News & analysis


Yesterday saw another bout of loonie strength as oil prices rose yet again. WTI closed out yesterday’s session at $24.56, its highest level since early April, while the loonie also enjoyed improved economic conditions to rally near 0.5% on the day. The Canadian dollar continues to trade towards levels seen prior to the appointment of Tiff Macklem as the new Bank of Canada governor, as another patch of mild dollar weakness appears in today’s market pricing. The loonie move comes despite the longest oil rally since July 2019 beginning to stall, with WTI prices for June delivery down 20 cents. The Department of Energy is due to release US crude inventory data this afternoon at 15:30 BST. A build in inventories of 8.6m barrels is expected for the week ending May 1st, confirming yesterday’s API data of an 8.44m rise in stockpiles. Besides inventory data released this afternoon, the data calendar for the loonie is sparse.


While other safe-haven currencies advanced following US-China trade tensions, the dollar showed mixed performance against its G10 peers yesterday. A continuing rally in crude oil led to NOK and CAD posting solid increases against the dollar, while the euro slightly pared back losses following yesterday’s court ruling.  The Office of the United States Trade Representative is considering a 12-month extension on the exclusion of some products that would otherwise be included in the series of tariffs imposed in 2018. Data released yesterday showed that the trade balance dropped to -$44.4bn in March from a revised $39.8bn in February, while the median forecast provided by Bloomberg wasn’t far off and estimated a widening of the overall gap to $44.2bn. US exports of goods and services showed a record drop in March while imports fell by the most in over 10 years. During a speech in Phoenix overnight, President Donald Trump stated the US must reopen as soon as possible, while acknowledging that reopening the economy would likely lead to more cases and deaths. He added that if cases do rebound, it would be like fire that could be extinguished fast, but criticised Johns Hopkins University model that showed new projections of what could happen in case containment measures are lifted too quickly. Another analysis by the University of Washington showed that the US death toll could reach 135,000 by the beginning of August if shutdown orders are lifted too soon, but President Trump stated that “these models have been so wrong from day one”.  Later today, housing and employment data are released with MBA mortgage applications expected at 12:00 BST and ADP employment change at 13:15.


The euro sharply fell against the dollar yesterday and has managed only a minor recovery since then, after a ruling from Germany’s Constitutional Court that the European Central Bank’s QE programme violates the ECB’s mandate under EU law, and called for German institutions such as the Bundesbank to cease participation unless the ECB could prove its actions were “proportional” within 3 months. The plaintiffs argued that ECB asset purchases were a form of monetary financing prohibited by EU treaties, but this was rejected by the judges in a 7-to-1 ruling, following a ruling on the same issue in the European Court of Justice in 2018. However, the Court added an explosive conclusion to its ruling, where it found that the ECB had not given the ECJ sufficient and comprehensible justification that its actions were “proportionate” relative to other policy considerations. In doing so, the court waded into the balancing of macro policy for the whole Euro area – a distinctly political issue that is unlikely to remain contained within Germany. Although the ECB may meet the requirement for “proportionality” within 3 months, or a workaround may be found either by the ECB or in the political sphere, the judgement has the potential to have dire repercussions. In setting aside a judgement from the ECJ, the Karlsruhle has created a precedent for other national legal systems to do the same, while also placing the ECB’s ability to respond to future crises in question. In response to the ruling, the ECB’s Governing Council remarked that the German court had previously stated that QE caused no violations with the law. Additionally, they stated that “the Governing Council remains fully committed to doing everything necessary within its mandate to ensure that inflation rises to levels consistent with its medium-term aim and that the monetary policy action taken in pursuit of the objective of maintaining price stability is transmitted to all parts of the economy and to all jurisdictions of the euro area”. This morning, the euro continued to trade on the back foot against the dollar during the build-up to April’s Markit Purchasing Managers’ Index releases. Spanish services PMI printed an unprecedented level at 7.1, well below the consensus of 10.0 and a prior reading of 23.0, while the composite PMI dropped to 9.2 from 26.7 in March, also below the consensus of 10.5. Given that restrictions were in place throughout the entire month of April, the single-digit PMIs may not come as a surprise. Markit estimates that “the economy is currently contracting at a quarterly rate of around 7%, and acknowledges that “job losses and great pessimism amongst firms about the future leads to notable concerns over the strength of any rebound”.  Later this morning, PMIs will be released for France, Italy, Germany and the eurozone.


Despite eye-catching headlines stemming from the government’s Scientific Advisory Group for Emergencies, little new information came out yesterday for the pound. UK Chancellor Rishi Sunak is reportedly examining ways to move millions of workers off of government support and back into the workplace as the Johnson administration is set to lay out exit plans in the coming days. With the Brexit extension clock also ticking away, the potential for a double whammy of damage to the UK economy is weighing on the pound, especially as European economies slowly start to resume activity. Yesterday’s final reading of the April PMIs saw a minor upward revision in the service and composite reading, while the construction PMI, which was released this morning, saw activity in April dip to 8.2 from 39.3 in March. The decline in the construction PMI to single digits means the construction sector saw the fastest decline in output since the survey began 23 years ago. All three main categories of construction work experienced a survey-record fall in April, says IHS Markit, with declines in house building (7.3) and commercial activity (7.7) exceeding that for civil engineering (14.6). The historic collapse in the construction data only exacerbated fears of the UK economy crumbling under lockdown, putting further pressure on the pound this morning. Sterling now sits over half a percentage point lower against the dollar compared to its opening price this morning.