Quick Take
The buy-side campaign in the US equity space continues to reverberate in the broader spectrum of FX via a weaker US Dollar across the board, even if this time a poorer performance was observed in the likes of the euro, Swissy and yen. In Europe, the market was disappointed to learn that EU ministers failed to agree on a virus rescue plan.
On the winning side, the Aussie, Kiwi and pound thrived amid the ‘true risk on’ environment in US stocks as the buzzword of a COVID-19 flattening curve, combined with talk of further stimulus and the gradual re-opening of the US economy reinforced the good vibes. A historic stimulus employment package in Australia aided the AUD.
A special mention in the next 24h must be given to the Canadian dollar, which has shown a sluggish performance despite the stabilization in the oil market ahead of Thursday’s OPEC+. The push higher in oil may have more to do with the overall ‘risk on’ sentiment and the fragile USD trend than the optimism for a deal.
The indices show the performance of a particular currency vs G8 FX. A video on how to interpret these indices can be found in the Global Prime’s Research section.
Narratives In Financial Markets
Flat-lining of COVID-19 Curves Aids Equities
Optimism keeps reigning in the markets as further evidence exist, via the daily global aggregation of COVID-19 cases/deaths, that developed countries (especially in Europe) are turning a corner. The flat-lining of COVID-19 curves keeps assisting the main indices in the US equity market (over 20% up from its March trend low). Anthony Fauci, director of the US National Institute of Allergy and Infectious Diseases, even said, as cited by CNBC, that “the start of a turnaround in the fight against the coronavirus could come after this week.”
Re-opening of US Economy Sooner Rather Than Later
Another clear catalyst to keep the positive vibes in the US equity space include plans by Trump to reopen the economy as reported by Bloomberg yesterday, noting that the Trump administration is in the works with an ‘early stage’ plan intended to prioritize the re-activation of the U.S. economy”, with efforts would likely to begin in smaller cities and towns and be extended to bigger cities later (NY, etc). Speaking to Fox News, the President said the administration was “looking at the concept where we open sections of the country and we’re also looking at the concept where you open up everything.
Chatter for Further US Stimulus
There is growing chatter for further US fiscal stimulus. Sectors of the Democratic party are looking to up the coffers of the government with an extra $500b package intended for hospitals and state governments, which adds to the $250b requested by Treasury Secretary Mnuchin for small businesses. This talk is, one would think, supportive for stocks, although this is still early days and detail won’t be fleshed out this week.
A Promising COVID-19 Treatment Gets Fast-Tracked
In an official note, Johns Hopkins announced that the promising prospects of a convalescent serum therapy to treat COVID-19 using blood plasma from recovered patients. If early promising studies on the therapy done in China are confirmed by U.S. trials, thousands of survivors might soon line up to donate their antibody-rich plasma. “I absolutely think this could be the best treatment we have for the next few months,” Hopkins pathologist Aaron Tobian says.
EU Ministers Fail to Agree on virus Rescue Plan
Unlike the improved risk sentiment in the US, European equities were suppressed in comparison after the markets were disappointed to learn that EU ministers failed to agree on a virus rescue plan. Reuters reported that such disagreement between the Southern (NYSE:SO) and Northern countries even “spurred Spain to warn the bloc’s future was on the line if it did not forge a joint response to the crisis.” No wonder that the performance of the Euro was sluggish in the grand scheme of things.
OPEC+ Meeting Is Upon Us, Brace For High Vol.
Ahead of the high-stakes historic OPEC+ meeting tonight, which is going to guarantee high-vol activity in the likes of the CAD, NOK, and oil prices without a shed of a doubt, the latter strengthened. The push higher in oil may have more to do with the overall ‘risk on’ sentiment and the fragile USD trend than the optimism for a deal. It will come down to Saudi Arabia and Russia coming together by agreeing to cut their output conditional to the U.S. playing its part in cutting too.
USD Underperforms as ‘Risk On’ Dominates
One of the flaws of monitoring the standardized USD index, also known as DXY, is that it fails to account for the overall performance of the USD against a broader spectrum of currencies since the EUR is weighted by a factor of 60+%. This issue is addressed by incorporating instead an equally-distributed USD index vs G8 FX. By doing so, one can observe that in index terms, the USD performance was very poor in the last 24, something not reflected via the DXY as the latter attaches too much weight to the EUR performance, weak too on Wed. The AUD and NZD outperformed amid ‘true risk on’ markets.
Careful Management of Containment Measures
It is in the DNA of most politicians, especially if you have a Presidential election to run this year (Trump), that you may want to get ahead of the ‘curve’ by re-opening the economy. But, if scientist recommendations or the experience in China serve as a ‘leading indicator’, the likelihood that normalcy will be back rapidly is simply wishful thinking as a cautious approach to the removal of containment measures is warranted to avoid a second mass wave of infections. We’ve seen this playing out in China, Japan or Singapore where after some relaxation, they had to tighten again. This also applies to Europe, with talks of easing measures only gradual. Bottom line: This is a multi-month risk management exercise with ‘business as usual’ conditional to a vaccine made available or countries can really up their game to a whole new level using Taiwan/South Korean as role models.
Australia Approves $80b Jobs Rescue Package
The Australian parliament passed a record A$130 billion ($80 billion) jobs-rescue plan late Wednesday. “It’s unprecedented in its scale and its scope, and around six million workers should be able to use this program to stay in a job,” Treasurer Josh Frydenberg said in a television interview. The package “will help build that bridge to the recovery on the other side.” All the details in this Bloomberg report. The Australian Dollar cheered the news by spiking into new highs.
FOMC A Non-Event as Widely Expected
Even if quite backward-looking, the FOMC minutes revealed that trading conditions across a range of markets were severely strained. The main highlights included that “a number of primary dealers found it especially difficult to make markets in off-the-run Treasury securities and reported that this segment of the market had ceased to function effectively.” Moreover, it detailed that “all participants viewed the near-term U.S. economic outlook as having deteriorated sharply in recent weeks and as having become profoundly uncertain.” Full text.
Recent Economic Indicators And Events Ahead
Source: Forexfactory
