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Last week’s news

• Industrial output in 3 of the Eurozone’s largest economies increased by more than expected in June, as governments begin easing lockdown measures. Spain, France and Germany outputs rose by 14%, 12.7% and 8.9% respectively, all above analyst expectations. Car manufacturing and clothes production led the way in a sign that certain industries are picking up as consumers begin spending money saved from 6 months of minimal spending. Production is still well below pre-pandemic levels and the resurgence of COVID-19 cases in several EU countries in recent weeks has raised fears that the uptick in industries could be dampened once again.
• The White House and Democrats remained at loggerheads over talks regarding stimulus legislation, as President Trump threatened to take executive action to help Americans bear the economic brunt of the COVID-19 pandemic. Treasury Secretary Mr Mnuchin has hosted talks with the democrats regarding a monetary package to help US citizens struggling during COVID-19 and Mr Trump is using the threat of executive action to urge Democrats to move closer to his position on the subject. The democrats are fighting to renew $600-a-week in emergency unemployment benefits, which ended last week and $1tn to help cities with rising health costs while Trump and the republicans are after a cheaper alternative.
• Last Thursday, the Bank of England stuck to its existing view that the UK economy will bounce back rapidly from the COVID-19 crisis when it eventually ends. Key takeaways from their view are that they are more upbeat than many economists about the short-term outlook and the resilience of the UK public. Policymakers expect a slower recovery and greater long-term damage after a short, sharp rebound and that pre-pandemic output levels will take a long time to be reached. It could take a long time for those who lose jobs to find new ones and therefore unemployment will remain higher than recent times until sectors fully recover or people transition into other industries or type of jobs.
• The Reserve Bank of Australia (RBA) kept its rate as expected at 0.25% and kept the 25-basis point yield on 3-year Australian Government bonds, supporting a stronger Aussie and making it one of the best FX performers over the last week. It gained 0.48%, 0.13%, 0.2%, and 0.31% versus the Pound, Euro, Greenback, and Japanese Yen, respectively. The RBA said that the mid-March support package for the Australian economy is working as expected.

Looking ahead

• UK Chancellor Rishi Sunak is under renewed pressure to avert a wave of Autumn job losses and to extend the UK job furlough scheme which is due to end in October. The BoE warned that unemployment would remain high and output below pre-pandemic levels until at least the end of next year. He has not completely ruled out extending the scheme which currently supports more than 9 million people however he told the BBC that ‘most reasonable people would say that this is not something that can carry on forever’ as he thinks about the mounting national debt it is putting onto the country books.
• Trump’s executive orders could threaten agreements with the democrats over an additional COVID-19 relief package, which could potentially help the US dollar to bounce due to its safe haven status, assuming this dynamic is still valid in the current environment. Nonetheless, gold’s value continued to go up and ended over 3% higher last week in response to the slump in real interest rates. Inflation expectations are going higher and/or interest rate expectations are going lower. Gold and the US dollar usually move in different directions, so it will be interesting to see how US political issues, low global interest rates and unprecedented amounts of monetary and fiscal stimulus will affect the Greenback and other G10 currencies over the next few months.
• According to the Commodity Futures Trading Commission, the snapshot of positioning until August 4th shows that money managers (leveraged funds), such as the ones engaged in managing currency futures trading and trading on behalf of speculative clients, have changed their net position to be net long on the Euro since April 2018. (Note that “long” means that they are bullish or optimistic about the Euro). At the same time, the net long positioning for the Swiss Franc and Japanese Yen have increased in this weekly report. On the flip side, the Loonie and Mexican Peso saw an increase in net short positioning, which could be negative for those currencies.
• President Trump is losing support in the polls, and according to the forecasting site PredictIt, Trump will lose. He is down from a 2020 high of 57% in late February and his chance to remain in the White House was around 42% as of last Wednesday. Implied volatility, a gauge from the “FX options market”, says that market participants are bracing for FX market turbulence around November. However, the US stock market shows less concern about November’s elections. Market participants are looking for hints to define if a complacent stock market that brings down FX volatility continues or if the expected increase in FX market volatility in November materialises pressuring stock valuations.

Key market events this week

• GBP Employment Change (May)- Tuesday
• EUR German ZEW Economic Sentiment Index (Aug)- Tuesday
• Westpac Consumer Confidence Index (Aug)- Wednesday
• RBNZ Interest Rate Decision & Press Conference- Wednesday
• GBP UK GDP 3-Month Average & GDP YoY (Q2)- Wednesday
• USD Inflation Rate YoY (Jul)- Wednesday
• AUD Unemployment Rate & Employment Change (Jul)- Thursday
• EUR GDP Growth Rate Estimates YoY & QoQ (Q2)- Friday
• USD Retail Sales MoM- Friday
• USD University of Michigan Sentiment (Jul)- Friday