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Improving risk appetite saw the dollar lose ground comprehensively last week for the second week in a row, with stronger economic data and more stimulus measures causing markets to speculate that the bottom has now been seen in the coronavirus crisis. In particular the strength of the US jobs report on Friday caused equity markets to rally strongly, bonds to weaken and the yield curve to steepen. Oil prices also recovered strongly with Brent moving above USD40pb another sign that all the pieces are coming together in a broadening recovery, with talk of a V shaped recovery in the US gaining more support. However, there are still many headwinds, and economies have a long way to go before they are anywhere near back to normal, requiring monetary policy accommodation and fiscal support to remain in place for some time before markets can truly relax.
The main positive catalyst for markets was the May employment report which saw the US labour market unexpectedly add 2.5 million jobs and the unemployment rate fall to 13.3% from 14.7% in April. The market consensus had been for further job losses of over 7.5 million, so the fact that employers started rehiring in the midst of the pandemic is a very positive sign for what will happen as the incidence of coronavirus continues to ebb, and as restrictions are eased. Survey evidence from the ISM and global PMI data also supported the view that economic activity probably bottomed out globally in April. Nonetheless it is important not to lose sight of the fact that there were still 21 million people unemployed in May, and that unemployment claims stood at 21.5 million in the latest week. It will clearly take a very long time to get all of these people back to work, and the process is unlikely to be straightforward. However, the optimism provided amidst the gloom of ongoing protests across the US was clearly a very welcome tonic for markets, reinforcing the downward trend in the USD that had been underway most of the week.
The FOMC meeting will be the highlight in the coming week with the Fed likely to highlight that rates will stay low for a long time, but with Chair Powell also likely to strike a slightly more optimistic note. The Fed will probably refrain from publishing targets for bond yields for the time being following speculation that that yield curve targeting could be its next policy step, and it will probably also hold back from announcing a new round of asset purchases.
On its DXY measure the dollar declined significantly, briefly dropping to as low as 96.442 before finishing the week at 96.952, falling by as much as 1.42% over the week as a whole. The only exception to USD losses was USDJPY which increased by over 1.63% for the week, also consistent with improving risk appetite. The currency pair looked to test the 110 area but met resistance at 109.85 to finish at 109.59, well above the 200-day moving average of 108.42.
The Euro continued its positive form last week, at one point reaching its longest rally since 2011. The currency reached highs of 1.1384 following the dollar's weakness, meeting resistance here before falling back to 1.1292, marking an increase of 1.71% over the week as a whole. The EUR was also supported by the ECB which increased the Pandemic Emergency Purchase Program (PEPP) by €600 billion, raising the total size of the program to €1.35 trillion. The timeline for the PEPP was also extended to June 2021 from December 2021, and maturing PEPP holdings would be reinvested until at least the end of 2022, and longer if necessary.
Following on the back of the EU Commission’s EUR750bn fiscal stimulus plan the previous week, and Germany’s fresh fiscal stimulus announced last week, the impression is growing that the EU is finally getting its act together and becoming more coordinated in both monetary policy and fiscal policy, which is constructive for more sustainable EUR gains going forward. Preliminary data for May suggest the Eurozone economy is also starting to stabilize a little as re-openings across the region continue, but economic activity overall remains very weak and a full recovery will take many months if not years. The ECB downgraded its growth forecast sharply to -8.7% in 2020 before seeing a rebound of 5.2% in 2021, and 3.3% growth in 2022, and ECB President Lagarde’s is likely to highlight the challenges ahead in her testimony to the EU parliament on Monday.
Sterling also experienced big gains last week, advancing by 2.63% to finish the week at 1.2668, despite a lack of clear progress in Brexit talks. However, there was news on Friday that the current round of UK-EU trade negotiations would continue which did help the pound to firm. The Brexit talks are at a critical point before the July 1st deadline over whether the UK can extend its post-Brexit access to the EU's customs union and single market beyond the end of this year. The BoE last week reportedly warned UK banks to be ready for a no-deal Brexit, but it seems likely that both sides will continue playing hardball all the way to July 1st, which should keep GBP volatile in that period.
Finally commodity currencies like the AUD had tremendous gains for the week, briefly breaching the 0.7000 mark, but finishing the week at 0.6969, an increase of 4.52%. The NZD was similarly positive, increasing by 4.87% to finish at 0.6507, while the CAD and the NOK, both heavily dependent on oil also had strong gains rising by 2.67% and 4.35% respectively.
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Source: Bloomberg
Emirates NBD Research