeared to place a greater onus on UK labour data. Outgoing governor Mark Carney may, therefore, have the deciding swing vote.

As mentioned earlier in the week, the key to whether the BoE cuts next week may well lie with tomorrow morning’s PMI data, set for release at 9:30am BST (10:30 CET).

Lagarde to lay groundwork for ECB strategic review

Probably the big mover in the currency markets today will be this afternoon's European Central Bank meeting.

We do not expect any change in policy, or even any real change in the stance of the bank’s communications from the December meeting. President Lagarde is likely to maintain her upbeat tone, stating that recent economic news has shown signs of improvement and that the slowdown witnessed of late has likely bottomed out. Investors will instead be focusing on comments regarding the bank’s strategic review. This review, which is expected to last most of the year, will include an evaluation of the structure, timeline and agenda of the Governing Council’s future policy meetings.

The bank’s rate decision will be announced at 12:30pm BST (13:30 CET), with Lagarde’s press conference to follow 45 minutes later.

US home sales jump at fastest pace in 2 years

EUR/USD looks prime for a breakout from its recent narrow range, with the pair barely moved from its 1.108-1.11 band.

Macroeconomic news out of the US yesterday was insufficient to meaningfully shift sentiment towards the dollar. Existing home sales rose were actually very impressive, jumping at their fastest pace in nearly two years (a 3.% MoM increase in December). While another encouraging sign that the US economy ended last year on a strong footing, the reaction in the FX market was limited given the already ultra-low expectations for any further easing in policy from the Federal Reserve any time soon.

This afternoon’s jobless claims data will unlikely rock the boat. Investors will instead be awaiting Friday’s preliminary US PMI data for January.

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FX Market Update - 22/01/20

Wed, 22 Jan 2020 11:37:54 GMT

Coronavirus concerns drag Asian currencies lower

The Chinese yuan led Asian currencies lower on Tuesday, with concerns over the ‘coronavirus’ pulling much of the markets’ attention in the past 24 hours or so.

The potentially deadly virus has already claimed nine victims in China, with the first reported case in the US sparking concerns that it could be set to spread around the globe. This period of the year is just about one of the most important for the Chinese economy. Chinese New Year falls on saturday, so there is a now a real risk that concerns surrounding the virus could warn off foreign visitors, damaging both tourism and the Chinese economy in general. Approximately 3 billion trips are set to take place during the holiday season, so the potential negative impact could be a severe one.

For now, the market is not getting overly concerned. The yuan lost around one percent of its value on Tuesday, although appears to have found some support around the 6.90 mark.

Euro ends day little changed despite ZEW data

Among the majors, EUR/USD was little changed for the day despite the headlines out of China.

The euro received some brief support from the latest ZEW economic sentiment numbers, although the support was fleeting with the currency giving up the entirety of its gains as the day progressed. President Trump spoke during the Davos event in Switzerland, once again taking a swipe at the Federal Reserve for raising interest rates too fast and holding back the US economy. His comments were, however, not really market moving and investors largely brushed his appearance aside.

With no major data out of the Euro Area today, the key pair may be driven by this afternoon’s US housing data. Aside from any surprises here, the Bank of Canada could be set to steal the limelight as it announces its latest monetary policy announcement.

Pound hits two-week high versus euro

Meanwhile, sterling continues to hold firm against its peers, despite rampant speculation in the markets that the Bank of England could cut interest rates at its next monetary policy meeting later this month. The UK currency even managed to rally to a two-week high versus the euro on Tuesday, perhaps due to the fact that yesterday’s labour data avoided surprising to the downside.

Money markets are now pricing in around a 60% chance of a BoE rate cut next week, although as we mentioned yesterday, much now rests on the strength of Friday morning’s PMI data for January. A disappointing reading here could all but seal the deal for a January cut, whereas a strong reading may punt the decision to Andrew Bailey’s first as the new governor in March.

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FX Market Update - 20/01/20

Mon, 20 Jan 2020 15:53:34 GMT

Currencies move in tight ranges as markets await macro data | Risk appetite starts to pick up

All G10 currencies ended last week almost exactly where they started it.

The sole exception was the Japanese yen, which suffered as increasing risk appetite drove traders out of safe-havens. Equities and credit markets worldwide continued to rally in celebration of the signing of the phase 1 trade agreement between the US and China. Emerging market currencies turned a mixed performance, but are generally up strongly so far this year.

We expect currency market volatility to return this week as critical PMI activity surveys are released in the UK, the US and the Eurozone. We expect a strong release in the latter that should, we believe, buoy the euro. The ECB meets on Thursday, but no policy actions or significant changes in its outlook are expected.

GBP

Sterling resilience in the face of decidedly weak economic data last week is remarkable. Industrial production, inflation and retail sales were all weaker-than-expected. As a result, markets are now starting to price in a cut at the next Bank of England meeting at the end of the month.

In spite of this dovish backdrop, sterling ended up nearly flat against both the dollar and the euro. This week, the latest PMI data (Friday) and employment report (Tuesday) are both expected to be relatively strong, which should ease a bit of the negative sentiment around UK fundamentals and be supportive of the pound.

EUR

Our view for Eurozone economic outperformance relative to consensus will be tested this week. The early PMI surveys of business activity for January will be released Friday. We expect a significant improvement across the board on the back of the financial market rallies and general optimism about trade conflicts. This upside surprise in the PMI release could provide a significant boost for the common currency this week.

While the ECB meeting on Thursday is unlikely to generate market-moving headlines, investors will be paying close attention to any comments regarding the launch of the bank’s strategic review, the first such conducted by the central bank since 2003. The debate is expected to cover the topics regarding the structure, timeline and agenda of its future policy meetings.

USD

Aside from the signing of the US-China phase 1 trade deal, the most important news out of the US last week was a softer-than-expected CPI inflation report. Inflationary pressures in the US remain muted, though inflation remains close to the Fed’s target. This means the Fed will not be moving rates any time soon.

This week, the Markit PMI release on Friday should be the main focus for dollar traders. Aside from that President Trump, along with a number of other politicians and central bank heads, will be speaking at the Davos Economic Forum in Switzerland.

CHF

Last week was a good one for the Swiss franc. The currency climbed by around 0.8% against the euro and around 0.5% versus the US dollar.

One of the key factors behind the rally was the US government’s announcement that it was adding Switzerland to its currency manipulators watchlist, while also calling for looser fiscal policy in the country. This is a pretty unexpected move but not necessarily unreasonable given the regularity of the Swiss National Bank’s FX intervention designed to prevent the franc from becoming too strong. As the SNB reiterated in its recent statement, “[interventions] are not aimed at bringing an advantage for Switzerland by making the franc undervalued”. While adding the country to the aforementioned watchlist does not entail any sanctions, investors ramped up CHF buying, believing that it could potentially limit the SNB’s willingness to intervene in the FX market.

This week will not bring any key data prints from Switzerland, with attention likely to be focused on the Davos event.

AUD

The Aussie dollar has begun this week as it ended the last one, posting losses against the USD. The currency has extended its year-to-date sell-off to over 2%, in large part due to the ongoing bushfires and heightened expectations for RBA policy easing. Amid relatively soft economic data, futures markets are now placing a near as makes little difference 50/50 chance of another interest rate cut from the central bank as soon as the bank’s February meeting.

Looking ahead, Thursday’s Australian labour report for December is likely to shift the Aussie dollar this week. Investors are eyeing a fairly weak job creation number around the 15k mark, which would be a bit of a step down on the 40k net jobs added in November. An underwhelming reading here would no doubt heap additional selling pressure on AUD, as investors further ramp up their already lofty expectations for RBA rate cuts.

CAD

The Canadian dollar spent much of last week largely rangebound against the dollar. With no real major domestic macroeconomic or central bank announcements of note, the USD/CAD pair ended the week roughly where it started it.

Attention this week will be firmly on the Bank of Canada’s monetary policy announcement on Wednesday. The BoC is almost certain to keep interest rates unchanged this week, with the central bank remaining one of the few in the G10 to not take a dovish stance in the face of rising global uncertainties. This resolve will be tested once again this week, particularly given the mixed nature of recent data. In our view, last month’s solid labour report, which showed a rebound in job creation to a net 35k in December does, however, ensure we expect a steady as she goes approach from the BoC this week. Given the nervousness surrounding central bank easing, this could provide some assistance to CAD this week.

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Reasons to buy and sell G3 currencies - 17/01/20

Fri, 17 Jan 2020 10:35:50 GMT

Reasons to Buy & Sell

GBP

Reasons to buy:

Boris Johnson’s Conservative Party achieved a sizeable majority in the House of Commons following December’s general election:

Ensured MPs voted overwhelmingly in favour of Johnson’s Brexit Withdrawal Agreement Bill in Jan.
UK is now all but certain to leave the EU in an orderly fashion at the end of January - avoids the worst-case ‘no deal’ scenario (for now).  The UK labour market remains a bright spot:
Earnings growth has slowed, although remains high above 3%. Real wage growth is firmly positive at almost 2%. Unemployment is at its lowest level in nearly 40 years.

Reasons to sell:

Johnson has insisted that the UK will not ask for an extension to the Brexit transition period (ends 31st Dec 2020):

UK has until end of June to ask for extension.
11 month period unlikely to be enough for negotiations on full agreement to take place.

UK economic data has taken a turn for the worse amid the Brexit uncertainty:

Composite PMI below the level of 50 that represents contraction. o
UK GDP contracted by 0.3% in November.
Headline inflation has fallen to 1.3%, well below 2% target.
Retail sales decline by 0.6% (5th consecutive month of declines)

A number of Bank of England MPC members, including governor Mark Carney, have suggested that the central bank could cut interest rates in early 2020:

Market pricing in greater than 75% chance of a cut at 30th January meeting.

EUR

Reasons to buy:

The ECB has very limited room to lower interest rates further compared to its G10 peers for risk of negatively impacting bank profitability.

EZ economic data has shown signs of stabilising of late:

Services PMI now comfortably above the level of 50 (52.8).
Business sentiment has shown signs on an uptrend, particularly in Germany.

Christine Lagarde struck an upbeat tone during her first official communications as ECB President in December:

Suggests that policy likely to be kept on hold throughout 2020.

Reasons to sell:

The ECB cut interest rates by 10 basis points at its September meeting, while resuming its quantitative easing programme. The QE programme will run indefinitely, i.e. it will be open-ended:

There remains scope for monthly purchases to be increased.
New ECB President Lagarde appears willing to increase QE if required.

Overall growth remains fairly soft in the EZ:

Growth of 0.2% in Q3 was joint slowest pace since 2013.
Manufacturing activity still deep in contractionary territory. Industrial production has been negative for much of the past year.

Headline inflation is still short of target (1.3%). Core inflation has moved higher (1.3%), although still well below the ‘close to, but below’ 2% target.

USD

Reasons to buy:

Federal Reserve Chair Jerome Powell struck an optimistic tone in December:

‘Act as appropriate’ pledge removed from statement.
FOMC members do not expect to cut rates again in 2020, with gradual return to hikes in 2021. Only 4 of 17 members expect higher rates this year.
Market still pricing in another cut in late-2020 – not warranted in our view.

The US labour market continues to perform fairly well: Unemployment is near a 50-year low, wage growth is around 3%, 12M average non-farm payrolls around 175k mark.

US economy is growing around 2% annualised, much faster than major peers. Fears of US recession are overblown, in our view. We do not think an aggressive pace of easing is warranted.

USD has historically outperformed its peers during presidential election years.

Reasons to sell:

The Fed has much more room to continue cutting interest rates than many of its counterparts, particularly the ECB.

More cuts could be on the cards if US-China trade war escalates.

We think that a resolution to the US-China trade war is more likely than not: o ‘Phase 1’ trade deal was finally signed in January.

Should lead to unwinding of USD safe-haven flows.

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FX Market Update - 16/01/20

Thu, 16 Jan 2020 09:42:28 GMT

US and China finally sign off on ‘phase 1’ trade deal

Investors breathed a sigh of relief on Thursday after the US and China finally signed off on their so-called ‘phase 1’ trade deal in Washington.

As mentioned yesterday, the news was, of course, widely expected and heavily priced into the market so there was no major reaction in the currencies to note. While both sides have acknowledged there is still some way to go before a full agreement can be struck, the development is undoubtedly a step in the right direction. As part of the deal, China will increase US imports by $200bn above 2017 levels, while also strengthening its intellectual property rules. Importantly for the markets, Trump has also agreed to halve some of the tariffs on Chinese products, although most will still remain in place.

General optimism surrounding US-Sino trade relations has already provided good support for emerging market currencies in the past few months, with many rallying off multi-month or, in some cases, record lows. A good gauge of how EM currencies are performing is MSCI’s emerging market currency index, which as you can see below has risen by around 5% since September alone.

Currency traders will be hoping that the phase 1 deal ensures no additional tariffs are slapped on China by the US President this year. Risk of an escalation in tension do remain, however, particularly should China not be able to fulfill its pledge to increase US imported goods by the sizable extent laid out in the deal.

ECB to release December meeting accounts

The euro rallied by around 30 pips against the dollar yesterday afternoon, in part due to trade optimism.

Investors actually largely overlooked data out in the Euro Area yesterday, which was broadly negative. Industrial production fell short of expectations, remaining deep in negative territory year-on-year. Real GDP growth in Germany was also confirmed to have reached a six-year low in 2019 at just 0.6%, considerably lower than the 1.5% and 2.5% registered in the two years previous. We think that this is largely a reflection of the trade uncertainty and growth in Europe’s largest economy should, therefore, start to pick up steam in 2020.

All attention in the market will now turn to this afternoon’s speech from President of the European Central Bank Christine Lagarde. In the meantime, the ECB will be releasing the accounts from its latest meeting (12:30 GMT, 13:30 CET). We don’t expect too many fireworks, with the message likely to be in line with Lagarde’s upbeat comments in December.

Soft UK inflation data ramps up BoE rate cut bets

The release of a disappointing set of UK inflation numbers on Wednesday heaped added pressure on the Bank of England to cut interest rates when it meets at the end of the month.

Headline inflation slowed to just 1.3% year-on-year in December, 0.2 p.p. below the November reading and its lowest level in three years. Unsurprisingly, expectations for Bank of England easing have risen again, with the market now pricing in around a 60% chance of a cut at the bank’s 30th January meeting.

Given recent comments from BoE members, we think that next week’s PMI numbers will now be key. Another slowdown here may well be the final nail in the coffin for a rate cut, although an upside surprise may be enough to tip the balance in favour of the hawks on the MPC.

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FX Market Update - 15/01/20

Wed, 15 Jan 2020 12:02:30 GMT

Pound reverses losses ahead of UK inflation data

Sterling climbed back above the 1.30 level against the US dollar on Tuesday afternoon, reversing much of its sell-off induced by heightened bets in favour of an imminent Bank of England interest rate cut.

The pound was hammered at the beginning of the week after three members on the bank’s rate-setting committee suggested that lower rates may be needed as soon as this month. One of the two members on the bank’s MPC that already voted in favour of more stimulus at the end of 2019, Michael Saunders, this morning also reiterated his view that rates needed to be lowered in the UK. Saunders stated ‘with limited monetary policy space, risk management considerations favour a relatively prompt and aggressive response to downside risks at present’. He noted both ‘sluggish’ economic growth and ‘subdued’ inflation as his rationale for lower rates.

This morning’s UK inflation data will now be key. The headline number continued to undershoot the Bank of England’s 2% target in November, coming in at just 1.5%. Investors are expecting an unchanged reading for December, although another downside surprise here would heap a great deal of pressure on the BoE to at the very least consider the possibility of lower rates at the end of the month.

US and China set to sign ‘phase 1’ trade deal

EUR/USD ended London trading yesterday roughly where it started, despite briefly making a move towards the 1.11 mark.

With not too much in the way of major political or economic developments for investors to digest on Tuesday, currency traders were focusing fully on this afternoon’s signing of the US-China phase one trade deal. The signing is expected to take place in Washington at around 16:30 UK time this afternoon (17:30 CET). While tariffs on many billions of dollars of goods will remain in place, the signing of the deal is an encouraging step in the right direction to a full-blown trade agreement. While we certainly don’t expect a reaction in the currency markets to this afternoon’s news, given it is already priced in, investors will breath a sigh of relief that at least some of the short-term trade risk is alleviated.

As mentioned, there wasn’t too much market moving data out yesterday, with the US inflation numbers for December coming in right in line with expectations. The headline number picked up as predicted to 2.3% year-on-year, now comfortably above the Fed’s 2% inflation target. This significantly lessens the need for additional rate cuts in the US this year, in our view.

Next up will be this morning’s industrial production numbers out of the Eurozone. We will be looking for signs that the improvement witnessed recently in the bloc’s sentiment numbers is also being reflected in hard data.

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Market Update - 14/01/20

Tue, 14 Jan 2020 10:08:57 GMT

Will the Bank of England cut interest rates this month?

The last 24 hours or so have been pretty remarkable as far as UK interest rate expectations are concerned.

The soon to be former-governor of the Bank of England Mark Carney gave the first real hint yet that lower rates could be on the horizon last week, saying on Thursday that there would be a ‘relatively prompt response’ from the bank should weakness in the UK economy persist into 2020. While the market mostly took Carney’s comments in its stride, developments since then have caused investors to come round to the idea that interest rates could be lowered as early as this month.

First, fellow MPC member Silvana Tenreyro claimed on Friday that UK growth was likely to undershoot the bank’s November projections and that she would support a rate cut should the economy continue to slow. Gertjan Vlieghe, who joined the rate-setting board in 2015, was even more forthright in his comments over the weekend, saying that he would vote for a rate cut this month, barring an ‘imminent and significant’ turnaround in UK growth data.

This aforementioned data took a significant turn for the worse on Monday, with the UK economy contracting by 0.3% in November alone according to monthly data from ONS. This was well short of expectations and dragged the three-month rolling growth number to 0.3% quarter-on-quarter. Manufacturing and industrial production also posted sharp contractions during the month, the latter putting in its worst performance since April 2019.

Investors quickly reacted by selling the pound, sending the currency around half a percent lower against the dollar back below the 1.30 level. Expectations for immediate Bank of England action were also ramped up aggressively, with futures markets now placing a greater than 50% chance of a rate cut at the bank’s next meeting on 30th January.

While we acknowledge that the chances of a cut later this month have undoubtedly increased in the past few days, we think that the market has slightly overreacted. It is worth stressing that the three BoE members (Carney, Vlieghe and Tenreyro) all noted that additional data would be required before they decide on whether to vote for lower rates. The November growth data does, of course, encompass a period before the general election, a time of intense political uncertainty and heightened concerns surrounding a ‘no deal’ Brexit.

For a January cut to become a reality, we think that we would need to see signs that business and consumer confidence has not recovered since the election to the extent that would ensure a continued slowdown in UK growth at the beginning of 2020. The January PMIs, out on 24th, now take on added importance. Any sign of a continued slowdown here would undoubtedly increase the chances of a rate cut later this month.

US-China set to sign ‘phase 1’ trade deal

Aside from the pound, the other major currencies spent much of trading yesterday relatively rangebound. EUR/USD ticked higher slightly, although with macroeconomic and political news at a premium, there was very little volatility to write home about.

Investors are instead gearing up for the eventual signing of the ‘phase one’ trade deal between the US and China, which is expected to take place in the White House tomorrow. With the signing of the deal on track and the US-Iran spat seemingly on the path to de-escalation, traders have piled into equities and reduced holdings of the safe-havens. The S&P 500, Nasdaq and indeed the MSCI world equity index all hit record highs on Monday, while government bond yields in the US and Euro Area also rose. While the reaction in the FX market has been relatively limited, we think that the avoidance of additional negative headlines on these fronts should be good news for emerging markets in the coming weeks.

Next up in the markets will be this afternoon’s US inflation data, which is generally key for Federal Reserve policy.

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The Berkshire Exchange welcomes their newest partner, Boardroom Advisors

Tue, 14 Jan 2020 00:06:33 GMT

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The Berkshire Exchange will now act as the official FX partner for Boardroom Advisors to provide preferential wholesale exchange rates and currency hedging services to their members and clients.

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FX Market Update - 13/01/20

Mon, 13 Jan 2020 13:35:41 GMT

Emerging market currencies rally as Iran tensions cool

2020 has started on a positive note in financial markets.

News that the US-Iran conflict remains contained for now, prospects for a US-China trade deal, and good news from the world's major economies pushed stock markets worldwide to record highs. The dollar put in a mixed performance, up sharply against risk havens like the Japanese yen but down against most major emerging market currencies that have been the main beneficiaries of the festive mood in markets.

The focus this week shifts back to macroeconomics, including US inflation on Tuesday, the UK inflation report and industrial production in the Eurozone, out on Wednesday, and retail sales in the US, out on Thursday. The publication of the ECB minutes and speeches by central bank officials on both sides of the Atlantic should also provide some volatility.

GBP

Governor Mark Carney signalled a more dovish outlook from the Bank of England last week. While the initial impact on sterling was limited, the pound has sold-off sharply this morning after MPC members Tenreyro and Vlieghe sounded a similar note over the weekend.

We do, however, think market pricing of a cut in the medium term is not yet justified. We look to the latest inflation numbers on Wednesday and other second-tier releases to provide evidence that the economy is on firmer ground now that uncertainty over Brexit is much diminished. The large upward revision in the PMIs of business activity we saw last week already points in this direction. We remain positive on the pound’s medium-term prospects.

EUR

The turn for the better in Eurozone economic data has gone remarkably unreported, in our view. Last week, the December PMIs underwent a large upward revision, and the composite index is now firmly back in expansionary territory. Retail sales data was also strong, and core inflation at 1.3% remains at the top of the recent range.

Negative European rates continue to weigh somewhat on the common currency. We think the ECB minutes for the December meeting this week may alleviate market concerns about further cuts or increase in QE from the central bank, providing modest support for the common currency.

USD

The labour market report for December provided the best of both worlds for equity markets, with job creation modestly above labour force growth and no sign of wage acceleration. This data pushes any prospect for policy tightening further and further into the future, and risk assets in general are reacting accordingly.

This week's critical data point will be CPI inflation, out on Wednesday. The core index excluding volatile food and energy components should remain above the Fed 2% target, but without evidence of acceleration in wage growth we expect the central bank to look through this data.

CHF

The Swiss franc ended last week rising somewhat against the euro, but declining slightly against the US dollar. The EUR/CHF pair actually reached another multi-year low, falling to its lowest level since early-2017 on Wednesday, despite signs that the Swiss National Bank may have intervened in the FX market in order to weaken the franc.

When it comes to macroeconomic news from Switzerland, the key reading was December’s consumer inflation print. After two months of deflation, price growth picked up to 0.2% compared to the same period a year previous, surprising the Bloomberg consensus that was expecting flat growth.

This week will be very light in terms of economic data from Switzerland, with the market's attention likely to be focused on outside news.

AUD

Last week was a rather mixed one for the Aussie dollar. The currency fell sharply on Tuesday as the ongoing wildfires ramped up expectations for RBA interest rate cuts, although AUD recovered its losses at the end of the week on the general improvement in risk appetite.

A combination of the US-Iran tensions and concerns surrounding the negative economic impact of the bushfires hit AUD hard in the first week of the year, with the currency shedding over 2% of its value. Estimates for the cost and economic impact on Australia of the fires has been understandably wide-ranging, although there is a broad consensus that the final bill will be in the many billions of dollars. As for the economy itself, it is likely to shave at least a couple of tenths off growth this year, making additional RBA rate cuts that bit more probable. This does not present a particularly good backdrop for AUD strength.

Trade figures on Thursday will be the main data out this week. Aside from any surprises here, the dollar is likely to be driven largely by expectations for RBA easing.

CAD

The Canadian dollar continues to trade broadly in line with our view. CAD had a very impressive end to 2019, although has since eased back slightly as oil prices retrace from their initial surge higher at the beginning of the year.

The currency received a bit of assistance from last Friday’s labour report, although the reaction in the USD/CAD cross was limited to around 40 pips. The Canadian economy created a net 35k jobs in December, higher than the 25k the market had been priced in and a significant improvement on the 71k that it shed in November.

Investors were slightly wrong-footed by the strength of the report, which eases concerns surrounding BoC rate cuts. We continue to think that calls for lower rates in Canada is an overreaction, with Friday’s jobs data providing vindication this view.

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FX Market Update - 07/01/20

Tue, 07 Jan 2020 10:34:27 GMT

Euro rises above 1.12 level on higher services PMI

The euro made a positive start to the week on Monday, briefly rallying back above the 1.12 mark against the US dollar, after the release of yesterday morning’s upwardly revised Eurozone PMI data.

The bloc’s crucial composite PMI, arguably the most important snap indicator of economic activity in the Euro Area, was revised up fairly markedly from the initial flash estimate. Last month’s index rose to 50.9 from 50.6, largely due to a pretty hefty 0.4 point upward revision to the services PMI, which is now back at its highest level in four months. We think that much of the adjustment is due to increased optimism among businesses following the news of the phase 1 trade deal between the US and China, which was struck after the preliminary PMI had been released.

While this, of course, provides reasons to be optimistic, overall activity remains worrying low. According to Markit’s chief business economist Chris Williamson ‘another month of subdued business activity in December rounded off the euro zone’s worst quarter since 2013’. We expect overall growth in the final quarter to have remained positive, although the bloc looks likely to have expanded by no more than 0.1-0.2% quarter-on-quarter.

Arguably the main focal point of trading today will be this morning’s preliminary Euro Area inflation numbers for December. We will be looking for continued signs of a pick-up in the main headline measure and whether or not it is showing any meaningful advances towards the European Central Bank’s elusive 2% target. The latest retail sales numbers could also be a market mover, although this data is running on a bit of a lag and so may be overlooked by investors.

UK services PMI revised sharply higher

Sterling has also had a very good start to the week, rallying sharply against the US dollar yesterday morning and then again as London trading opened on Tuesday.

Similarly to the Euro Area, we had a sharp upward revision to the UK’s December services PMI. The index was revised up a massive 0.8 points to 50.0, although this still only represents flat growth. Clarity over Brexit following the general election and news of a US-China phase 1 trade deal are undoubtedly behind much of the revision, in our view.

With only second tier data out in the UK during the week, the pound is likely to be driven by sentiment towards Brexit and geopolitical risk during in the coming days.

US-Iran concerns ease on lack of bad news

Much of the strength in the euro and pound can also be attributed to a reversal in safe-haven flows in the past 24 hours or so. The yen and the franc both pulled back from recent highs, while higher risk currencies gained as investors became less concerned regarding a full-blown conflict between the US and Iran. Markets have calmed since last week’s drone attack, partly due to the lack of any additional negative headlines on that front.

Next up will be this afternoon’s US non-manufacturing PMI from ISM. This indicator has had a more significant impact on the US dollar than usual in recent months, so investors will be paying close attention to its release.

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FX Market Update - 06/01/20

Mon, 06 Jan 2020 11:25:53 GMT

Dollar retreats as major bond market sell-off rolls on

An unusually volatile holiday left the dollar mostly lower against world currencies.

The news of the killing of the highest-ranking military figure in Iran by a US drone strike focused traders attention in the absence of any macroeconomic or policy news of note. The initial market reaction was, curiously enough, to send the US dollar lower, although the moves were modest in size.

In addition to the headlines from the Middle East, two events will hold markets' attention. Tuesday we get the flash inflation data out of the Eurozone, where we hope to see a continuation of the upward trend in core inflation. Then on Friday, the US payrolls report for December comes out. We will be looking for a continuation of the strength seen in November.

GBP

The pound has recovered nearly all of its liquidity-driven sell-off against the euro on the last day of 2019 and is currently trading back above the 1.31 level versus the dollar following this morning’s upwardly revised services PMI.

In the near term, sterling performance will be determined by both euro movements against world currencies and headlines regarding the negotiations for a final Brexit deal. If previous negotiations are anything to go by, we are unlikely to receive market-moving news until the self-imposed deadlines draw closer. Boris Johnson has until the end of June to ask for an extension to the transition period. Should it become clear that an extension is not on the cards, then we may start seeing a bit of weakness in the UK currency.

EUR

Most sentiment indicators out of Eurozone continue to grind higher, with the conspicuous exception of German manufacturing. We also had a solid upward revision to the December PMIs this morning, which bodes well for final quarter growth. The composite index is now fairly comfortably above the level of 50 that denotes expansion, suggesting no risk of a recession any time soon.

This week's inflation data is now key. The core number has been trending up over the past few months and is now bumping up against the 1.3% level that has been a ceiling since early-2017. A print above this level would be quite significant and should be supportive for the euro.

USD

While the rising Middle East tensions have boosted some safe havens like the Japanese Yen and US Treasuries, the US dollar has so far not joined the rally.

US Treasuries rallied sharply last week, shrinking the differential in interest rates between the US and the Eurozone. On the economic front, second-tier data out of the US has been weaker lately, and the payrolls report out on Friday takes on additional importance. Investors are eyeing a fairly solid job creation reading around the 160k mark. As always, we will also be paying close attention to the latest earnings data, expected to remain above the 3% level year-on-year.

CHF

The Swiss franc has benefited heavily from the flight from risk in the financial markets following the drone attack in Iran, briefly rallying to its strongest position in over a year versus the dollar on New Years Eve. December was a great month for the safe-haven currency, with CHF clocking a more than 3% appreciation against the USD.

Investor appetite for risk is likely to remain the main driver for the franc as we enter the New Year, particularly given domestic data is largely few and far between in the next couple of weeks. That being said, tomorrow’s inflation data for December could receive some attention. The critical measure came in negative again in November at -0.1%. We think that another negative surprise on Tuesday could trigger a modest reversal in some of the recent safe-haven flows into the franc.

AUD

The Aussie dollar has eased off its five-month highs against the USD so far in 2020.

Signs of progress over trade between the US and China provided good support for AUD in December. The catastrophic bushfires in the country that have damaged homes and destroyed wildlife does, however, appear to be taking a toll on the dollar, given the undoubted negative impact it is set to have on the Australian economy.

Heightened expectations for further RBA easing at the bank’s February meeting amid a broadly stronger domestic currency has compounded losses for AUD in the past week. The currency does for now, however, remain just shy of the 0.70 level versus the US dollar, right around our end of Q1 forecast.

CAD

In line with almost every other major currency, the Canadian dollar ended 2019 on a strong note, rallying sharply against the USD. The appreciation in CAD can largely be attributed to external factors, rather than any significant news coming out of the Canadian economy.

This Friday’s Canadian labour report looks set to be a very important one. After November’s disastrous report, investors will be eyeing a much improved level of job creation. Another more of negative net jobs created would be a massive disappointment and would almost certainly ramp up expectations for Bank of Canada rate cuts and send CAD lower at the back end of the week.

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FX Market Update - 03/01/20

Fri, 03 Jan 2020 12:10:44 GMT

Baghdad airstrike jolts foreign exchange market

Unsurprisingly, investors were in somewhat of a post-holiday season slumber on Thursday, with many of the major currencies trading within a tight range.

News out overnight regarding the US airstrikes on Baghdad did, however, jolt market sentiment, causing investors to flock to the safe-havens. The Japanese yen has been the main beneficiary, with the higher risk euro and sterling both edging lower this morning. According to reports, Iran’s most powerful military leader, General Qasem Soleimani, was killed in the attack, causing investors to fret over geopolitical tensions between the US and Iran.

With many traders still off from their desks, yesterday’s Eurozone manufacturing PMI went largely under the radar. The index remained deep in negative territory, although picked up modestly to 46.3 from 45.9. We now look ahead to this afternoon’s German inflation numbers, set for release at 13:30 GMT.

Brexit concerns drag sterling lower

Sterling was an exception to the rule on Thursday, with the currency shedding over half a percent of its value versus the dollar. Choppy trading for the UK currency looks set to continue, despite Johnson’s Brexit deal passing through parliament last month. Investors are clearly still concerned regarding the possibility of a no deal at the end of the year. As we mentioned yesterday, we could see some more weakness in sterling in the coming months should the Prime Minister continue to take a hard line stance regarding the end of the country’s transition period from the EU.

Meanwhile, the manufacturing PMI from the UK was barely changed, remaining similarly below the level of 50 that denotes contraction. Next week’s services index should take on much more significance given its larger contribution to overall activity.

2020: The year of the Trump re-election?

With 2020 now upon us, we’re tentatively looking ahead to events later in the year. While still almost a year away, November’s US Presidential election will come around quickly. Donald Trump still remains the front runner, despite his recent impeachment. Betting markets continue to show around a 50% implied probability of his re-election, with his nearest rivals Joe Biden and Bernie Sanders some way off. The outcome of the election is likely to hinge on the final result in a handful of states, given the peculiar US presidential electoral system. This makes it particularly hard to predict. The greenback has, however, historically performed well during election years, so it will be interesting to see whether this trend continues in 2020.

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FX Market Update - 02/01/20

Thu, 02 Jan 2020 10:37:23 GMT

Sterling enters the New Year on the front foot

2020 has begun and it promises to be another very hectic one in the currency markets.

Sterling is very likely to be driven almost entirely by Brexit once again. The pound climbed to a two-week high back above the 1.32 level during thin New Years Eve trading, its sixth consecutive session of gains. The good end to the year for the UK currency can largely be attributed to a reversal in profit-taking trades and investor comfort that a hard Brexit at the end of the month has been avoided.

The key this year will now be whether or not a full agreement can be reached in time for the end of the transition period, or if an extension beyond 31st December 2020 is required. The Prime Minister has until the end of June to ask for said extension, or risk crashing out of the bloc at the end of December. Should it become clear that a cliff-edge exit is back on the table at the end of the year then we may begin seeing some weakness in the pound.

In the immediate term, the next two days will see the latest manufacturing PMI (Thursday) and construction PMI (Friday).

Euro consolidates gains after strong rally

The euro had a similarly strong end to 2019, rallying by over one percent in the few days in between Christmas and the New Year.

Thin trading during the holiday season can be attributed to much of the volatility in the major cross, which has been well supported by the general improvement in optimism towards global growth and trade. The phase one deal over trade between the US and China is now all but signed, which bodes well for a full-blown agreement in the coming months.

Our expectations for an improvement in European data this year ensures that we think that the ECB will now likely hold policy steady for the foreseeable future, which should continue to support the common currency. It remains the case that the Federal Reserve has much more room to cut interest rates than the European Central Bank. Stable rates from both banks would, therefore, be supportive of a higher EUR/USD this year, in our view.

The next couple of days should, however, be relatively quiet as investors return to their desks following the long holiday break. Eurozone PMI data will probably therefore go largely under the radar.

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FX Market Update - 20/12/19

Fri, 20 Dec 2019 10:59:18 GMT

UK parliament set to vote in favour of PM’s Brexit deal

Sterling edged back towards the 1.30 level against the US dollar this morning, weighed down by concerns that Boris Johnson would thwart attempts to extend the UK’s EU transition period beyond the end of December 2020 deadline.

MPs are due to vote on Johnson’s Brexit Withdrawal Agreement Bill today, which is now overwhelmingly expected to pass. This would set the wheels in motion for the UK to leave the European Union by the end of January. While this removes the near-term threat of a ‘no deal’, Johnson’s proposal to include a clause that would prevent the government from extending the transition period has got investors concerned.

The result from the House of Commons vote is expected at around 3pm GMT (4pm CET) this afternoon. Once passed, MPs will further scrutinise the Withdrawal Agreement, before it gets passed onto the House of Lords, which are expected to debate the bill before the end of the year. Given that the bill is all but certain to pass through parliament today, we don’t expect too much reaction in the pound when it inevitably does.

Andrew Bailey appointed new BoE governor

Yesterday’s Bank of England meeting largely came and went without anyone really noticing. Policymakers deemed it too early to gauge whether the recent election victory for Boris Johnson would remove the Brexit uncertainty in the UK. According to the bank’s statement ‘there was no evidence yet about the extent to which policy uncertainties among companies and households had declined following recent domestic policy developments’.

The main headline actually came out this morning after it was announced that chief executive of the FCA Andrew Bailey would replace Mark Carney as governor of the Bank of England when his term comes to an end at the end of January. Bailey’s views on monetary policy are not yet necessarily known, although we should get a much better idea following his first official meeting as governor in March.

US macro data comes in weaker-than-expected

This afternoon’s revised third quarter GDP numbers out of the US will be the main data point to look out for today. The market is not expecting any meaningful revisions from the 2.1% annualised estimate, so any deviation from this could shift the US dollar today.

The dollar was broadly weaker against its major peers on Thursday following some softer-than-expected data out of the world’s largest economy. Existing home sales fell sharply, while initial jobless claims also moved higher last week. As mentioned yesterday, there has been little reaction in the currency markets to Trump’s impeachment, largely given that he is still highly unlikely to actually be removed from office.

Meanwhile, news out of the Euro Area has been pretty light on the ground in the past few sessions. EUR/USD has been slightly weaker in the past few days, although the main pair looks set to stay in a fairly narrow range ahead of the quiet holiday period.

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FX Market Update - 19/12/19

Thu, 19 Dec 2019 09:54:39 GMT

Trump impeached: Why the lack of dollar reaction?

The FX market took the Trump impeachment news in its stride this morning, with the dollar little changed against its major peers.

For only the third time in history, a US President was impeached by the House of Representatives, with the two charges being abuse of power and obstructing Congress. The lack of reaction in the currency markets is primarily down to two factors. Firstly, the impeachment vote was overwhelmingly expected to pass, given that the House is currently controlled by Trump’s opposition, the Democrats. A trial will now take place in the Senate in the New Year, of which is controlled by the President’s Republicans. A two-third majority vote is required here in order to actually remove Trump from office, an outcome that looks next to impossible at this stage.

Given the very high likelihood that Trump will remain in office until at least November’s election, EUR/USD has spent the past 24 hours fairly rangebound. Economic data out yesterday also didn’t rock the boat. Euro Area inflation remained unrevised at a lowly 1% in November, well short of the ECB’s target.

There also wasn’t any major pieces of data out of the US on Wednesday, with today likely to be no different. We instead look to tomorrow’s revised Q3 growth numbers.

What to expect from today’s BoE meeting

Sterling has remained around the 1.31 level versus the dollar in the past couple of sessions, weighed down by concerns regarding the length of the UK’s transition period with the EU.

Investors will now be bracing for this afternoon’s Bank of England meeting, the first since the Tories resounding victory at the general election. While governor Carney will not be delivering a press conference today, we will be receiving the central bank’s meeting minutes. We expect the minutes to strike a more optimistic note than we have seen in recent months, stressing the reduced Brexit risk in the near-term.

The issue for the BoE does, however, lie with UK economic data, much of which is below the levels that they would desire. Inflation is below target (coming at at 1.5% in November), earnings growth is slowing and growth is barely pottering along in positive territory. This, combined with the fact that a cliff-edge exit from the EU could be back on the table by the end of 2020, may cause policymakers to allude to the possibility of easing at some point next year.

The BoE’s rate decision and minutes will be released at midday UK time today. Retail sales at 9.30 GMT will also be worth watching.

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