News & analysis

This week’s price action has had hints of a fear-driven short squeeze as the greenback continued to make inroads against all of the G10 currencies. Differing policy signals were to be found in central bank meetings in New Zealand, Norway, and Sweden, as well as a major speech from Reserve Bank of Australia’s Deputy Governor Guy Debelle.

The two antipodean central banks arguably gave a significantly more dovish policy message, hinting at further monetary stimulus and, in the RBNZ’s case, the viability of negative rates. However, both NOK and SEK saw far bigger losses against the dollar in the aftermath of their respective monetary policy meetings, as both the Norges bank and Riksbank printed a relatively flat set of interest rate projections against expectations. Meanwhile, fiscal policy remained in focus. Hopes of fresh stimulus in the US prior to the November election received a boost as the Democrats began drawing up plans for a scaled-back stimulus proposal, while UK chancellor Rishi Sunak announced a partial wage subsidy scheme aimed at supporting the labour market after the more generous furlough support ends.

The week ahead offers a moderately eventful calendar that will be capped off by non-farm payrolls. However, other themes are likely to provide plenty of impetus for further volatility in risk appetite, especially as Covid cases start to rise again in Europe and North America.

This was reflected last week by US equity markets, as they traded well on the back foot due to the overall increase in risk aversion, which was also mirrored in FX price action. A continuation of this trend may put NOK, SEK, AUD and NZD under further pressure, with the latter two particularly vulnerable in light of last week’s dovish central bank commentary. Trade talks between the EU and UK have yet to make any meaningful progress, with the EU’s end-of-month deadline fast approaching for the UK withdrawing controversial legislation regarding last year’s withdrawal agreement. The end of the month has also been described as a “realistic deadline” for striking a trade deal by the EU, although the UK has set a later mid-October deadline. Another round of formal talks will continue this week, with an EU summit meeting set for Thursday.

 

CALENDAR:

Monday 28th: Central Banks are in the spotlight again as the new wave of infections pose threats to the expected recovery path with potential local containment measures ahead. Markets are seeking reassurance that financial conditions would not be tightened as a result, with a hint of another dollar squeeze triggering red lights on markets’ screens. After Powell’s testimonies in US Congress last week, it is Christine Lagarde’s time to present the ECB’s case in the European Parliament at 14:45 BST. Topics for the hearing will center on asset purchase programmes and possible avenues to improve the ECB’s accountability mechanisms. A media report last week indicated the ECB was considering extending PEPP’s flexible conditions to the APP, which rose concerns that the ECB could risk legal trouble yet again. While still placed under the umbrella of “emergency powers”, Lagarde’s comments will be heavily scrutinized. Markets will hope Lagarde signals that the ECB wouldn’t not be dented by the threat of legal enforcement while the pandemic weighs on the economic outlook.

Tuesday 29th: US politics will come back into scope on Tuesday when presidential candidates Donald Trump and Joe Biden take place in their first public debate on Fox News Tuesday at 21:00 ET. The Biden-Kamala ticket ran a 51%-46% lead in the latest official polls, with the 5 percentage-point advantage sitting right at the margin of the survey’s sampling error, taken after the Democratic and Republican national conventions. With such a tight race ahead, key events in the debate agenda might change the balance of risks. While Biden is preferred over Trump on the topic of coronavirus management, topics such as Supreme Court nominations and country unification, heavily politicized issues like the vaccine race and the debated fiscal aid package are still in the game. Meanwhile in Europe, inflation figures will likely follow Lagarde’s tone in highlighting the level of uncertainty in the path of the recovery, with expectations sitting firmly in negative territory for the CPI releases that begin at 08:00 BST. Spanish and German numbers for September will be published on Tuesday along with eurozone consumer confidence, while France and Italy will release their data the day after.

Wednesday 30th: The global economic outlook could take another revision on Wednesday morning after the release of China’s latest economic data, with Markit and official Purchasing Manager’s Indices for September coming out at 02:00 BST. The services PMI is set to rise as social distancing measures are eased further, while manufacturing could still stay above the 50 expansionary benchmark amid a combination of strong fiscal support and supportive credit growth. However, both may begin to show the early signs of importing weaker global growth as major trading partners cope with a renewed wave of infections. The data will be assessed in the context of potential stringent measures being put forward elsewhere, while final readings of Q2 GDP are scheduled in the UK and the US at 07:00 BST and 13:30 BST. Canada’s July GDP data is also due out of North America at 13:30 BST, which may continue to print above the Bank of Canada’s expectations as the economy enters the recuperation period. Meanwhile, the Brexit saga will hold everybody’s breath as the end of the month arrives and the UK faces an EU ultimatum to drop the legislative proposal to renew the Internal Market Bill. The law would potentially override key decisions agreed in the Withdrawal Agreement signed in October of last year, compromising both the bilateral talks on the future trade relationship as well as the UK position internationally.

Thursday 1st: After the slump in the services and composite Purchasing Managers’ Indices from Germany, France and the eurozone last week, flash manufacturing PMIs from Spain, Italy and the Netherlands and final readings for the manufacturing PMIs from Germany, France and the Eurozone are released between 08:00 and 09:00 BST. Last week’s manufacturing indices for Germany and the eurozone printed at 56.6 and 53.7 respectively, while the French manufacturing figure printed slightly lower at 50.9. All three figures remained above the 50-mark that indicates an overall expansion from the previous month. The preliminary figures from Spain and Italy are set to have increased to 50.5 and 53.5 respectively, while Bloomberg does not provide a forecasted median for the Dutch figure. All three are likely to print above the 50-mark as the French and German numbers already set the stage for a continued recovery in the manufacturing sector, but any surprises to the downside would not bode well for the euro as this would confirm the bleak picture of the current state of the eurozone recovery. The first signs are likely to be noticed in the services sector, however, as bars and restaurants are the first to suffer shortcomings brought about by social distancing measures as the winter months approach, where terraces will no longer be open and the number of guests will be limited to the inside spaces. For the manufacturing sector, the transition to winter will likely be a little calmer as long as national lockdowns are unlikely to be re-imposed, but risks remain tilted to the downside.

Friday 2nd: Topping the week´s calendar, non-farm payrolls for September will be key in assessing the pulse of the US economic recovery at 13:30 BST, after a string of disappointing jobless claims numbers and more gloom to come should a second wave hits the country. Even though net jobs are likely to increase over the last reading, the sustained rate of job losses through the month suggests a further stalling in the labor market recovery as a whole. Throughout the day, the European Council will be hosting a special gathering after the 24th-25th September date was postponed on President Charles Michel being in quarantine. The event might pass unnoticed as no major Brexit or pandemic-specific issues are in the agenda, yet a broad set of topics like the EU-China relations and industrial policy will be put on the table.

 

JULY’S GDP, BILL C-2 AND CONFIDENCE VOTE IN SCOPE FOR THE LOONIE NEXT WEEK

We flagged the elevated risk profile of Canadian assets in the coming weeks and months in last week’s edition of the Week Ahead. Generally, the risks revolved around the political landscape and Canada’s credit outlook, but the recent uptick in Canada’s case count pose risks for the recovery as it enters the recuperation phase. While this has been noted by Prime Minister Trudeau after last week’s parliamentary session resumed, new measures in response to the rise in case count have yet to be announced.

What is known for markets and the economic recovery, however, is that the government will continue with active fiscal policy measures in order to shoulder the debt burden instead of households while “building back better” with respect to job creation and green investment.

That is if they remain in power…

Parliament has six sessions to debate last week’s thrown speech before a confidence vote is triggered. These six sessions don’t have to be on consecutive days, meaning the timing of the vote is uncertain, but many assume that the vote will take place sometime next week. Political analysts were in broad agreement that Trudeau will likely find support ahead of the next confidence vote. The likelihood of this occurring took a massive jump after the Bill C-2 was announced, which aims to fill gaps in the social security system and meet key requests made by the New Democratic Party. The new proposed measures include a benefit scheme to cover 10-days’ worth of sick leave in order for workers to self-isolate after testing positive, a benefit scheme to support workers who must stay at home to care for a child under 12 or dependent due to facility closures, and a boost in the level of payments available to gig economy workers from C$400 to C$500 a week. While the Bill is yet to pass the legislature, NDP leader Jahmeet Singh stated it was what he was waiting for.

Prior to the fall budget, expected as late as December, markets will focus on the progression of the economy and the likelihood of containment measures being tightened to control a second wave. Focus will be on Ottawa for any response to the rising case count, which is seemingly lagging Europe’s recent surge by a matter of weeks, while concerns over the economy’s transition from the CERB scheme to alternative social security measures will be examined. In our latest CAD outlook, we highlighted the risks of a bumpy transition between labour market support programmes as one of the main factors that could derail the recovery and have sizeable effects on the housing market. With the Canadian Centre for Policy Alternatives estimating 482,000 CERB applicants won’t be eligible for alternative schemes and the holes in the social safety net yet to be patched by the C-2 bill, the next few months’ worth of data will be crucial for the loonie.

 

7-day rolling average of the daily new confirmed Covid cases per million people shows recent spike in Canada lags Europe by a matter of weeks

Source: European CDC  – last updated 24th September 10:05 BST

 

With all of this on the horizon, Wednesday’s GDP data for July may fall to the market’s wayside. In the Q2 report, Statistics Canada printed a preliminary 3% reading for July, down from June’s blockbuster 6.5% report. However, the median expectation of economists surveyed by Bloomberg sits at 2.8%, suggesting the risks to the release are skewed to the downside. Even though the market focus will be on the future progression of the economic recovery and any buffers imposed by containment measures or political uncertainty, should July’s GDP reading surprise to the downside, it will likely give markets further reason to sell the loonie. However, while policymakers are hoping the recovery was robust during the initial re-opening as it heads into the recuperation phase, bad news could mean good news for Trudeau’s spending plans and their path towards legislative approval.

 

PMIS MAY BEGIN TO SHOW CHINA IMPORTING A SLOWER ECONOMIC RECOVERY AS AUTHORITIES START TO LET CNY WEAKEN

A strengthening of the Chinese yuan has been the narrative for markets since the global economic recovery began. The yuan has benefitted from China being the first in and first out of the pandemic, resulting in the domestic economy driving the global economic recovery. Broad USD weakness exacerbated the drop in the USDCNY rate, however, recently officials have also allowed the yuan to strengthen on a trade weighted basis. However, with risk appetite deteriorating amid the prospect of tighter lockdown measures in Europe and North America, the Chinese economic recovery may soon start to import a slower economic recovery as external demand begins to wane. While Wednesday’s release of September’s official PMIs and the IHS manufacturing PMI are unlikely to show the effects of new export orders dropping, officials will be more than aware of the threat this dynamic poses in the coming months.

 

Authorities allowed the yuan to strengthen on a trade weighted basis, but slowing global recovery could start to unwind some of the recent moves

 

The latest move by the Peoples Bank of China to gradually set the USDCNY fixing higher could be testament to this. Although the dollar has recently found a new set of legs in the growing risk-off environment, which would naturally force the USDCNY rate higher, a more competitive yuan would also aid the continuation of the economic recovery. Should the PMIs show a minor slip ahead of the incoming cooling off phase of the global economic recovery, officials may feel more obliged to progressively lift the USDCNY fixing. The question markets participants will be asking in the run-up to Wednesday’s release is how likely is a PMI underperformance?

A natural cooling off of the domestic recovery will likely be the main downside driver for a slip in the PMIs.

However, a recent relaxation in social distancing measures will likely keep the services PMI trending at an elevated level, while high manufacturer’s confidence indicators could point to a slight uptick in the manufacturing readings. The proof will be in the pudding and given the risk climate, the markets focus will also be on new export order sub-indices.

 

PBoC start to allow the yuan to drift higher as risk climate deteriorates

 

WILL THE US LABOUR MARKET STALL?

August’s non-farms report will remain an important barometer for the pace of the economic recovery in the US, and comes after several weeks of ominously high initial jobless claims. July’s jobs figures from the US were encouraging by any measure, with the economy adding 1.37 million jobs, beating expectations. Census hiring provided a 238,000 job boost. Importantly, the rate of permanent job losses accelerated slightly, with permanent job losses since March rising to 4.1 million. Some 45% of unemployed workers were still reporting being on temporary layoff – usually a good sign for a speedy labour market recovery.

However, weekly initial jobless claims have been stubbornly high in recent weeks, consistently defying expectations for a slowdown in new claims. This week’s figure of 870,000 was broadly unchanged when compared to the first week of September. High-frequency data from Homebase have pointed to flat employment in the small business sector in August, and the sustained rate of job losses in September suggest a further stalling in the overall job market. Net jobs are likely to increase, but at a significantly slower pace than August. The 11 forecasts currently submitted to Bloomberg are widely distributed around a median of 900,000. With coronavirus cases still elevated across many states and restrictions still in place, the recovery in consumer spending seen in recent months is unlikely to continue at its current pace. As the wider economic bounce slows, employers are likely to also taper re-hiring accordingly. In this sense, September’s payrolls may begin to show the first glimpses of the full long-term impact of covid-19 on the labour market.

 

Initial jobless claims remain elevated – at well above 2009 levels

Authors: 
Ranko Berich, Head of Market Analysis
Simon Harvey, FX Market Analyst
Olivia Alvarez Mendez, FX Market Analyst
Ima Sammani, FX Market Analyst

 

 

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