🔺 What to do when markets are at an all-time high? Find smart bargains, like these.See Undervalued Stocks

Currencies Rebound But Consumer Comeback Is Key

Published 06/12/2020, 04:36 PM
Updated 07/09/2023, 06:31 AM
GBP/USD
-
USD/JPY
-
AUD/USD
-
EUR/GBP
-
NZD/USD
-
EUR/CHF
-
CAD/USD
-
CL
-

Currencies and equities ended on a high note Friday, rebounding after extensive losses mid-week. There was no specific catalyst, but Thursday was the worse day for stocks since March, so a relief rally is not unusual. U.S. data beat expectations, with consumer confidence rising in June, according to the University of Michigan report. However, this came well into the recovery in currencies, which began in the early European session. The uptick caught no one by surprise, as the prior rally in stocks and state reopenings boost sentiment. However, concerns about a second wave remain, casting doubt on the overall recovery, which prevented currencies from extending their gains in the New York session.

The Australian and Canadian dollars were the best performers, with the New Zealand dollar trailing not far behind. CAD was supported by oil prices, which bounced as well. Aside from the safe havens, sterling struggled the most as UK data missed expectations. Industrial production and monthly GDP contracted more than forecast, while inflation expectations declined in May. The only good news was the trade deficit, which narrowed, but the headline is misleading as the improvement was due to weaker imports and exports. As the UK struggles to reach a trade agreement with the rest of Europe, trade activity will only suffer. Eurozone industrial production, on the other hand, beat expectations allowing the euro to outperform sterling.

Between mid-May and early June, currencies and equities rallied on the prospect of recovery. Next week, we’ll get a chance to see just how good these recoveries have been. Lockdown measures led to depression-like economic activity in March and April, but we’re looking forward to a number of May economic reports in the week ahead. Last month, countries around the world eased lockdown restrictions, with many U.S. states following suit. The hope is that by removing restrictions, economic activity will recover and that’s what central bankers have suggested as well. China, the U.S., UK and Canada will release May retail sales and investors will be eager to see if there’s a meaningful consumer comeback. Unfortunately, economists are not looking for major improvements. For the U.S., they are looking for a 7.2% increase in spending with only a 3.9% bump up excluding auto and gas purchases. For the UK, they estimate a 5% increase in retail sales.

Given how low these forecasts are, we think there’s a greater chance of an upside than a downside surprise. If retail sales rise more than expected, particularly in the U.S., we should see a recovery in equities and a relief rally in USD/JPY. At the end of the day, unless reopenings cause a second wave of COVID-19, the U.S. economy is on a path to recovery with gradual improvements in data expected. But at the same time since the jury’s out on the U.S.’s ability to avert a second wave, especially given the new highs in virus cases in states across the country, the number of new daily infections will have just as significant of an impact on market flows as economic data.

Aside from these retail sales reports, there are also three central bank monetary policy announcements, Australian employment and New Zealand GDP scheduled for release. Between the Bank of Japan, Bank of England and the Swiss National Bank, the BoE is the only one expected to ease monetary policy. Unlike the Federal Reserve, the BoE is less opposed to negative rates. Last month, it said it is examining the option for the first time ever, and this revelation sent GBP sharply lower. As most policy-makers are skeptical of their effectiveness, the central bank will most likely raise bond purchases rather than cut rates but it’ll probably make it clear that the option remains on the table. As a result, sterling will most likely extend its losses in the week ahead. No action is expected from the BoJ, but the SNB could take negative rates lower or talk down the currency as it won’t be happy with the recent slide in EUR/CHF.

Latest comments

Loading next article…
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.