News & analysis


Yesterday, the loonie capped off a four-day consecutive rally reaching levels not seen in over a month as the dollar spent another day generally declining. However, the Canadian dollar struggled to hold onto much of its gains after the US Covid case data was released at around 11:00ET, eventually closing out the day a measly 0.05% higher. The loonie failed to find support from oil prices either as WTI slipped back below $42 on concerns that demand conditions may not be showing strong signs of recovering after all. Oil markets seemingly shrugged off Wednesday’s 4.89m build in inventories, but the 1.4m rise in initial jobless claims in the US hammered home the fears. Oil currently trades just below $41 per barrel this morning with the outlook for a higher price per barrel still clouded as major economies continue to battle with opening back up their economies at the cost of raising new cases. With OPEC+ set to scale back production cuts by 2m barrels per day next month, demand conditions in the market could soon be tested.


The dollar has been teasing market participants this week by trading differently each day. Earlier in the week, the greenback was sold-off across the board, helping nearly every asset class to make gains as domestic Covid cases rose and US-China tensions simmered. However, this morning, despite similar dynamics in play, the dollar is being supported in G10 FX markets along with other traditional havens such as JPY and CHF. Yesterday’s Covid data saw a record number of new cases reported in states such as Alabama and Virginia, with new cases remaining elevated throughout most of the Sunbelt strip. This has led to tightening restrictions in some states. Weekly jobless claims showed their first increase since March last week, rising to above 1.4 million from 1.3 million the week prior. The development is significant as it suggests that the wave of recent restrictions on hospitality and indoor entertainment venues to control the Covid outbreak in the south may have reignited job losses in these sectors. Of the 4.8 million net job increase reported in June, almost 3 million were workers from hospitality, leisure, and retail sectors – exactly those workers most likely to be affected. Elsewhere, the Federal Reserve Board announced an expansion in the counterparties participating in three facilities, the Term Asset-Backed Securities Loan Facility, Secondary Market Corporate Credit Facility, and Commercial Paper Funding Facility. These facilities are aimed at easing credit conditions. Due to dealing with assets collateral that is riskier than the usual sovereign holdings of the Fed, they had to be capitalised by the US Treasury. In other news, US-China trade tensions continue to bubble with China reacting to the closure of its Houston consulate by forcing the US to evacuate its operation in Chengdu. Tensions aren’t being soothed by the US Secretary of State Mike Pompe who called Premier Xi Jinping a “true believer in a bankrupt totalitarian ideology”. The fun doesn’t stop there in the US either as the republican pandemic relief proposal is unlikely to be released until Monday according to officials. Differences within the party about where the money is targeting continue to hold back the fifth round of stimulus, with negotiations between the Republicans and Democrats yet to even begin. Today, the focus will be on US preliminary PMI’s for July and whether the surveying period takes into account the re-imposed containment measures in some US states. All of these issues just add to the Federal Reserve’s plate ahead of next week’s FOMC meeting with markets still toying with the idea of negative rates in the US.


The euro enjoyed another day of broad dollar weakness yesterday as the rise in US jobless claims added to the pile of domestic concerns in the US related to the surge in virus cases and a flare-up in US-Sino tensions. The increase in jobless claims was the first since March and was followed by EURUSD reaching highs not seen since October 2018. The eurozone, on the other hand, continues to gradually open up its economies while also keeping new cases relatively under control.  Italian benchmark bonds recovered their losses since the beginning of their national lockdown, sending yields below 1% for the first time since March. The recovery comes only days after the EU leaders approved a €750bn stimulus package recovery fund in which Italy is set to be its biggest beneficiary, but also on the same day as the launch of a new Eurosceptic party in Italy. Gianluigi Paragone, a Brexit-inspired populist senator and former talk-show host, launched a political party called “No Europe for Italy” and is committed to pulling the nation out of the EU and leaving the shared currency. The EU support from the recovery fund should help to ease concern over Italy’s debt to GDP ratio which was already projected to exceed 150% this year before the government announced an additional €25bn of extra spending this week. Later this morning, markets will get a glimpse at the eurozone recovery with July’s Purchasing Managers’ Indices to be released between 08:15 and 09:00 BST.


Sterling has traded broadly flat against the euro and US dollar over the past 24 hours, but due to Monday’s rally is likely to close the week higher against the greenback. Monthly retail sales data from the Office for National Statistics were released this morning and showed headline retail sales rising by 13.9% in June, significantly more than the 7.9% expected, following a 12.3% increase in May and contractions in April and March. Excluding petrol, retail sales volumes are now 2.4% higher than pre-covid levels. However, although the retail sales boom is welcome, it is not a sign that consumer spending as a whole is anywhere near recovering pre-covid levels. Firstly retail sales comprise some 31% of total household expenditures, with consumer services comprising the lion’s share of the remaining discretionary spend. With UK consumers still facing restrictions to many indoor services, or averse to return en masse to bars and restaurants, the drag to total consumer spending may persist for some time. High-frequency data from sources such as credit card companies suggests that total consumer spending is solidly down on a year on year basis. Another potential factor that flattered May and June sales was a “catch up” effect from consumers delaying purchases of big-ticket items, due to the inconvenience of purchasing them in lockdown. Looking ahead, risks abound for consumer spending as a whole, not least of all from declining household incomes due to higher unemployment. Elsewhere in UK news flow today, face masks became compulsory in a wide range of indoor retail venues today, while yesterday’s main news was a warning from Michel Barnier about the lack of progress in UK-EU trade talks.



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