The USD is trading somewhat directionless with a slight weakening bias, primarily against the G10 currencies. Continued concerns of more COVID-19 hotspots breaking out, increasing mortality rates, and localized lockdowns could hurt confidence that has been building and that this will slow the US recovery. The market hates uncertainty (especially ahead of elections) and thus appears to be weighing somewhat on the USD. The market's appetite to take on more risk combined with summer trading conditions is likely impacting currencies as well. This week, watch for the GOP Phase 4 proposal for stimulus and negotiations with Democrats. Any surprise on the overall stimulus size, unemployment benefits, and signs of progress in bipartisan talks could potentially be supportive, but prolonged discussions and further uncertainty coupled with political bickering could impact the USD. In terms of data, the fx market will be watching sentiment indicators for July, as they begin to incorporate the increase in COVID-19 cases we have experienced in some regions lately. Consumer confidence surprised at the downside last time so it will be interesting to gauge market reaction this week. The all-important manufacturing numbers and services in July (released on Friday) could be impacted by renewed hot spot reporting & concerns, although consensus expects them to improve from June. Other data releases include home price index, existing and new home sales.
With EU leaders still in discussions at the EU Summit, any material EUR reaction could happen once we gain more insight into these talks. There have been several press reports out this morning noting that a deal is imminent, with continued negotiations scheduled for later today. The questions will be around size, split, location, and monitoring of the recovery fund. The question now is has the “deal” been fully priced into the market? Angela Merkel’s eagerness to reach meaningful progress before the summer recess is also encouraging and could help the momentum of the deal. The market will be the final sentiment indicator and will likely quickly move on to the operational aspects of the agreement that will take months to work out. Provided the deal signals to the market that ECB support is strong, and the risk of a European break-up is remote, it will have achieved its goal. Any deal announcement coupled with summer trading conditions will likely mean continued volatility in the near term.
The market could see a neutral reaction if no significant progress comes out of the latest EU Summit. The UK and the EU start the fifth round of negotiations this week. The market is calling for a deal to be reached before year-end, so any material progress early on could give the market increased volatility. If we see increased and material negotiations in July that focuses on trade in goods, and maybe visa-free travel, that could pave the way for continue and substantial progress. This coming Friday has several releases; flash July PMIs, consumer confidence, and retail sales which should give us some near term direction.
USDJPY seems to be stuck between the spread of COVID-19 infections and headlines around vaccine developments and has remained in a range. In Japan, new COVID-19 infections are moving higher in Tokyo and the governor has raised the city’s alert to the highest level. The market does not seem to be expecting another emergency declaration, however, the Nikkei continues to stay supported and any impact to USD/JPY has been muted. With national holidays in Japan on 23-24 July, we will likely see the fx stay in a range and somewhat lacking conviction.
Bank of Canada left the policy rate unchanged last week, which was what the market was expecting. The BOC introduced two (maybe material?) changes in its communication, explicitly acknowledging the LSAPs program as QE and providing forward guidance on interest rates by stating that they will stay at the effective lower bound 'until economic slack is absorbed so that the two percent inflation target is sustainably achieved'. USD/CAD moved in line with higher oil prices early in the week but retraced part of its gains post-BoC. Short term, CAD seems tied to market moves in risk sentiment, especially with the spike in COVID-19 cases in the US. In the medium term, the focus may change as lockdown restrictions have been eased without a spike in cases and Canada’s healthcare infrastructure could provide greater economic resilience in the post-COVID world.
The Mexican Peso continues to trade around its recent range, broadly following the volatility in global risk sentiment. With summer trading conditions, local interest rates could dominate price action in the near term. Some economic numbers to watch this week with inflation (Thursday), and the economic activity index (Friday). Banxico’s governor Diaz de Leon reiterated his concerns on potential capital outflows exacerbated by interest rate cuts. Holdings by foreign investors have been on a steady decline since the beginning of the crisis and currently stand below 50% of total outstanding holdings for the first time since 2012.
While the positive recovery momentum seems supportive of CNY, the dampening in Chinese (local) equities sentiment following continued US-China tensions may warrant some caution. The above consensus 2Q GDP and June data did not help the market as the numbers would have suggested. US-China tensions increased on expectations of retaliatory sanctions around issues in Xinjiang, Hong Kong, and the South China Sea which will likely give us some near term direction on market direction. FX settlement data for June showed that the exporter conversion ratio dropped in June for the first time since the beginning of the year. This may indicate that exporters are not looking for significant moves from current levels.