RedFX Update: Dismal data from both sides of the Atlantic
The main theme of recent weeks has been the ‘collapse’ of the USD – the DXY index is now 9% lower since March, and the pace of the EUR/USD move in particular suggests it has been accompanied by EUR strength. Economists assume some of the EUR gains have been driven by the EU Recovery Fund agreement which in essence removes much of the sovereign risk imbedded in the single currency. For this to be sustainable, markets will need to see economic strength come through – which is debatable as Europe is clearly experiencing an increase in Covid cases. EUR/USD currently sits at 1.1800, having been up at 1.1900.
In the USA, extremely poor data last week leads us into a key week – on Friday we have Non-Farm Payrolls – the most closely watched employment figures. Republicans and Democrats are set to resume talks for the next fiscal stimulus bill later on Monday after weekend negotiations were inconclusive. The $600/week top-up for the unemployed and other programs lapsed at the end of July and their absence may weigh on the economy. Any decision will be key for the USD, and as we approach flu-season and an election which will be contentious in some of the key battle-grounds, there is plenty of volatility ahead.
GBP has been preforming well – GBP/EUR around 1.1100 and GBP/’USD at 1.3100. Market commentators, however, struggle for positive stories – on the basis the Government reaction to the pandemic was late and compromised by inconsistent policy meaning the UK will experience a deeper and longer economic setback. This continued to play out in July as the Government re-imposed lock down conditions across large parts of Northern England. In addition Brexit talks remain stalled and hope of a ‘Landing Zone’ being agreed by the end of July has now been pushed out to September. We continue to think the market is under-pricing risks to the UK economy and the possibility the UK leaves the EZ on WTO terms which will have long term negative implications, compounding a significantly weakened domestic growth story.
As government support for individuals and businesses is wound down globally, questions remain regarding the stability of economies, and the ability of businesses to cope with the new-normals. One commentator brought to my attention that flu-season will be upon us soon and Covid-19 will still be with us – the global economic and health impact could make Q2 of 2020 just the beginning.
AUD: Tomorrow’s monetary policy meeting is likely to mention concerns surrounding recent AUD strength (AUD/USD 4% higher in the last 2 weeks) – if this is the case, AUD could well correct lower. With 429 new cases confirmed in Victoria overnight, markets will become nervous. Last night’s up[beat Chinese Caixin Manufacturing data certainly helped prevent losses this morning, but with US data later this week, and tomorrow announcements, it’s a pivotal week for AUD.