Sterling traded in line with the rest of the small open economies in the G10 yesterday, falling 0.2% against the dollar as risk sentiment crumbled in markets. The preliminary May PMIs highlighted that the contraction in the UK economy due to coronavirus may have bottomed out, with the manufacturing reading coming in at 40.6 vs 32.6 previously and the services PMI rising from 13.4 to 27.8. While both readings remain below the break-even 50 mark, thus symbolising continued contractions in the sectors, the slowing rate and easing lockdown measures suggest that a slow expansion may be on the horizon. The manufacturing sector is likely to lead this, with construction and industrial production workers the first to return to work under the current system. This morning, retail sales data for April showed a contraction of 22.6% YoY, sending volumes to their lowest level since December 2005, but the reading came as no surprise to markets given lockdown measures crippled the sales of non-essentials. Non-food retailers’ sales volumes fell by 41.7%, which includes their online sales data. Additionally, this morning saw the release of the UK’s public sector net borrowing for April. Government borrowing excluding public sector banks was £67.1bn, far higher than the previous record high of £22.2bn in April, as the UK government rolled out measures to support household incomes and extending credit lines to businesses. Despite the torrid figures, sterlings 0.4% drop this morning doesn’t seem out of line with the rest of the G10 price action. Most, with the exclusion of JPY, are taking on water against the dollar as the US-China trade war threatens to resurface.
The euro was trading comfortably in the green against the dollar yesterday hitting highs not seen since May 1st, as markets kept hope that the broad easing of containment measures will smoothen economic recovery, until risk sentiment collapsed in markets. While the €500bn initiative proposed by Angela Merkel and Emmanuel Macron last week to help sectors hit hardest by the virus also boosted confidence in the euro area, a downturn in risk sentiment reversed the euro’s rally and sent the single currency lower along with its G10 peers. The European Central Bank will release its minutes from the late April meeting today at 12:30 BST. The release should shed some light on whether or not the ECB deems it necessary to ramp up monetary stimulus. Any strong comments on the eurozone outlook that may point to additional easing could put pressure on EURUSD price action today. Later in the afternoon, ECB Chief Economist Philip Lane will speak at a virtual conference at 15:30 BST. In terms of data, the week ends on a quiet note for the eurozone with no major releases.
After seeing a brief patch of weakness yesterday afternoon, the dollar re-asserted itself and strengthened against most major currencies overnight. Worsening risk appetite was the main theme, as market attention turned to the prospect of renewed tensions between the US and China. Two key developments from the US legislature suggested a trajectory of increased confrontation between the two superpowers. On Wednesday, the US Senate passed a bill that could force the de-listing of some Chinese companies from US exchanges, if they do not comply with certain accounting regulations, while also forcing companies to disclose if they are owned or controlled by foreign governments. Yesterday, news emerged that US senators were introducing a bill to sanction Chinese officials and entities enforcing new security laws in Hong Kong, while also penalising financial institutions who do business with proscribed entities. Chinese authorities have historically taken a hard line in all diplomatic considerations to do with its domestic policies, including human rights, highlighting the risk of increased tensions as a result of the legislation. Yesterday’s data included weekly jobless claims, which rose by 2.44 million last week, bringing the total number of jobless claims made since the beginning of the coronavirus pandemic to an eye-watering 38 million. No major US data will be released today, but with China’s National People’s Congress commencing today, markets will be watching for any potential signs of retaliation.
The loonie failed to capitalise on WTI’s continuing rally yesterday, with the currency falling 0.4% against the dollar despite oil climbing to its highest point since early March at $34.66. A collapse in risk sentiment was the main driver for the loonie’s slump after the US Senate passed a bill that could result in Chinese companies being banned from US stock exchanges. This morning, it is more of the same for CAD with the US and China locking horns again, this time over Beijing’s attempt to gain more control over Hong Kong with a national security law. Oil is trading lower, holding its head just above $31 per barrel at time of writing, as haven flows dominate FX markets. This afternoon, Canada’s data calendar sees the release of March’s retail sales at 13:30BST, with a 10.5% MoM contraction expected. March doesn’t capture the full extent of Canada’s lockdown measures on the economy, so the dated nature of the reading is likely to result in limited market volatility.