News & analysis


Sterling is trading mildly lower on the week, after disappointing gross domestic product data set the pound on the defensive and suggested a deeper and potentially longer lasting covid-19 shock to the economy. Yesterday’s labour market data, while better than expected, did little to buoy the pound, due to expectations that future releases will more fully reflect the shock to the economy, especially as the Government’s furlough scheme is wound down. The Bank of England’s Credit Conditions Survey for the second quarter was released yesterday, presenting results from 1st to 19th June – when the economic recovery from lockdown was tentatively beginning. Unsurprisingly, the availability of secured and unsecured credit to households decreased in the three months ended May, and was expected to decrease further. Conversely, supply to corporates had increased and was expected to do so, as a result of the BoE and Treasury’s significant measures to support lending. Interestingly, lenders reported that they expected demand for house purchases and remortgaging was expected to increase in Q3. Evidence from the housing sector is noisey at the moment, but some indicators have suggested housing demand has proven robust, for now. Defaults had not yet increased significantly, but were expected to do so in Q3. BoE Governor Andrew Bailey will speak today at 11:00 BST on a virtual forum. Later today further information on the easing of lockdown is expected from Prime minister Johnson, potentially including further guidance for the re-opening of workplaces.


The euro swiftly seesawed from its 4-month highs to its daily lows after the European Central Bank left its interest rate and asset purchasing programme unchanged. In the press conference following the decision, ECB President Christine Lagarde reiterated that the Pandemic Emergency Purchase Programme will retain its flexibility and that the central bank intends to fully exhaust the package unless the economy recovers sooner than expected. Her comments contrasted with recent signals from her colleagues that the improving economy may mean the QE programme could end before reaching its current cap. Regardless, Italian bond yields fell to their lowest level since March, as Lagarde’s comments gave good grounds for expecting that the ECB isn’t likely to withdraw support any time soon. For today, all eyes are turned to the EU summit that markets have been waiting for all week, but expectations for a breakthrough remain fairly low since negotiations thus far have not led to any agreements. Since the interim negotiations, it was widely known that the frugal four countries (Sweden, Austria, Denmark and the Netherlands) want the recovery fund to be paid out in loans, be smaller in size, and demand more strings attached to the funds. This morning, Dutch Prime Minister Mark Rutte further lowered any expectations of the summit by telling reporters that chances of the EU agreeing on a Covid-19 recovery package at today and tomorrow’s meeting is under 50%. His comments come after stressing earlier this week that there should be stronger conditions tied to the grants, and that a government structure should monitor reforms – a model that is likely to meet fierce opposition from Italy. Today’s meeting could add some downward pressure on the euro if the negotiations stall and members still cannot agree on the details of the fund, while any openness from the frugal four to grants may indicate that a compromise is shaping up, which would bode well for the currency. As today’s meeting is extended through tomorrow, the euro may be in for a surprise at Monday’s open.


It’s been another indecisive week for the dollar, with the Bloomberg dollar index set to fall for a third consecutive week, while roughly half of the G10 currencies are up against the greenback. Some mild but fairly broad dollar strength was seen overnight that has not dented these overall dynamics. Yesterday’s data and news flow was mixed, with weekly jobless claims remaining unprecedentedly high and daily deaths in Florida and Texas reaching fresh records, while monthly retail sales data was ostensibly a positive surprise. Total retail sales were up 7.5% in June, compared to the 5% increase expected and the very healthy 18.2% increase in May. All components apart from sporting goods remained below their pre-Covid peaks. Initial jobless claims were 1.3m last week, essentially unchanged on the week. The extremely high rate of jobless claims remains a unique feature of the Covid-19 recession in the US: during the 2008-2009 recession, the highest weekly job losses were around 600,000 and were not sustained for a period of months as they are now. With domestic outbreaks in several populous US states still so severe that restrictions are unlikely to be eased in the near future, the risk of continued job destruction remains very high. In the geopolitical sphere this has been another week marked by rising US-China tensions, with Donald Trump signing legislation offering further sanctions on Chinese officials involved in Hong Kong’s national security law, and China imposing retaliatory sanctions. These developments were followed by reports overnight that the US is considering a ban on the popular Chinese-owned social networking app TikTok. US social media and tech companies are, in general, banned in China, a development that has arguably assisted the flourishing of domestic giants such as Baidu, Sina Weibo, and others. Building permits and housing starts data will be released at 13:30 BST today, followed at 15:00 by consumer survey data from the University of Michigan.


The Canadian dollar reversed 2/3rd’s of Wednesday’s rally in yesterday’s session, weakening 0.48% against the US dollar. The main catalyst was a deterioration in risk appetite as Covid cases continued to rise in Tokyo, Melbourne and Texas, while new cases in California and Florida remained elevated. Yesterday’s ADP data point showed payrolls increased by 1.042m in June after decreasing by 5.31m in the two-months prior. The data showed a greater impact to Canada’s labour market than initially estimated by the Labour Force Survey, which saw net employment drop by 1.993m in April and actually rise by 289k in May. With the Bank of Canada signalling that rates will remain low until economic slack is absorbed, the importance of labour market data will only increase with time. The only other data of note was that foreigners bought net C$22.41bn of Canadian securities in May – a theme that is likely to extend in the coming months as issuance in bond markets in Canada increases. Today, the data calendar is thin with wholesale trade sales data for May released at 08:30ET.



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