At the beginning of the year 2021, USD had hit a bottom and it hasn’t revisited those levels since January. However, sentiment is shifting with USD pulling back this week. Much of that has to do with the persistent strength of US equities but as stocks consolidate and the gains moderate, investors are wondering if the bubble is beginning to deflate. This is important for currency traders because a large part of greenback’s decline in 2020 was tied to the strength of equities. If stocks are at the cusp of a deeper correction, USD may witness a rally.
In the short term, there are many reasons why stocks could correct. As shown by Thursday’s weaker jobless claims report and last week’s subdued payroll growth, the future is bright, but current conditions are weak. Equities had a great run and a new speculative fervor has increased volatility. Last week it was GameStop, this week Reddit forums are all over cannabis stocks. They gained 51% in one day and lost almost the same amount in another. This level of hysteria can be very dangerous in an overextended market.
The new South African corona variant has been reported in California. There are now four states with cases of this highly contagious variant that appears to be resistant to current vaccines. If it spreads quickly, it could spark a new fear that would send equities sharply lower and USD higher in the process. With that said, the University of Michigan consumer sentiment index is due for release on Friday and the current vaccine rollout along with the continued rise in stocks should boost confidence.
Meanwhile it is no surprise that commodity currencies continued to outperform European currencies. Virus cases are low, there are minimal restrictions and the summer weather is beautiful. AUD added another 0.4% to its gains, thanks to stronger consumer inflation expectations. Inflation is rising across the globe but they are still at rates low enough for the central bank to be unconcerned. NZD shrugged off weaker credit card sales. Manufacturing data was due for release and the ongoing recovery should lift activity. Oil prices dropped for the first time in 9 trading days.
EUR extended its gains while GBP pulled back ahead of fourth quarter GDP. Although, the resilience of EUR is remarkable considering their slow vaccine rollout and strict lockdowns, the currency could reject the 50-day SMA at 1.2150 if Eurozone industrial production is weak. The UK’s fourth quarter GDP report is scheduled for release on Friday. Economists are looking for a slight increase but with the government issuing very tough holiday restrictions, we think they would be lucky to seek out positive growth.