Last week the pound was off by a small amount versus the dollar but is still holding up relatively well with the help of financial markets calming down, outside of oil. But will it last? At some point in the relatively near future probability appears skewed towards markets testing measures recently taken by central banks.
The UK’s strategy and timing for returning the economy to some form of normality will be closely watched. This could be a boon or hindrance for sterling, depending on whether it is felt the government can transition sooner or later than other countries. GBP/USD price action has not given any good indications since the panic plunge and reversal, and so we will continue to take a neutral stance until clearer signalling makes itself available. This week the economic calendar in the UK is light.
The euro remains at risk with uncertainty over the European coronavirus recovery fund. The European Commission indicated commitment to acting, which helped blow some life into the single currency on Friday, but they were not able to agree on details. Nothing new on that front. The next meeting is on May 6th.
We continue to focus on how the market behaves around the massive 35-year trend-line, when re-constructing the euro from its current constituents back to as far as 1975. The 1.0635 level remains a very important level in our book. Weaker German CPI figures are due out on Wednesday and Thursday for the Euro-zone. On Thursday, April German unemployment data is due out, and later in the day the ECB is expected to keep all three key rates unchanged.
EUR/USD 35-yr “line-in-the-sand”
Last week PMI data for manufacturing was a weak 36.9, while the more important services figure was a paltry 27 for March, down from 39.8 in February. Market consensus estimates are finally coming in-line with reality. Another 4.4 million jobs were lost for the week ending April 11, almost matching the Bloomberg analyst estimate of 4.5 million claims. For this past week, the forecast is for 3.5 million new unemployment claims. An improving trend if you can call it that.
On Wednesday, the Fed is expected to keep rates unchanged at 0.25%. Fed chair Powell will speak at 18:30 GMT time. The Fed has come under considerable criticism lately for its support of various parts of the market, namely low-quality corporate debt. The front month (May) WTI crude oil contract tanked to -40 bucks a barrel (not a typo) on Monday, as storage is running out amidst the unprecedented supply/demand shock. Apparently, the Fed cannot backstop oil prices. Right now, the USD price action is wish-washy, we are keeping a close eye on how it trades versus the euro.
The Canadian dollar is interesting because it seemingly has little reason to stay where it currently is given the insanity that is called the oil market. Despite all of it, though, USD/CAD only rallied by a small amount last week before reversing to close in the lower portion of its range. For now, we still hold on to the fact that much long-term damage has been done, and that probability remains skewed towards seeing the highest levels in USD/CAD since the early 2000s. The economic calendar this week is not filled with anything too meaningful.
The Australian dollar continues to hang tough and back our notion that we could continue to see near-term strength as the wash-out in March was tremendous. But this does not change the long-term trend. A rally to 0.67 may unfold in the short run, however we could see that being about as far as AUD/USD gets before it could turn lower again. This is not news to the market, but the Australian economy is falling into a recession for the first time in thirty years. Last week the services PMI was nearly cut in half to 19.6 while manufacturing is only in a modest recession with a PMI reading of 45.6. Nothing too exciting on the Australian economic calendar this week.
Overnight the BoJ kept rates on hold while the central bank said it has no limits on its bond buying activity. The yen rallied small after the announcement, but mostly yawning price action as BoJ intervention has become so routine anymore that one feels they could be reading headlines from a decade ago. USD/JPY has created one its smallest one-month ranges in years relative to its level of volatility. This is likely to give-way soon to a move, but it may only be of the short-term variety as it remains contained within a multi-year range. We expect that to also give-way as well (this year) as FX volatility on the whole has entered a higher volatility regime.