Currency View by OFX

Last week’s news

• A renewed flare-up in US-China relations and weakening Q1 GDP numbers in US, China and Europe hit global stock markets last Friday. Donald Trump escalated his attacks against China at a White House coronavirus briefing, citing evidence Covid-19 had originated from a scientific laboratory in Wuhan and raised the prospect of using tariffs against Beijing. The FTSE 100 and S&P 500 fell 1.9% and 2.1% respectively. Despite this, Government and Central Bank interventions across the globe, plus hopes of a potential treatment have pushed U.S stocks to their biggest monthly rally in April since 1987.
• Boris Johnson asked the E.U to give ground on three key areas if there is going to be a UK-EU trade deal this year. The three topics include Britain’s right to its own fishing borders, environmental legislation and the role of the European Court of Justice. With Britain keen not to extend its transition period, there is only 8 months remaining for any agreement to be negotiated and failure to come to an agreement would put a no-deal Brexit on the table. Further talks are due on May 11th.
• The Eurozone’s economy shrank by the fastest rate on record in Q1 2020 as measures to contain the coronavirus pandemic completely immobilized household and business activity and spending. Preliminary estimates found that GDP fell by 3.8%, the largest drop since the data began in 1995. ECB President Christine Lagarde warned EU leaders last week that Eurozone GDP could fall by 15% this year.
• As expected, the Fed left rates unchanged. Fed Chairman Jerome Powell urged American congress to deliver more fiscal stimulus to safeguard the U.S. economy as he warned of a weak recovery. The economy shrank an annualized 4.8%, the most since 2008. Consequently, the U.S. dollar index fell 1.3% and the Bloomberg U.S. dollar index decreased 1.08% due to less exposure to the Euro and Pound and higher exposure to other currencies such as the Australian dollar and Mexican Peso. Market participants find an increase in rates unlikely within the next three years, which could put a cap on U.S. dollar expectations.
• The CAD appreciated 0.1% versus the U.S dollar over the last week but didn’t do well against the other major currencies. The fundamental drivers explaining the Loonie’s weakness include manufacturing PMI, which continues to plunge, Canadian GDP, which came in at 0% growth for February (versus 0.1% expected) and low expectations for March GDP numbers. Prices for products manufactured in Canada also decreased 0.9% in March, along with a decrease of 15.6% in the prices of raw materials purchased by manufacturers operating in Canada, mostly due to lower prices for crude oil..

Looking ahead

• According to a joint BoC statement, the Canadian Government named Tiff Macklem as successor of Stephen Poloz to head the nation’s central bank. Macklem is a veteran of the 2008-2009 financial crisis. Last Friday, the Canadian dollar lost the most since mid-April after Macklem said that negative rates are among the tools the central bank could use to support the economy.
• In the U.S., April jobs report could reveal the sharpest deterioration in the U.S. labor market since 1939. Non-farm payrolls forecast shows a 22 million decline from March and the unemployment rate is expected to surge into the mid-teens.
• The Euro Pound volatility could be set to continue as UK starts embarking in talks with the US plus expectations around their own lockdown exit plan. On the Euro side, the Fiscal talk will continue with a new Eurogroup meeting focused on the recovery initiative.
• Emerging-market currencies such as the Mexican peso, weakened last Friday due to concerns about renewed U.S.-China tensions and limited risk appetite. The reason for concern might be due to the perception of limited room for fiscal stimulus in the developing world. Market participants might start to worry about how the efforts to bolster their economies may impact debt sustainability.

Key market events this week

• RBA Interest Rate Decision – Tuesday
• CAD Balance of Trade (Mar) – Tuesday
• NZD Employment Rate and Change QoQ (Q1) – Tuesday
• AUD Retail sales – Wednesday
• MXN Inflation Rate YoY (Apr) – Thursday
• BoE Inflation Report – Thursday
• BoE Interest Rate Decision – Thursday
• AUD Trade data – Thursday
• RBA Statement on Monetary Policy – Friday
• CAD Employment Rate and Change (Apr) – Friday
• US Non-farm Payrolls (Apr) – Friday
• US Unemployment Rate (Apr) – Friday