Currency View by OFX

Last week’s news

• The European labour market has shrunk by a record amount in Q2 2020, with almost 5 million falling into unemployment. The drop represents the sharpest decline since records began in 1995 and is aligned with the huge drop in GDP, which fell by a record 12.1% in Q2. Nonetheless, recent PMI results suggest there has been a strong rebound in manufacturing and consumer industries across the EU in July, fuelling confidence that Q3 2020 could be the start of a long road to recovery.
• President Trump has threatened to deprive the US post office of funding that is urgently needed for postal voting in November’s presidential race, a move that could undermine a system that will play a much larger role than usual in the US election. President Trump is typically stronger at rallies and face-to-face election debates however COVID-19 has forced the US to change their usual formats of rallying support. Trump has been wary of postal voting in the past and believes its ‘riddled with fraud’. He currently trails Joe Biden, the democratic candidate, in national and swing-state. The democratic-controlled house earlier this year passed a $3.5tn rescue plan, however republicans want to see that figure go down to $1tn so at current, there is a $2.5tn bridge to close before things can get moving.
• The UK officially entered a recession last week when GDP results from Q2 2020 showed a 20.4% fall in output, the biggest quarterly fall ever and the largest from any of the world’s major developed economies. The announcement led to calls from business groups for ‘bold action’ especially as government job support schemes begin to wind down. The UK has shed around 750k jobs during the pandemic which has mostly come from the UK’s dominant service sector, which typically represents 80% of the UK’s economy.
• The Australian dollar managed a recovery of 0.30% against the USD on Friday, closing around 0.7170, just shy of the current resistance level around 0.72. The Aussie correlation with risk assets continues, and it would seem to be vulnerable to a drop in global equities, which have been on recovery mode following the massive stimulus packages provisioned around the Globe.

Looking ahead

• The AUDNZD is testing levels not seen since August 2018 and managed to trade temporarily above 1.10 on Monday Asia open. NZ Prime Minister Jacinda Ardern delayed elections by 4 weeks to October, after extending Auckland lockdowns on Friday to reduce the impact of an apparently growing cluster of cases. There’s also been some noise in the media around negative interest rates, in contrast with the RBA that has not shown, at least yet, much concern against a stronger Aussie.
• Interest rates in countries from Indonesia to Brazil have been pushed even lower as monetary policymakers across emerging markets acted swiftly to soften the economic blow caused by COVID-19. This act however has reduced the historic interest rate gap between emerging and developed markets, and as investors with access to funds search for where the next high-yielding asset is hiding, the gap becomes even lower. During risk-on periods, investors would typically sell the JPY, USD and CHF to fund long positions in high-yielding EM currencies however the risk/reward for holding such currencies has now dropped.
• The US-China trade deal review scheduled for August 15th (what would have been the six-month anniversary of the agreement) was postponed. The official reason for postponing the review included, “…scheduling conflicts and the need to allow time for more Chinese purchases of US exports.” But even signs of Chinese compliance could bring more criticism from the Democratic presidential candidate, Joe Biden, who said last week that the agreement that Trump has called a historic win is “failing”. President Trump repeated his view that the trade deal was “doing very well” last Friday. According to The South China Morning Post , China saw the meeting as an opportunity to consider broader issues, such as a proposal to ease their rising tensions.

Key market events this week

• AUD RBA Minutes (Aug) – Tuesday
• G GBP Core Inflation Rate YoY (Jul)- Wednesday
• EUR Core Inflation Rate YoY (Jul)- Wednesday
• CAD Core Inflation Rate YoY (Jul)- Wednesday
• USD FOMC Minutes- Wednesday
• JPY Inflation Rate YoY (Jul)- Friday
• USD Markit Manufacturing PMI (Aug)- Friday