Sterling jumped on its opportunity to return to pre-virus levels against the dollar last week as the greenback broadly softened. This morning, the tone has softened somewhat, however. The pound has been treading water as it entered the new trading week as reports suggest Boris Johnson’s inner circle are discussing plans to seal off London and order members at risk to stay at home, should virus cases rise in the capital. On the economic front, this morning markets get the final reading of July’s manufacturing PMI, which is expected to remain at 53.6, while the Bank of England on Thursday draws the most attention in the calendar. The meeting will see the release of a new Monetary Policy Report and Financial Stability report, as well as the usual rate announcement and policy statement. A number of things will be worth looking out for. Firstly, the MPC’s last Report, in May, contained a daily optimistic forecast “scenario”, which assumed lockdown measures would be phased out by the end of the third quarter – an assumption that now looks heroic. How pessimistic the MPC’s base case assumption is will be of relevance for sterling. Secondly, any discussion or consideration of negative rates will be of interest, after Andrew Bailey recently conceded that the options were “under review”. Finally, the short-term performance of the economy and the reliability of alternative data for assessing it will be of interest, after Chief Economist Andy Haldane gave a surprisingly optimistic reading of the economy in a recent speech. Haldane also voted against increasing asset purchases. Thursday will be an opportunity for markets to parse new information to judge if majority opinion among the MPC has developed, as well as if Haldane remains an optimistic outlier.
The euro rose the most in a decade in July thanks to the dollar’s largest retreat since 2010. The euro’s largest rally in July is arguably due to expectations of a stronger economic recovery in Europe now the virus situation has stabilised. The divergence in growth expectations has also led to a build-up in EUR longs by speculative investors. Asset managers ramped up net-long positions in the single currency to almost 340,000 contracts – a record according to the CFTC data which stems back to 2006. Its surge against the dollar ran somewhat out of steam at this morning’s open, however, hitting a low during Asian trading hours. The release of the manufacturing Purchasing Managers’ Indices from all over the eurozone caught the markets’ eyes this morning as all indices rose from the flash reading and also printed higher than the forecasted medians, supporting further the prospect of a quicker economic recovery relative to the US. This week’s data calendar will include composite and services PMIs from the eurozone on Tuesday, eurozone retail sales on Wednesday and German and Italian industrial data on Friday.
Further losses for the dollar rounded out the worst month for the currency in a decade, measured by the DXY index, as a severe domestic Covid outbreak and tensions with China were compounded by a tweet from Donald Trump questioning the legitimacy of the upcoming elections. Secretary of State Mike Pompeo said that the US will target a range of Chinese software companies with sanctions. The measure comes after President Trump told reporters he planned to ban popular social media app TikTok from the US last week. The major US social media apps remain banned in China. The week’s data and political calendar remains eventful for the dollar this week, with legislative progress over a new stimulus package slowing while previous special weekly unemployment payments of $600 expired last week. The data calendar will be eventful this week, with manufacturing purchasing managers indices released by Markit and ISM at 14:45 and 15:00 BST respectively today, followed on Friday by the monthly non-farm payrolls report.
The Canadian dollar was one of the standout currencies last week, and not necessarily for the right reasons. The loonie joined the New Zealand dollar as the only two currencies in the G10 space not to make hay while the dollar broadly weakened. With NZD trading at pre-virus levels already compared to the loonie trading around 2% below its pre-virus range, it begs the question if the slower anticipated US economic recovery is weighing on the loonie’s rebound. We suggest it is. The dollar has been weakening against its G10 peers of late due to its domestic outbreak weighing on expectations of a sharp US economic recovery. Broadly speaking, on this scale, the risk of such an event is isolated to the US economy as peers have already faced the first wave and now begin to tackle localised outbreaks invited by loosening lockdown measures. However, a more protracted US economic recovery will weigh on the global economic recovery. The most exposed are America’s regional trading partners; Canada and Mexico. The US accounts for over 60% of Canada’s exports, meaning the loonie will continue to struggle to make ground against a weakening USD, if the weakness is being driven by a weaker growth forecast. Data on Friday showed Canada’s economy bounced more aggressively in May than expected, with MoM growth coming in a full percentage point higher than expectations at 4.5%. May’s reading was weighed down by lockdown measures being eased at the back-end of the month while Ontario, which includes financial capital Toronto, remained in lockdown. Budget deficit figures for April and May were also released from the government’s finance department. The shortfall hit C$87bn in the two months, higher than any 12-month period in history with the previous annual deficit being recorded by PM Harper in 2009 at C$56bn. This highlights the extensiveness of Canada’s support measures. Speaking of which, they will be in focus this week as labour market data is released on Friday for July. With the CERB scheme set to wind down in October and the CEWS programme, angled at wage subsidies to encourage the return to work rather than a blanket unemployment benefit, extended potentially until the end of the year, investors will eye how much progress the labour market recovery has made.