Rose tinted glasses
It is easy enough to see why the Australian dollar was the top performer overnight. However, to justify the Japanese yen’s place out at the back of the field requires some lateral thinking. Roughly, it boils down to the idea that lockdown is ending and all will be sweetness and light thereafter.
The charitable observer would say that investors, especially equity investors, are taking the long view. They believe the current harsh cycle of pandemic-induced economic contraction will come to an end as restrictions are relaxed and the world gets back to work. Demand and supply will recover together as productive businesses once again put money in their employees’ pockets. Civil unrest in the United States will fade away, China will rethink its clampdown on Hong Kong and Britain will strike a cushy trade deal with Europe. Those – evidently in the minority – who think otherwise believe that US racial tensions, the Sino-US power struggle, a potential no-deal Brexit and social distancing are not merely short-term noise. None of them has a quick or easy solution and to go all-in at this juncture requires a serious suspension of disbelief.
However, it was the optimists who won the day again on Tuesday. Only in Saudi Arabia did share prices fail to make upward progress. The corollary to that was a further move away from safe-haven currencies. The Japanese yen came last for a third consecutive day, falling an average of 1.5% against the majors. America’s dollar and the Swiss franc shared the penultimate slot, down by 0.7%.
Aussie on a roll
From its downward spike in mid-March the Australian dollar has rebounded 23.5% against the US dollar. It continued to press ahead on Tuesday, taking first place and strengthening by an average of 1.4%. Positive sentiment was boosted this morning by the first quarter GDP data.
Australia’s economy contracted by 0.3% in Q1, an achievement that would not normally be a cause for celebration. However, in an environment where peers such as Canada and Switzerland suffered multi-percentage-point contractions over the same three months, -0.3% is a result. The other numbers from Australia were less helpful. Building permits fell 1.8% in April. The AiG construction sector purchasing managers’ index reported a further retreat in May, and Markit found services sector activity “falling substantially further”.
Tuesday’s Bank of England Money and Credit report showed a serious retrenchment in household finances as borrowers repaid a record £7.4 billion in April. Mortgage approvals plunged 72% to 15.8k. Here also, the optimists and pessimists put different slants on the situation. One side sees record savings as “fuelling hopes that consumer spending will rebound”. The other believes “economic fears could reduce spending”.
Services and the BoC
The second chunk of purchasing managers’ index readings, this time for the services sector, comes out today. They are certain to look even less impressive than Monday’s manufacturing PMIs but they might indicate that the nadir has passed.
The Caixin/Markit services PMI from China at 55.0 is likely to be the strongest showing of the day. Three months ago it was 26.5. To put that in context, today’s UK reading for May is forecast to be 28.0, a 14.6-point improvement on April but still not very good. Euroland as a whole is pencilled in at 28.7 for services with the composite at 30.5 while the two services readings from the States are supposed to be 36.9 and 44.0.
The Bank of Canada is expected to keep its target for the overnight rate at 0.25% this afternoon. There may be some news from the UK-EU Brexit negotiations but don’t expect it to be positive for sterling.