It’s been an indecisive week for G10 FX, with the major pairs remaining within recent trading ranges as hopes for US fiscal stimulus faded and several regions continued to report worsening Covid-19 pandemics.
Sterling will be in focus next week, with plenty of MPC member speeches and labour market data scheduled ahead of Thursday’s potentially fateful EU summit.
In addition to this week’s review of data, geopolitics, and central banks, we have taken an in-depth look at the recent uptick in Covid019 cases worldwide, and considered the impact of renewed containment measures on markets and regional economies.
Brexit continues to contribute to GBPUSD volatility
Canada and the US will enjoy public holidays, with a smattering of light data releases elsewhere. The Bank of England’s Jonathan Haskel will speak about the economic impact of COVID-19 at 15:00 BST. The speech comes after Friday’s reading of August gross domestic product in the UK fell well short of expectations, growing at a 2.1% rate that was less than half of the median forecast submitted to Bloomberg. Half of this already meager growth was in the food and accommodation categories and likely a direct result of the Government’s Eat out to Help Out scheme, which has now been discontinued. August’s poor performance now means that for the economy to meet the MPC’s most recent forecast for Q3, GDP would need to grow an implausible 10% in September. BoE Governor Andrew Bailey will speak at 17:00, but given it will be at a Citizen’s Panel Open Forum, discussion may not turn to practical monetary policy considerations.
UK labor market data will be released at 07:00 BST, adding further colour to the concerning picture painted by last week’s August GDP release. The key headline UK jobs releases are highly lagged, with the ILO Unemployment Rate representing an average of the three months ended August in this instance. As such, the full rise in unemployment that is likely to result from the economic slowdown this year will not be reflected in the release, due to Government furlough support. However, claimant count and jobless claims data for September will be available – and is likely to show the effects of August’s slowing economic recovery.
At 08:30 BST, Swedish core inflation is expected to come in at 1.2% compared to the prior 1.4%, while the headline inflation is set to print at 0.6% in September vs the prior 0.7%, according to the median forecast submitted by Bloomberg. The recent strengthening of the Swedish krone has further weighed on the already weak inflation outlook, but the Riksbank mentioned renewed virus uncertainties domestically and among trading partner. This will likely keep the bank on a dovish footing. The central bank’s inflation target stands at 2%, and the Riksbank mentioned that it will let inflation overshoot the target if a period of low price increases occur beforehand, before the central bank starts tweaking its monetary policy. However, disappointing inflation rates mean that a rate cut cannot be ruled out in the foreseeable future completely.
At 10:00 the German ZEW expectations index is set to print at 72.5 compared to September’s 20-year high of 77.4, according to the median forecast submitted to Bloomberg. The current situation index is expected to print at -63.0, a minor improvement from September’s -66.0. The ZEW index will be the first datapoint released that covers the period of October. Data from the past two months may not paint an accurate picture of where the index is headed, considering that Germany has seen a resurgence in virus cases over the past couple of weeks, which may dilute expectations for a speedy economic recovery. In August and September, Germany was the one country in the eurozone which managed to keep the virus situation somewhat under control while other countries grappled with resurgences. This month however, new cases in Germany exceeded 4,000 for the first time since April. It is worth noting that the ZEW survey represents the opinions of economists and can does not contain data on real economic activity, but given the renewed virus risks and the fact that the index already hit a 20-year high last month, the data release is unlikely to surprise to the upside.
At 11:00 BST, the National Federation of Independent Businesses will release its latest survey results in this US, including widely watched indices on sentiment and hiring intentions. At 13:00 BST, official US inflation data will be released.
Although US inflation data will be released at 13:30 BST, for sterling the day will kick off with a speech from the Bank of England’s Andy Haldane at 14:00 BST. Haldane warned of the risks of “contagious pessimism” in another recent speech, but has taken a rather upbeat tone on the UK economy that may be difficult to reconcile with last week’s August GDP release. A spate of FOMC speakers dot the afternoon and evening including Clarida, Quarles, and Kaplan. However, a speech from the Reserve Bank of Australia’s Governor Philip Lowe at 22:45 BST may be of more consequence for markets. Lowe has previously built something of a reputation as perhaps the most hawkish G10 central bank governor, arguing strongly against negative rates and repeatedly saying that there are limits to what monetary policy can do. However, a recent speech from his Deputy Guy Debelle and official RBA statements suggest the central bank is considering how to further support the Australian economy. Lowe now has an opportunity to set out his views in light of this week’s generous federal budget, which included some $26bn in capital expenditure tax rebates and $13bn of additional tax cuts.
Monthly labour market data for Australia will be released at 01:30 BST, meaning that between this and the previous night’s speech from RBA governor Low, AUD will have a busy few hours as markets digest the likelihood of further easing from the central bank this year. The day’s main event, however, will be the beginning of an EU Summit that will cover the issue of trade negotiations with the UK. The summit has previously been viewed as something of a deadline – including by Boris Johnson, although the UK Prime Minister has recently softened his tone on this issue and talks may continue beyond the summit. This week’s negotiations have concluded without a breakthrough, although the chief negotiators for the UK and EU made positive statements this week. Michel Barnier said he would appeal to EU leaders directly for compromises in fishing rights, while David Frost said that the UK was willing to discuss state-aid commitments that “go further than you normally do in a free trade agreement”. Managing the political appearance of a deal is important to both sides, particularly the UK – so an EU concession on fisheries may give Boris Johnson the leeway to make necessary concessions on state aid. In addition to ongoing talks between Michel Barnier and David Frost, a direct high-level channel is now open between Boris Johnson and European Commission president Ursula von der Leyen. These developments reinforce our view that the likeliest outcome is a free trade deal by the end of October, but although talks are likely to continue up until the summit, a lack of a breakthrough may mean they are extended past next week. If no breakthrough is achieved by the summit, Boris Johnson may use the opportunity to make further threats of leaving negotiations – as recent price action has shown, such developments are still able to drive sterling volatility. Survey indices will be released by the Philadelphia and New York Federal Reserves at 13:30 BST, with the former showing a slight dip in its last reading. Weekly initial jobless claims will also be released at this time.
Eurozone CPI releases usually have a muted impact on the euro itself, due to the insensitivity of the ECB’s reaction function. However, if the final reading of September’s core CPI at 10:00 BST contains downwards revisions to the already significant 0.3% year on year contracted reported in preliminary data, eyebrows at the ECB may finally be raised. The EU summit will continue today, with headlines and market volatility possible depending on how well – or poorly – negotiations earlier in the week went. The US data calendar is busy in the afternoon, with the advance reading of September’s official retail sales figures due at 13:30 BST. August’s report showed a dramatic slowdown in consumer spending growth, and with the effects of fiscal stimulus waning September’s report will be watched for any signs of stagnation or even contraction. Categories that registered falls in August’s report, such as sporting goods and department stores will also be worth keeping an eye on for further declines.
Covid cases on the rise
During the summer months as economies re-opened for business, markets became less concerned about the incoming case count data and focused more heavily on the level of fiscal stimulus.
However, over the last few weeks, rising cases in Europe and Canada suggests the market’s focus is likely to revert back to the domestic outbreaks, containment responses, and what this means for their respective economic recoveries.
The situation in the UK has rapidly deteriorated with record new cases of Covid-19 being reported on a daily basis. While it is common knowledge that this spike in new confirmed cases is predominantly isolated to younger demographics, who are less susceptible to severe medical consequences, the recent spike has resulted in more than a quarter of the population becoming subject to tighter lockdown measures. These localised measures have been the response of choice by authorities and generally pertain to limiting the contact between households with exceptions for work and schooling. However, with cases still rising despite the imposition of localised measures and the positive test rate also etching higher, meaning rising the rising case count isn’t due to increased testing, speculation over more extensive lockdown measures has risen.
The most covered option in media outlets is the possibility of a “circuit breaker” style lockdown that coincides with the October school two-week holiday at the end of the month.
This is a short but extreme lockdown measure designed to have a sharp impact on breaking the chain of transmission by effectively placing the whole nation in a self-isolated state. While the jury is out over what measures the UK government will actually enact, with the most likely a traffic light system for local lockdown measures, one thing is almost certain – additional containment policies are an inevitability now and pose downside risks to the UK economy’s recovery.
Additional localised lockdown measures implemented:
- Leicester – additional lockdown measures have been in play in Leicester since the 29th While the local measures have been eased somewhat since their imposition, households are still not allowed to mix in indoor areas, while the re-opening of certain industries took longer than elsewhere nationally.
- Wales – 2/3rdsof the population of Wales are now living under additional measures. Under these measures, inter-regional movement is restricted, while households are not allowed to meet indoors unless they are extended households.
- Scotland – “circuit breaker” policy for late October under review by Nicola Sturgeon. From October 9th – 25th, pubs and cafes are banned from serving alcohol indoors, and are shut to all but takeaway customer in five health board areas including Glasgow. Indoor hospitality venues selling food and non-alcoholic drinks are now only allowed to operate between 6am and 6pm. Citizens are urged not to travel beyond their health boards, while public transport isn’t advised unless absolutely necessary.
- Newcastle – beginning on Friday 18th September, households aren’t allowed to meet in each other’s place of residence. On September 30th, this was tightened further with residents not allowed to socialise with others outside of their household or support bubbles in indoor areas such as pubs and restaurants. Public transport is only to be used for essential purposes.
- Birmingham – since September 5th households have been banned from meeting unless within the same support bubble.
- Manchester – households are banned from socializing indoors or in gardens. Stricter lockdown measures in parts of greater Manchester have been in place since the end of July.
- Bolton – since September 8th households have been banned from meeting unless within the same support bubble, while pubs and restaurants are restricted to takeaway service.
Heat map shows rising case counts in the North of England, where local measures were implemented, and parts of London
Figure 11 of the Public Health England Covid-19 Surveillance Report Week 40
Weekly rate of Covid-19 cases per 100,000 population tested under Pillar 1 and 2, by upper-tier local authority, England (box shows enlarged map of London area).
Financial markets are yet to display the consequences of the UK slowly moving into more restrictive lockdown measures. Sterling’s focus has been centered more on Brexit negotiations, while the front-end of the gilt curve continues to sit in negative territory. Arguably, this is because fiscal policy has played an active role in offsetting some of the economic damage inflicted by the tightening of containment measures. To avoid a cliff-edge exit for the labour market once the furlough scheme expired at the end of October, the Chancellor of the Exchequer, Rishi Sunak, announced a winter plan which included the job support scheme. Under such a scheme, the government will pay up to 22% of workers’ wages who continue to work at least 33% of their usual hours. In addition, further VAT cuts were announced for the hospitality sector. However, with tightening lockdown measures being imposed in the north of the UK, it is likely that the government’s purse will be opened yet again. Friday’s papers reported that Sunak is to announce a local furlough scheme for areas impacted by more restrictive measures, likely in the coming days.
The Covid situation in the UK rapidly deteriorates as new cases explode despite a stable testing rate
However, as seen in areas like Leicester and Birmingham, the path to an exit from local lockdown measures isn’t clear.
With restrictions set to tighten in the foreseeable future, this remains a concerning factor for the path of the UK’s economic recovery.
Goldman Sachs estimates that the current lockdown measures already weigh on economic activity by around 10% relative to pre-pandemic levels, which will only increase towards the -30% estimate seen during the full national lockdown implemented in Q2. Given this incoming dynamic, the focus for the pound may quickly jump back to tracking lockdown measures and the corresponding impact they have on the economic recovery. The likelihood of lockdown measures becoming a prominent driver for GBPUSD rose substantially after August’s GDP reading signaled the UK economy was some 9.2% off pre-pandemic levels, while the month-on-month reading of 2.1% came in substantially below economists’ expectations of 4.6%.
After a summer of seemingly effective pandemic management, the eurozone has seen a sharp increase in the daily rate of infections over recent weeks. While the rise in reported cases is partly due to increased testing across all countries, data has revealed a new wave of contagion after the stringency of containment measures was relaxed during the summer. Measures in place after the lockdown phase were gradually aimed at averting a major collapse of economic activity while keeping the death toll from the pandemic in check. Results were fairly constructive: the death rate remained low on average despite rising infections, while economic activity has shown a strong rebound. As the virus advances into the winter season, however, governments are increasingly concerned about the threat of additional pressure on health care infrastructure. Most countries are again considering new restrictions, which pose challenges to the expected economic recovery by the end of the year.
The euro remains broadly supported on a relatively robust policy backdrop but hints of new restrictions on the way threatens to derail the currency towards the year-end, as downside risks to the growth outlook materialise.
France and Spain paint the most concerning picture of contagion in the area…
Even though the death toll is nowhere near the situation seen during the initial peak of the pandemic, the cases count has increased to severely high levels. France has almost tripled the number of daily new cases with respect to the highest record in the first wave, while the level of testing has dropped 1.4 times over the last month. Spain has also exceeded the peak of reported infections from the initial outbreak, with twice the level of testing leading to 145% more cases by the end of September. Daily infections in Spain remain high despite having moderated in recent weeks. Paris closed all bars from October 6th for two weeks, while restaurants and food-serving bars will stay open until 22:00 and customers will need to register personal data. This rule applies to other 11 cities. WFH has been reinstated as a rule of thumb and university classrooms in Paris are limited to half-capacity. Private gatherings of 10 only are permitted and outdoors facemask wearing is compulsory. On Friday, France extended the maximum state of alert to Lyon, Lille and Grenoble in addition to Paris and Marseille. In Spain, bars and restaurants can stay open until 22:00 and all services have had to reduce the number of customers allowed at once. Private and public social gatherings are limited to six people and facemask are mandatory all over the country. The Spanish government imposed a new lockdown in the capital and nine surrounding towns, in contradiction to the wishes of local authorities. After the Supreme Court sanctioned the measure, the government moved quickly to declare the state of emergency in the capital, which could affect mobility of nearly five million people.
The situation in Germany and Italy seems milder…
With daily infections still way below the April peak amid 2.8 and 1.4 times higher testing rates respectively. However, the increasing trend of infections is concerning. In Berlin, which is among the cities with the steepest rise of infections within the country, bars and restaurants will have to close at 23:00 from October 10th. Private gatherings will be limited to 10 people and public reunions at night will be permitted for 5 members of two households only. For the rest of the country, public gatherings will be limited to 50 people and private ones, to 25. People are asked to leave identity information at restaurants and bars and they also face fines for breaching mask wearing in shops and public transport. People arriving from high-risk countries are compelled to be tested at airports and from September 30th on they also have to isolate for two weeks. In Italy, all dance venues and nightclubs have been shut down and facemask wearing in public and private places other than home is now mandatory.
New measures have already slowed the speed of economic recovery in most areas, with the services sectors particularly affected. PMIs signal the most severe impact for French and Spanish services towards the final quarter of the year, while German manufacturing remains a silver lining. In recent presentations, Christine Lagarde has yet again highlighted the need for domestic governments to avoid dropping fiscal stimulus. This warning points to a potential revision of economic projections to the downside, with recent measures threatening a hit of almost 6% of GDP growth. Markets are already mulling the prospect of additional monetary stimulus by the ECB. The latest meeting minutes revealed that the Bank remains committed to exhausting the entire current limit of its PEPP program, leaving room for expansion if deemed necessary.
Similar to that seen in Europe, the level of Canada’s new cases and positive test rate has begun to rise. Much of the resurgence has been isolated in the region of Quebec. In response to this development, the Quebec premier has placed parts of the region, designated “red zones”, into a mandatory 28-day lockdown. The red-zones include major cities Montreal and Quebec City, as well as parts of the Chaudiere-Appalaches region. Under the 28-day lockdown, private gatherings are prohibited and restaurants, bars, cinemas, theatres and museums are being forced to close. Additionally, pupils and staff within schools inside the red zones are required to wear face masks at all times when on school grounds. The measures were announced by Premier Legault on Tuesday 29th of September at a time when new cases were averaging between 750 and 900 each day. With Ontario posting 797 new cases on October 8th, the focus now turns to Premier Ford and whether the province including the previous epicenter, Toronto, will be placed under stricter lockdown measures.
Daily new cases in Alberta, Ontario and Quebec
Given the resurgence in new cases is currently isolated to the provinces of Quebec, Ontario, and to a lesser extent Alberta, the prospects of a nationwide lockdown are slim at present. Stricter lockdown measures put in place in these regions support the Bank of Canada’s view for the economic recovery in the coming months. That is, growth is set to be choppy and less even – presumably in both a sectoral and geographic sense. However, recent stimulus measures implemented by the Trudeau administration are likely to have offset any market impact. The latest policies saw the unemployment benefit rise from C$400 to C$500 per week along with access to a national paid sick-leave scheme which pays out C$500 per week for a fortnight should one test positive.
For now, Canada’s economic recovery has proven to be robust with output sitting at around 95% of February’s levels in August. The latest fiscal measures should support the recovery through the next month or so despite the tighter containment conditions in Quebec, while rumours of a rent subsidy programme may even offset the damage imposed by a tightening of measures in Ontario. Given this, the loonie is likely to continue trading unaffected by domestic Covid conditions. However, should more provinces announce a tightening of lockdown measures, or the 28-day containment policy prove ineffective in Quebec, the Canadian dollar is likely to refocus on domestic conditions and what it means for Canada’s growth outlook.
The US has also seen a recent uptick in infection cases, even though the situation seems more controlled compared to the summer and to other regions. From previously lagging its European peers in the control of the pandemic, the gap of contagion over the last few weeks has considerably narrowed since the summer, although with a moderately lower level of testing. The state of New York is again the main focus in the country, with the 14-day change of new reported cases increasing by an 80%. While all the regions in the state remain under phase 4 of reopening and no relevant new measures have been imposed, the risks to a sharp rise of infections are increasingly higher. Markets have failed to place major attention on the topic as the number of deaths remains almost muted compared to Q2, but history is likely to repeat itself should no new measures be put in place soon enough. Other dominant narratives are keeping markets busy at the moment, with the US elections and intense talks over the next round of stimulus relief underpinning the price action across all asset classes.
The dollar has traded broadly range-bound since August, with risk-off moves mainly triggered by the political uncertainty pervading markets at the moment.
Trump’s Covid infection spooked markets on fears the election campaign would be derailed, adding to already high tensions over a highly contested election. The lack of agreement over the fiscal stimulus package, on the other hand, poses major risks to financial stability as the economic impact of the pandemic filters through. The estimated GDP drag from restrictions currently in place is in the 5%-6% range, along the lines of the expected impact in the Euro area. However, with a lower level of stringency implemented and higher risks of a lagged outbreak in the US, the risks to a higher damage to the economic activity are tilted to the upside. The Fed continues to evaluate the economic outlook as unprecedentedly uncertain, while extra QE tools remain the rule of thumb should the fiscal aid be delayed further–most likely until after the elections. Risks to the USD on the back of a looser Fed stance and restricted fiscal policy are mixed, since risks to US and global growth are heavily contingent on the outcome of the upcoming US elections.
Ranko Berich, Head of Market Analysis
Simon Harvey, FX Market Analyst
Olivia Alvarez Mendez, FX Market Analyst
Ima Sammani, FX Market Analyst