Commodity currencies bounce back as strong economic data offsets US COVID fears
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6 July 2020
Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.
Risk assets worldwide continue to trade without a clear directional pattern as stocks, credit and oil bounce around current levels.
G10 commodity currencies, notably the Norwegian krone, led the way, joined by Latin American ones like the Colombian peso. The latter had been badly bruised since the pandemic began and it seems like traders are starting to see some value there. The week’s loser was the Russian ruble, down on fresh US sanction jitters and a massive dividend payment from Rosneft.
This week will be relatively quiet in terms of traditional data. Markets will be focused on the daily COVID figures out of the US and high-frequency indicators of economic activity, in particular weekly jobless data.
GBP
Optimism over the progressive easing of lockdown measures in the US outweighed Brexit worries last week, buoying sterling against both the euro and the US dollar. The UK currency ended the week as one of the best performing major currencies.
With a light data calendar on tap for this week, we expect sterling to remain largely range bound. Over the medium-term, however, we expect the pound to perform well as the UK economy continues to rebound and markets become confident that local lockdowns will not have a significant effect on the recovery. So far, the latest economic news, namely the PMIs and retail sales, have been encouraging – we expect this uptrend to continue in the coming weeks.
EUR
Economic data in the Eurozone continue to outperform expectations. The composite PMI of business activity rose more than expected in June, to 48.5. It must be remembered that a number below 50 is historically consistent with continued contraction, but it is likely that the massive swings of the last few months have rendered the absolute levels in this index less informative. We will have to wait for production and sales numbers for June to be released to get a clearer picture of the state of the recovery.
As we expected, the German parliament backed the ECB in its dispute with German constitutional judges, and peripheral spreads continue to come down in response to these developments. A series of high level political meetings (Eurogroup and ECOFIN) are likely to boost this optimism further this week, and we see scope for a euro rally.
USD
The June payroll report delivered another positive surprise to markets. June saw the recovery of another 4.8 million jobs, well above expectations, and the May number was revised upward to 2.7 million. Optimism about these numbers were somewhat tempered by the fact that the surveys are completed mid-month, and therefore do not reflect yet the rise in infection numbers and reversal of reopening measures in some states later in the month
Figure 1: US Nonfarm Payrolls (2017 – 2020)
Source: Refinitiv Datastream Date: 06/07/2020
We have not seen the US dollar react strongly to adverse trends in US COVID contagion yet. The interplay between the dollar’s dual roles as a safe-haven and indicator of the health of the US economy will surely dominate trading as we go into the summer months.
🔊 Listen to our latest FX talk episode on Spotify where our analysts discuss the increase in global economic data, the US labor market, and the upcoming non-farm payrolls report.
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