News & analysis

CAD

The loonie fell along with oil prices and risk sentiment yesterday while the dollar reigned supreme on a swathe of new US treasury issuance. This morning, the Canadian dollar managed to find a footing against USD and has reversed most of yesterday’s losses despite limited WTI price action. The loonie’s strength is likely stemming from a general risk move as other currencies in the G10 basket trade accordingly in line with a weaker dollar and improved risk sentiment. Prime Minister Justin Trudeau will announce cost-sharing agreements with various provinces today to increase wages of essential workers during the COVID-19 crisis. This will likely involve a transfer of federal funds to the provinces, who may then decide for themselves how to distribute the pay boost. Later today, investors will keep an eye out for Canada’s Purchasing Managers’ Indices for April that are released at 15:00 BST.

USD

The greenback surged along with long-dated US bond yields after the Treasury announced a record $96bn in long-term refunding debt sales next week. The Treasury also announced the first issuance of 20-year bonds, the first of their kind since the mid-1980’s, as it seeks to finance the latest fiscal measures by the US administration. But the dollar is joined by the Swiss franc and Japanese yen in trading lower this morning after news broke that the US and China’s trade chiefs are set to speak next week after Donald Trump’s threat to tear up the phase one deal. The talks would mark the first time Chinese Vice Premier Liu He and US Trade Representative Robert Lighthizer speak since the formal trade agreement was signed in January. Trump also seemed to suggest that a development was on the horizon when talking to the media at the White House yesterday, should the trade talks develop in the way he’d like. Additionally, officials have ruled out earlier reports by the Washington Post that the US could stop coupon payments on its debt instruments held by China – a move that was initially seen as highly damaging to the global financial system. Global risk sentiment was further aided by Chinese data this morning. Chinese exports in April were expected to contract by 11% YoY but actually rose by 3.5% in USD terms. A weaker yuan may be partly the reasoning behind this, but given that most of the effects are smoothed out when exports are quoted in dollar terms, markets began to see the first signs of demand conditions picking back up in the global economy. Given the questions around Chinese GDP figures, export data is often used as a proxy for domestic growth. A rise in exports in April highlights that China’s economy may begin to fire itself back on track as the economy works through a backlog of orders. Today’s data focuses on the initial jobless claims numbers released at 13:30 BST, which mark the final reading prior to tomorrow’s pivotal Nonfarm Payroll data. Initial claims are expected to rise at a much slower rate of 3m while the spike in the last few week’s worth of data will filter into the continuing claims numbers.

EUR

The euro was struggling to resist further depreciation against the greenback in the early trading hours today as the ongoing story between the European Central Bank and Germany’s Federal Constitutional Court remains key in FX markets. Four ECB council members gave insight on whether or not the central bank will accept the jurisdiction of the Court and reportedly stated on Wednesday that they are determined the ECB should not respond directly to the GFCC, although no official decision has been announced yet. The council members argued that accepting the jurisdiction would compromise the ECB’s independence. This morning’s data included German industrial output that plunged by 9.2% in March, worse than the forecasted median of -7.4%, and French industrial output that fell by 16.2% compared to the 13.4% forecasted decrease. The euro managed to recover some of its losses and jumped back over the 1.08 level despite the dismal industrial data, but lost its edge again after Italian retail sales plunged to -21.3% in March, while a drop of 15% was expected.

GBP

Sterling is trading higher this morning, after the Monetary Policy Committee of the Bank of England voted 7-2 to keep asset purchases unchanged, in a decision that also kept the official interest rate unchanged at 0.1%. The MPC did note that at its current pace, asset purchases would reach their declared limit by July, meaning the Committee will either have to announce more QE, or decrease the pace of purchases and therefore tighten monetary policy in the wake of the worst economic shock since the Second World War. The Bank of England has followed the OBR in rebranding their forecasts as an “illustrative scenario”, a change of language that reflects the extent to which the forecasts are conditional on changeable assumptions. This rightly puts the focus on the major uncertainties that the MPC will be watching to determine future policy, the most important of which is the shape of the economic recovery. The base case in the Monetary Policy Report is actually fairly optimistic, envisaging a 14% decline in GDP this year, followed by a 15% increase the next, allowing GDP to regain its pre-crisis level within a year of the peak of the shock. During the financial crisis, UK GDP did not regain pre-crisis levels until 2013, although the shock was of a different nature and the recovery was hampered by austerity. With the aggressive synchronized fiscal and monetary measures being taken by the UK there are certainly good grounds to hope the rapid recovery envisaged in the illustrative scenario comes to pass, although as the Monetary Policy Report is quick to emphasize, the assumptions underpinning this optimism may prove unrealistic.

 

 

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