JPY and XAU diverge
After their initial instinct to sell the EUR following the €750 billion recovery package, investors warmed to the single currency, leaving it on average unchanged on the day. They shifted their disenchantment to the USD, which took last place with a 0.9% drop. The AUD won the race with a 0.8% gain.
Although that all looks fairly straightforward, Tuesday was a confusing day for financial markets in more than one way. Whilst it was unsurprising that equity markets – and the “risky” antipodean dollars - reacted positively to the European recovery plan, there was an odd mismatch on the safe-haven side of the equation. The JPY quite reasonably had a worse day than sterling, falling an average of 0.5%, while that more traditional safe haven, gold, went up by 2% against its USD benchmark and by 1.1% against the major currencies. Along the way it touched a nine-year high and the 2011 record is only $65 distant.
There were several contributors to the USD’s softness. One was the general move away from safe-haven currencies. Another was the US president’s prediction that the pandemic in the States will “get worse before it gets better”. The warning was underlined by Trump’s U-turn on face masks, which were previously “unsanitary” but now represent “patriotism”. In Congress there were doubts about the extension of income support measures while the Senate Banking Committee looked likely to approve the appointment of Judy Shelton to the Federal Reserve Board. Ms Shelton is an advocate of the “gold standard” for currencies, a system that was abandoned as unworkable nearly 50 years ago.
After its vaccine-induced rally on Monday, the pound festered yesterday, losing an average of 0.4%. No unhelpful UK ecostats followed the predictably ugly public sector borrowing data but the report on Russian political interference contributed to the general impression that Brexit Britain has not got its act together.
The long-delayed report on possible Russian meddling in referendums and elections gave the impression that the government did not investigate suspicions at the time because it had got the results that it wanted. More generally, an analysis by Bloomberg found that the “risk of a no-deal Brexit is keeping investors away from the UK” and “the differences between European and UK markets are looking starker than ever”.
The only important economic data on Tuesday came from North America. A half-point improvement in the Chicago Fed’s National Activity Index suggested that “economic growth increased further in June”. An 18.7% monthly jump in Canadian retail sales was within arm’s length of the forecast 20% increase. The Loonie was unchanged against the GBP.
Retail sales and inflation
The retail sales data from Australia released overnight showed a provisional 2.4% increase in June. The number fell well short of the forecast 7.1% but did not prevent the Aussie taking first place for the day.
South Africa will also be reporting on retail sales this morning albeit, rather more belatedly, for April. The data are not likely to affect expectations for a rate cut by the South African Reserve Bank tomorrow. After lunch headline Canadian inflation is pencilled in at 0.2% for June, up from May’s -0.4%. A 24.5% rebound is expected for US existing home sales.
Tonight NAB will publish its quarterly survey of Australian business activity. Business confidence is predicted to have improved from -11 to -8 in Q2.