Currency View by OFX

Last week’s news

• The US labour market created 850k jobs in June as the world’s largest economy continues to heal from the COVID-19 shock. The non-farm payrolls came in well above expectations of 720k and surpassed the 583k gain posted in May. Despite the increase, unemployment rose from 5.8% to 5.9%. The strong results bolstered the case made by US central bankers that the Fed should begin to consider withdrawing its monetary policy support. Although, the overall reaction on equity and interest rate markets was tame.
• Despite upbeat PMI data, the Australian dollar has not yet been able to recover from current levels as iron ore and Chinese stocks decline. Australia’s 10-year bonds rose as lockdowns across the nation fuel demand for haven assets and global interest rates soften. Iron ore was under pressure after recent data suggested China’s economic growth may have peaked, raising concerns authorities will take further steps to roll back production in the steel industry.
• The number of unemployed people in the EU dropped by 382k in May, boosting optimism about a rebound in the region’s labour market as manufacturers are hiring at the fastest rate in two decades. Unemployment fell from 7.4% to 7.3%, although this figure remains below the pre-pandemic 6.6% level. Improving jobs data continues, adding to economists doubts about the transitory nature of recent inflation figures.

Looking ahead

• Crude oil held near $75 per barrel after infighting within OPEC+ delayed a much-anticipated decision on raising output levels. The United Arab Emirates blocked an OPEC+ deal on Friday because it wanted better terms. Russia and Saudi Arabia had negotiated to increase production, but the United Arab Emirates halted the discussions at the beginning of this week.
• Increasing oil prices on top of a promising outlook for Canadian economic growth and positive yield (interest rate) differentials versus the EU and US could give the Canadian dollar a boost in the near term. The CAD crosses have priced in two 25 basis-point increases in interest rates for 2022, well before any hikes currently priced for the European Central Bank or the Fed. Following the latest visit of the upper range level of 1.2450 last week, the USDCAD might trade between 1.1900 and 1.2500, pressured to the downside, until the Jackson Hole meeting at the end of August.
• UK Chancellor Rishi Sunak has used his annual Mansion House speech to insist Britain must beef up its trading relationship with China while admitting efforts to reopen direct access to EU financial services had failed. The Chancellor was downbeat about the prospects for a new regulatory deal with the EU but insisted that London is well-placed to serve a fast-growing Chinese ‘financial services market with total assets worth $55 trillion’. Sunak acknowledged the view that the City of London’s easy access to EU markets was not about to be re-established after Brexit, making it increasingly vital that it deepened relations with places such as China, the US and Singapore.
• Some currencies in emerging markets that are lagging in vaccinations might feel the pressure of the highly contagious Delta variant. South Africa, Colombia, and Russia are feeling the pain of COVID-19 with the recent spike in case numbers causing them to shelve their rate raising plans and postpone expectations of tightening the monetary policy. However, the Brazilian real and Mexican peso will be more resilient as their central banks tighten monetary policy. The Brazilian real and Mexican peso outperformed the US dollar by 3.14% and 0.92%, while the South African rand lost 3.6% versus the US dollar between May 31st and July 2nd.

Key market events this week

• Tuesday
  • RBA Interest Rate Decision
  • EUR ZEW Economic Sentiment Index (Jul)
• Wednesday
  
  • USD FOMC Meeting Minutes
• Thursday
  • MXN Inflation Rate YoY (Jun)
• Friday
  • GBP 3M Average & YoY GDP (May)
  • CAD Employment Change & Unemployment Rate (Jun)