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Price action in major currencies was again subdued last week. With few tier-one macro data releases for markets to trade off the focus was on the reaction function of governments and central banks to covid-19 related developments.
Only a handful of currencies appreciated by more than 1% vs the Dollar last week and no major currency depreciated by more than 0.7%. The net result was that the Dollar Nominal Effective Exchange Rate was down only 0.2% and it is broadly unchanged since Friday.
The calendar for tier-one macro data releases and policy events is far heavier this week, particularly in the US, China and UK. OPEC+ is also due to meet on 15th July with expectations that it will announce plans to start increasing oil production.
Since its rally in mid-June the Dollar has arguably been trading like a “safe-haven” again, with stronger-than-expected US macro data still mostly benefiting US and global equities. In this context this week’s release of June retail sales figures and NY and Philly Fed manufacturing indices for July will be in markets’ eye-sight.
The Sterling NEER is near a one-month high as the British government once again opens the spending taps but UK GDP, inflation, labour market and retail sales data out this week may well put a floor under reasonably high currency volatility.
In the Eurozone, macro data are likely to continue to play second fiddle to pan-European policy stimulus measures, with the Euro likely to be sensitive to this Thursday’s ECB policy meeting and in particular the special EU Summit on 17-18 July.
The Chinese Renminbi has appreciated a slow but steady 1.7% in the past month but has treaded water in the past four sessions. This week’s sequential June data and Q2 GDP figures could prove a litmus test for the PBoC’s appetite for further currency appreciation.
The Australian and New Zealand Dollars are struggling for clear direction but that is not the case of the Thai Baht which, in line with our expectations, has been weakening in July.
Subdued FX price action last week but data and event calendar heavy this week
Price action in major currencies was again subdued last week. With few tier-one macro data releases for markets to trade off the focus was on the reaction function of governments and central banks faced with spikes in covid-19 cases in a number of major cities, states and countries. The World Health Organisation announced today that a record high number of new cases (230,370) was recorded yesterday, with most new cases in the Americas, followed by South East Asia.
Only a handful of developed and emerging market currencies appreciated by more than 1% versus the US Dollar last week and no major currency depreciated by more than 0.7% (see Figure 1). GDP-weighted baskets of low-yielding and high-yielding emerging market currencies were both unchanged. Developed currencies posted a 0.5% gain, led by the Swedish Krone (+1.3%) – the best performing major currency last week – and Sterling (+1.0%). The net result was that the US Dollar Nominal Effective Exchange Rate (NEER) was down only 0.2% (see Figure 2) and it is broadly unchanged since Friday.
The calendar for tier-one macro data releases and policy events is far heavier this week, particularly in the United States, China and United Kingdom.
- The US is due release CPI-inflation, retail sales, industrial output and housing data for June, New York and Philadelphia Fed manufacturing indices for July and initial jobless claims for the week ending 16th July (see Figure 3).
- In the UK the focus will be on monthly GDP (May), CPI-inflation (June), labour market (May-June) and retail sales (June) figures. Bank of England Governor Bailey is also due to make two speeches (see Figure 5).
- European Union leaders will hold a special summit on 17-18 July to discuss the €750bn EU recovery fund (see Figure 7).
- In China, Q2 GDP data sequential data for June (retail sales, fixed investment, industrial output and house prices) are due out on 16th July (see Figure 9).
- Central banks in Poland (14th), Japan (15th), Canada (15th), the Eurozone (16th) and Indonesia (16th) are due hold policy meetings, with all expected to keep rates unchanged.
- OPEC and Russia are due to meet on 15th July and expectations are that they will announce plans to start tapering oil production cuts which were implemented in April.
US Dollar once again trading like a safe-haven currency
As was the case in the first week of July stronger-than-expected US macro numbers are pointing to a decent rebound in economic activity in May-June, but while they are dampening downward pressure on the Dollar they are on the whole still mostly benefiting US and global equities (see Figure 2). The historical inverse relationship between the S&P 500 and Dollar NEER, which had somewhat broken down in mid- June, has since re-established itself with the Dollar again trading like a safe-haven currency. The S&P 500 was up 1.8% last week and closed at a one-month high on Friday while the Dollar NEER depreciated about 0.2%.
US job opening and hires rose faster than expected in May and the US ISM non-manufacturing PMI, a survey of economic activity in the key US service sector, surged to far higher-than-expected 57.1 in June from 45.4 in May. The 11.7 percentage point monthly increase in the index was the largest on record and took the US PMI back to its February level when the US economy had not yet been subject to any state lockdowns or social distancing regulations and was arguably still running near “normal” (the state of Washington was the first mainland state to declare a state of emergency and did so only on 29th February).
Sterling near one-month high as government again opens spending taps
Sterling outperformed for the second consecutive week, appreciating 0.7% in NEER terms to a one-month high (see Figure 4). FX markets have seemingly concluded that Chancellor of the Exchequer Rishi Sunak’s summer statement (effectively a mid-year mini-budget) was a net positive but Sterling has lost a bit of ground since Friday.
While spending measures announced in March-April were designed to provide life-support for a UK economy under lockdown, Wednesday’s fiscal-give away is de-facto a “transition” budget to ease the economic pain associated with re-opening the economy. The spending measures, which amount to about £25-30bn (1.0-1.2% of GDP), are squarely aimed at spurring consumer demand, particularly in the critical hospitality sector, and the labour and housing markets in coming months before a number of critical fiscal measures (including the furlough program) start being unwound.
The UK macro data and event calendar is heavy this week (see Figure 5). Speeches by Bank of England Governor Bailey are unlikely to provide much (if any) guidance on the central bank’s quantitative easing plans beyond August. CPI-inflation data have not moved Sterling much (if at all) in recent months, and we expect this to be the case again this week, while the plethora of labour market indicators for May-June will likely have something for everyone. GDP data for May could rightly now be considered “old” but precedent suggests that this simple but important measure is likely to catch the market’s attention. We forecast a 3.0% mom contraction (see United Kingdom: Back to 1999…and to the future, 26th June 2020).
Euro – Macro data playing second fiddle to ECB and EU policy stimulus
The Euro NEER was flat last week and despite some modest gains today remains within a remarkably narrow five-week range of just 0.7% (see Figure 6).
The Eurozone currency has shown little reaction to recent macro data releases with markets seemingly more focussed on whether the European Central Bank has any appetite to further loosen monetary policy (unlikely for now in our view – see Figure 7) and whether European Union leaders can agree on a €750bn European Union recovery fund. The special EU Summit on 17-18 July could prove critical in this regard.
Chinese Renminbi appreciation running out of steam?
One of the more interesting currency trends in recent weeks, in our view, is the Chinese Renminbi NEER’s slow but steady 1.7% appreciation in the past month (see Figure 8). That is noteworthy in the context of China given that the People’s Bank of China (PBoC) arguably uses the Renminbi as a tool, carrot and stick. The PBoC fixes daily the USD/CNY parity rate, around which USD/CNY spot can trade +/- 2%, which gives it a degree of control over its currency which US President Trump can only dream of.
The PBoC takes into account a large number of financial, economic, geopolitical factors when fixing USD/CNY and the question is why it is allowing the Renminbi NEER to slowly appreciate. This was not the case in May when US-China tensions were flaring up and the PBoC weakened the Renminbi, in line with our expectations (see Conservative FX Markets Testing (Some) Extremes, 7th May 2020). We think the PBoC’s stance is partly a show of strength (i.e. the Chinese economy is doing fine/better) and partly reflects limited concerns about Chinese export competitiveness but greater concern that a weak Renminbi increases Chinese households/corporates’ FX-debt interest payments. It is not obvious to us that it is an olive branch to the US given simmering tensions between the two trading super-powers.
Price action in the past 18 months suggests that in level terms the PBoC may be comfortable with another 2.5% or so Renminbi NEER appreciation before it starts to cap/reverse the trend, as it did in late-April 2019 and late-March 2020 (see Figure 8). However, the Renminbi NEER has flat-lined for the past four trading sessions, suggesting that the PBoC may view the Renminbi’s current level as optimal for now. In any case its tolerance for further currency appreciation will likely in part depend on the Chinese economy’s performance and with this in mind Chinese policy-makers and financial markets will be keeping a watchful eye on domestic macro data due out Tuesday and Thursday (see Figure 9).
In particular GDP data for Q2 are likely to make headlines. The consensus forecast is that GDP rebounded 9.6% qoq, in line with our view that “A handful of Asian economies which suffered particularly sharp quarter-on-quarter GDP contractions in Q1, including China, may post modestly positive growth in Q2” (see Shape of Recovery: Square Root & Hockey Stick, 5th June 2020).
Australian and New Zealand Dollars struggling for clear direction
The Australian and Kiwi Dollars had somewhat contrasting fortunes last week, with the former weakening about 0.4% and the latter appreciating 0.3% in NEER terms.
The market’s reaction to the Reserve Bank of Australia policy meeting on 7th July, at which in line with expectations it kept its policy rate unchanged at a record-low of 0.25%, was nevertheless reasonably muted. Moreover, the Aussie Dollar NEER has inched higher since Friday near the top end of a narrow five-week range of only 1.7%. The focus this week will be on Australian labour market data for June (due out 16th July). A total of 822,000 jobs were lost in April-May but the consensus forecast is that the economy created 112,500 jobs in June.
The Kiwi Dollar NEER appreciated a significant 7% between mid-May and early-July, according to our estimates, thanks in part to the improving trade balance and to markets responding positively to New Zealand arguably being the only major economy to eradicate covid-19 (see Figure 10). However, the Kiwi Dollar NEER has ultimately been treading water since the 3rd July. The focus this week will be on New Zealand CPI-inflation numbers for Q2 (due out 15th July), with headline CPI-inflation expected to have halved in Q2 to 0.4% qoq. Markets are likely to be sensitive to material surprises, particularly to the downside in our view, given the Reserve Bank of New Zealand’s reasonably dovish statement at its policy meeting on 24th June.
Thai Baht continues to weaken, in line with our forecast
The Thai Baht NEER has weakened 2% so far this month (see Figure 11), which we suspect may be partly due to the Bank of Thailand (BoT) having slowed or stopped its FX intervention (buying Baht, selling Dollars) for now. This would be in line with our view that “the Thai Baht NEER has appreciated over 2% in the past three weeks to a five-month high which may invite central bank FX intervention to slow, cap or even reverse this trend in order to maintain Thai export competitiveness.” (see Risk aversion, not panic, in face of uncertainty, 1 July 2020).
Faced with the risk that most Asian economies may have to remain in partial lockdown for now, given spikes in covid-19 cases in countries such as Korea and Singapore, we expect the BoT near-term to continue to favour modest currency weakness in a bid to boost domestic trade and tourism competitiveness. The macro data release calendar for Thailand is light this week.