Currency View by OFX

Last week’s news

• The USD suffered its largest tumble in a decade last month, propelling the GBP and EUR higher, on questions over the recovery of the world’s biggest economy and growing political uncertainty. The USD shed 4.7% in July, its worst monthly sell-off since September 2010. The EUR reached a 2-year high against the USD that has been largely attributed to its increasing strength as a safe-haven currency during the COVID-19 outbreak this year. It seems that many global investors are turning their attention to the high infection numbers and increasing political unrest.
• The COVID-19 pandemic has plunged the euro zone economy into a historic recession with Spain suffering the biggest hit according to figures published last week. Euro zone GDP fell 12.1% between the first and second quarters of 2020, the sharpest drop in 25 years of records with the Spanish economy leading the way with a contraction of 18.5%. Others to be hit hard were Italy who contracted 12.4% and France who fell 13.8% in Q2, the biggest fall since WW2. Economists warn that the recovery across the euro zone is likely to be slow and uneven and will depend on how the virus is managed.
• Hong Kong’s chief executive Carrie Lam has postponed elections for the city’s legislature citing the COVID-19 pandemic. The decision came a day after the government disqualified 12 pro-democracy candidates from contesting the election for the city’s de facto parliament, the Legislative Council, for reasons including their refusal to support a new national security law for the territory. The elections are likely to be postponed a year.
• The rating company Fitch revised the United States’ debt to negative from stable and said that the worsening public finances and the lack of an honest fiscal consolidation plan weighed in their decision. They emphasised that, “…high fiscal deficits and debt were already on a rising medium-term path even before the onset of the huge economic shock precipitated by the coronavirus.” According to Fitch, US government debt is expected to exceed 130% of GDP by 2021.
• The Fed kept its interest rate unchanged near zero and voted unanimously to leave the federal funds target rate between a range from 0% to 0.25%. The FOMC said, “…the path of the economy will depend significantly on the course of the virus,” adding that economic activity and employment, “…have picked up somewhat in recent months but remain well below their levels at the beginning of the year.”

Looking ahead

• The Japanese Yen could also become one of the best performers again in case of more uncertainty and if risk appetite wears off. Finally, the Japanese Yen might be appealing because it seems cheap compared to its pre-abenomics levels. Interest rates in the other G10 countries are at record lows, so they are getting close to the interest rates in Japan. Also, there might be a bullish case for the Yen if we remember that the Yen rallied at the worst of the US-China spat, plus there are some sparks of complacency in the global stock market along with seasonality, which shows that August is a bad month for the stock market.
• Most companies now lack the time and resources to prepare for a no-deal EU exit, according to the CBI, with one in five businesses saying they were less prepared for Brexit than in January due to COVID-19 disruption, which has disrupted cash reserves, client and supplier relations and internal structure. In a survey by the employer’s group, 75% of companies were concerned about a further economic shock from a failure to agree a trade deal with the EU, the UK’s biggest trading partner. Only 15% of businesses said they were more prepared for the UK’s departure.
• Emerging-market currencies rallied against the USD following the Fed decision last week. It is well known that a weaker USD is positive for emerging markets, as many of these countries carry USD denominated debt. The best performers were the Thai Baht (+1.64%), Hungarian Forint (+1.62%), Czech Koruna +(1.03%), Danish Krone (+0.97%) and the Singapore Dollar (+0.57%). The only exceptions were the South African Rand that lost 2.49% due to South Africa’s narrowing trade surplus and the Turkish Lira that lost 1.84%, despite at least $700m being sold by state-owned lenders earlier on Wednesday.

Key market events this week

• AUD Retail sales- Tuesday
• RBA Cash Target Rate- Tuesday
• USD Factory Orders (Jun)- Tuesday
• NZD Unemployment Rate (Jul)- Tuesday
• EUR, GBP and USD Markit Services PMI (Jul)- Wednesday
• EUR Retail Sales MoM (Jun)- Wednesday
• USD ISM Non-manufacturing Index (Jul)- Wednesday
• BoE Interest Rate Decision- Thursday
• RBA Statement on Monetary Policy- Friday
• USD Change in Non-farm Payrolls (Jul)- Friday
• USD and CAD Unemployment Rate (Jul)- Friday