Invest in currency, dare if you can

USD kicked off the new trading week stronger against all of the major currencies. Friday’s non-farm payrolls report showed massive job losses in the month of April, but these disappointing numbers were still better than expected, paving the way for a recovery in the greenback.

Investors will tread more cautiously as the week progresses with inflation data on Tuesday, Fed Chairman Powell’s speech on Wednesday and retail sales on Friday. Aside from Powell, investors will hear from a number of Fed officials. The big question for the greenback is the possibility of more easing.

The Fed promised to provide ongoing stimulus, but are negative rates on the table? Last week Fed fund futures started pricing in negative rates in December 2020 but yields popped back above zero after NFPs. For the time being, analysts don’t think there’s any value to fanning speculation about negative rates.

There’s no question that the outlook by all policymakers will be cautious because no one knows how successful re-openings will be or how quickly a second wave will return but for now, the future looks brighter. The sharp decline in oil and gas prices last month should drive inflationary pressures lower.

The other big focus this week will be the Reserve Bank of New Zealand’s monetary policy announcement, Australian labor market numbers, Chinese retail sales and revisions to Eurozone GDP. NZD and AUD were the worst performing currencies Monday which could be a sign of what’s to come in the week ahead.

Both currencies traded near their 6 week highs last week and are due for a correction. The Reserve Bank of New Zealand is not expected to change policy but last month Governor Orr said negative rates can’t be ruled out and they will be thinking about additional stimulus in May.

Since that statement on 20th April, data has been mixed with credit card spending and building permits plunging, but the trade balance improved and employment change remained positive in Q1 instead of falling as economists anticipated.

CAD weakened against the greenback on Monday but on a relative basis, analysts expect it to outperform. Not only was Friday’s labor market report significantly better than expected but Saudi Arabia also voluntary cut crude oil production by another 1 million barrels for June. This announcement caught the market by surprise but the actual impact on crude was short-lived.

GBP fell harder than EUR which was virtually unchanged against the greenback. No major economic reports were released from Europe but first quarter GDP numbers are due from the UK this week which will be very market moving.

The UK Boris Johnson’s government announced an easing of the lockdown measures with some non-essential retail to open in June, while most of the economy was to be open in July. The announcement was marred by confusion on new social distancing rules. For EUR, policymakers are still talking about last week’s German Constitutional Court ruling which is creating some downward pressure on the common currency.

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