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Oil rally buoys crude exporting currencies

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22 June 2020

Written by
Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.

The rally in risk assets resumed last week, albeit more slowly and amid choppy two-way trading.

O
il prices did, however, break away from the pack, with crude up 10% for the week. Not surprisingly, the week’s top performing currencies were the Russian ruble and the Colombian peso, whose economies are highly dependent on energy exports. On the weak side, sterling underperformed all other G10 currencies, as fears of a hard Brexit continue to hound the British currency.

Oil tanker

This week we will get the critical PMIs of business activity for June in the Eurozone, the US and the UK. These are the most reliable advance indicators of the state of the economy. In the past few weeks, economic data has tended to surprise to the upside. We expect that trend to continue, and it is likely that some indices will break back up above the key 50 level that indicates a return to economic expansion.

GBP

Economic news last week out of the UK was generally better-than-expected. Unemployment rose less than feared, and retail sales ex-auto and fuel rose by 10% versus expectations for a 5% gain.
Meanwhile, the Bank of England left interest rates on hold and increased the QE target by an additional £100 billion to £745 billion, with just one dissenting vote. The pound, however, failed to rally in spite of these supportive circumstances, with both the size of the programme and pace of future purchases falling short of some investor’s expectations. It seems that traders are also becoming a bit nervous about the lack of progress in the Brexit negotiations with the European Union, particularly given that the UK government has now ruled out asking for an extension to the transition period.

EUR

There was not a lot of economic news out of the Eurozone last week. On the positive side, COVID-19 cases continue to trend down in the continent as a whole, a marked contrast to the situation in the US. Eurozone banks also took up more TLTRO III cheap loans from the ECB than was expected. This is another sign pointing in the right direction, as it indicates banks are more optimistic regarding the demand for credit.

We think there is potential for another upside surprise in the Eurozone June PMIs, out this week. If so, and the gap in new COVID cases with the US persists, we may well see the euro rally start the next leg higher.

USD

US economic data turned more mixed last week. Retail sales for May were much better-than-expected, rebounding twice as fast as expected from April’s dismal reading. However, the more timely weekly jobless claims were slightly disappointing. Another 1.5 million workers filed for unemployment benefits, and the number collecting benefits stayed above 20 million.

Perhaps more ominous is the upward trend in new COVID cases in many states, such as California, Texas and Florida, where the contagion curve is on the upswing and the number of new cases regularly hits records. We expect that the gap between these figures and the more encouraging ones out of the Eurozone (Figure 1) should be supportive of the common currency in the coming weeks.

Figure 1: New Daily COVID-19 Cases [US vs. Big 4 Euro Area] (March ‘20 – June ‘20)

New Daily COVID-19 Cases [US vs. Big 4 Euro Area] (March ‘20 - June ‘20)

Source: Refinitiv Datastream Date: 22/06/2020

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