Sterling weakened against both the euro and US dollar yesterday and has not managed to regain a significant portion of its losses against either currency overnight. A renewed deadlock in Brexit negotiations and mixed data have been the two main news themes of the week. Michel Barnier’s comments yesterday about stalled negotiations and “tensions” between the two parties may have contributed to yesterday’s setbacks for the pound. Yesterday’s data included a strong 58.8 reading for the Services Purchasing Managers’ Index, which nonetheless contained some concerning details about poor job retention. This morning, the equivalent index for the construction industry will be released at 09:30 BST.
The single currency continued its fall from grace in yesterday’s session, marking a three-day decline against the dollar. The euro came under pressure despite French President Emmanuel Macron unveiling a €100bn fiscal stimulus bill, which earmarks €35bn to make the economy more competitive, €30bn for investment in environmentally friendly energy projects and €25bn to support jobs. However, the double whammy of ECB speakers warning about the strength of the euro and the slip in August’s PMIs in Italy and Spain was enough to help the euro on its road of retracement. The euro’s momentum downwards is seemingly slowing of late, however, with EURUSD sitting only 0.04% lower this morning. This morning, French Finance Minister Bruno Le Maire stated that the fiscal package could be extended past the €100bn mark as the government is ready to extend its furlough scheme. Data released at 07:00 BST highlighted that the recovery in Germany’s manufacturing sector began to lose steam in July as factory orders rose 2.8% MoM, below expectations of a 5% rise, while the German construction PMI for August also slumped from 49.7 to 48.0. There is limited data scheduled in the European calendar for the rest of today, meaning the focus will be on US Nonfarm Payroll data released this afternoon.
The US dollar continued to rally against many major partners yesterday, and the weighted dollar index DXY is on track for only its second weekly gain since June despite the greenback paring back some of its gains overnight. US equities fell sharply yesterday, with the S&P 500 retreating more than 4%, having recently reached record highs, and the Nasdaq 100 dropping more than 5%. The losses come in the context of massive rallied in major equity indices from March’s lows – for example, S&P 500 had gained around 60% from March’s lows. Federal Reserve policymakers Raphael Bostic and Charles Evans spoke yesterday and seemed to downplay the prospect of major easing, or enhanced forward guidance beyond that offered by the recent changes to the Fed’s long-run statement, at this month’s Federal Open Market Committee meeting. Evans emphasized the level of uncertainty facing policymakers, while Bostic said that he didn’t think there was a lot of uncertainty about the Fed’s commitment to supporting the economy – implying perhaps that strengthened forward guidance was not necessary. Weekly unemployment claims fell to under 900,000 according to data released yesterday, while non-farm productivity rose 10% in the first quarter – a mechanical consequence of a rapid fall in hours worked. Today at 13:30 BST, August’s official non-farm payrolls report will be released. US jobs figures are arguably the most important regular data release during ordinary times, but take on additional significance given the uncertainty about the amount of scarring the US labour market has suffered from the coronavirus pandemic. The median forecast submitted to Bloomberg is for the net addition of 1.35m jobs, with forecasts distributed very widely around this number.
The loonie fell 0.65% in yesterday’s session as the dollar broadly rebounded against the G10. The Canadian dollar’s slump wasn’t unusual as it saw the currency sit between sterling and the high beta G10 currencies such as NOK and AUD. This is a normal trading pattern for the loonie, which enjoys relative comfort trading within this middle ground in the G10 pack. A general deterioration in the markets risk appetite could be attributed to the move as all of the traditional risk-on indicators flashed red; WTI fell as low as $40.22 before closing at $41.37, both US and Canadian equity indices closed in the red, but gold also closed lower. The move in gold suggests that the market’s appetite for prolonging the recent rallies in certain assets – commodities, G10 FX, equities and gold – began to wane, highlighting a potential top for the current rally. Yesterday’s main data release out of Canada saw the trade balance recover to within 5% of its pre-pandemic level. Exports rose 11.1% in July while imports increased by 12.7%. Combined, exports and imports have increased 35% since the April shock, leaving them 5% off of pre-pandemic levels. Today, the focus will be on Canada’s labour market report at 13:30 BST/ 08:30 ET as the release comes ahead of next week’s Bank of Canada meeting. Expectations sit at a 250,000 person rise in employment as the release for August encompasses the reopening of Ontario at the end of July. However, many economists have shown stark warning signs that the recovery in the labour market will begin to slow substantially hereon as the initial rebound of workers returning due to lockdown measures being eased has already occurred. With the labour market support measures set to end at the end of next month, the focus will be on the true level of economic scarring.