News & analysis


The loonie made a stark U-turn in yesterday’s session to finish the session in the green as the US dollar broadly sold-off once the new Covid case count was released. Ultimately, the Canadian dollar closed out Q2 3.47% higher against the greenback after depreciating some 8% in Q1. The loonie has carried yesterday’s momentum into this morning’s session, starting Q3 on the offensive as the dollar continues to be sold across the board, with the exception of GBP. Yesterday’s sole data point failed to move the needle for the Canadian dollar, however, as the April GDP release saw the month-on-month contraction in the economy land rather close to expectations. The Canadian economy contracted some 11.6% in April, close to the median expectation of -12.2%, as the economy entered full lockdown mode. Oil prices fell to record lows and even turned negative in the case of the WTI benchmark, and all 20 industrial sectors of the Canadian economy were affected. Market’s braced for the sharp economic contraction due to the nature of the shock and the policy reaction. The economic damage highlighted in the month-on-month slump in GDP was the worst since records began in 1961. The positive surprise in the data helped the loonie brush this data release to one side, although it was arguably offset by a negative revision to March’s release – 7.5% vs 7.2% previous. Befitting the latest Statistic Canada policy, the report also contained a preliminary estimate for May’s GDP reading, which was approximately forecasted at 3%. Today, there is nothing of note for the loonie in the data calendar as markets close for Canada day. Normal service is set to resume tomorrow with the release of the manufacturing PMI for June, released at 13:30BST.


The dollar ended the second quarter on the defensive, weakening across the board late in the afternoon amid intensifying concerns about the severity of the domestic US Covid-19 outbreak, after Florida reported a daily increase of more than 6,000 cases, while California saw its highest rise in new cases to date of 8,357. Federal Reserve Chair Jerome Powell and Treasury Secretary Steve Mnuchin testified before congress about the Federal Government’s response to the virus outbreak. Although Powell highlighted a bounceback in economic activity, he stated that the economic outlook is “highly uncertain” and will largely depend on how successful the US will be in containing the virus. Earlier on the day, comments by the nation’s infectious-disease expert Anthony Fauci dented risk sentiment after he stated that the US is “going in the wrong direction” and could start seeing 100,000 new cases each day, more than double the current rate. This morning, the dollar dropped against most of its G10 peers after the Purchasing Managers’ Indices in Asia showed an improvement and sapped demand for safe havens. PMIs in Japan, South Korea and Taiwan improved but still remained in contractionary territory below the 50 mark while Chinese PMIs rose above 50. This evening, the focus will be on the release of the FOMC minutes at 19:00 BST. The minutes may shed some light on how close the US central bank is to implementing yield-curve control; a tool that markets are increasingly pricing in for the next Fed meeting in September after Fed speakers appeared mixed on the topic.


The euro traded in the red against almost all G10 currencies yesterday despite the broad US dollar weakness. This morning, the currency edged slightly higher against the dollar after German retail sales surged by 13.9% in May compared to the forecasted 3.5% and the revised prior reading of -6.5%. German unemployment data released this morning showed a rise of 69,000 unemployed citizens in June vs the forecasted increase of 120,000. The Federal Labor Agency stated that more redundancies were prevented by the generous Kurzarbeit job-retention scheme that the government launched to support wages. German Foreign Minister Heiko Maas gave an optimistic outlook on the EU recovery fund while speaking to Reuters on Wednesday, increasing hopes for reaching a deal on the EU leaders’ meeting which is scheduled on July 17 and 18. Notably, the turnaround in the euro came after European Central Bank Executive Board Member Fabio Panetta said in a speech this morning that the eurozone has so far weathered the virus shock as well as could be expected, and that that we are now in a “better position to watch how key developments play out”. With most of the notable data releases being scheduled in the early morning, the rest of the day is rather calm on the eurozone data front.


Sterling joined most major currencies in a rally against the US dollar yesterday, and also managed to outperform the euro. The rally happened late in the afternoon, approaching the 4pm fixing time for exchange rate benchmarking, but has sustained itself since then. Boris Johnson gave a speech discussing the details of the extra £5bn in infrastructure spending that was announced earlier in the week via briefings to newspapers and other media. Economic policy is expected to be outlined further by Chancellor Rishi Sunak on July 8th. A regional return to strict lockdown measures in Leicester this week, serving as a reminder that a serious risk remains of further economic disruption due to localised spikes in coronavirus cases. Building society Nationwide released its house price index, which showed the first year on year decline since December 2012. Price fell 1.4% month on month in June, bringing the year on year change to -0.1%. Other surveys of the property market have been less pessimistic, notably that conducted by Zoopla. Mortgage activity also slowed down in May. Elsewhere yesterday, Bank of England Chief Economist Andy Haldane gave an astonishingly upbeat assessment of the UK economic outlook, where he justified his decision to vote against a further expansion of quantitative easing at the most recent Monetary Policy Committee meeting. Haldane’s reasoning was that the economic contraction in the second quarter had been less severe, and early data suggested the recovery was much faster than previously expected.

FX Elsewhere

The Scandinavian currencies are performing well against the dollar and euro this morning, led by the monstrous percentage point NOK rally against the greenback. A continued rise in the DNB/NIMA manufacturing PMI for June, which read at 48.9 vs 44.9 previously, compounded the source of strength coming from a rise in oil prices. This morning, WTI cracked above the $40 mark as it heads for its post-pandemic high of $41.63, while Brent also tracked $1 higher to trade above the $42 per barrel level. With crude benchmarks marking their best quarter in almost 30-years in Q2 due to the recovery from such a low base level, the API inventory report showed US stockpiles shrunk by 8.16m last week. While the API isn’t as much of a market mover as the EIA figures due later today, it gives markets a good indication of what is to come. If confirmed in the EIA data, markets would have seen their first draw in inventories since May and potentially the largest decline in inventories this year, helping to soothe supply concerns and evidence the rebound in demand conditions. The Swedish krona is struggling to match the NOK surge, but still sits marginally higher against both USD and EUR this morning. The Riksbank extended their asset purchasing program this morning, lifting bond purchases by SEK200bn to SEK500bn in total, purchasing bonds until mid-2021, while it also announced that it will start to buy corporate debt from September. This move came early relative to most bank’s expectations, which foresaw this extension being announced at the Riksbank’s September meeting. The Swedish central bank maintained its repo rate projections at 0% for the foreseeable future while verbally reiterating that rates would enter negative territory again should the conditions warrant. The monetary policy report also showed the central bank’s slightly more optimistic outlook for 2020 as its growth forecast was revised up from a drop of 6.9%-9.7% to -4.5%.


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