USD emerges stronger

Investors took the USD and US equities higher on Tuesday following better than expected data. This brought some comfort ahead of Friday’s jobs report, enough to ease the market’s concerns. It is necessary to say that the details of the report provide no reason to be optimistic. The deterioration in two of the most telling aspects of the service sector illustrates the depth of the economic contraction in April. USD/JPY is biding its time but tomorrow’s ADP report, which is predicted to show -21 million private sector job losses could affect the parity.

Meanwhile one of the big stories for EUR was the German Constitutional Court’s ruling that part of the European Central Bank’s bond buying program breached their mandate. Although, EUR traded sharply lower in response, it recovered a large part of its losses by the end of the North American trading session. Despite the initial response, the ruling has no affect on the central bank’s current bond buying activities or their Pandemic Emergency Purchase Program.

The ECB needs to provide justification for their bond buys but at the end of the day, the Bundesbank is unlikely to restrict the ECB’s ability to do what it takes to mitigate disruption in the financial markets during a major global economic crisis. Many view this as a jab at the EU Court of Justice rather than the ECB as they supported the central bank’s controversial policy, which the Germans saw as an overreach in power. For the central bank the only real implication is that they will come under greater scrutiny.

Eurozone data remains weak with producer prices falling for the second straight month. Retail sales are scheduled for release tomorrow and with contraction in spending in Germany and France, the broader release is expected to deteriorate as well.

The best performing currency on Tuesday was AUD, which rallied after the Reserve Bank of Australia’s monetary policy announcement. The RBA left interest rates unchanged, a decision that was widely anticipated. Instead, they are ready to scale up bond purchases and do what is necessary to support jobs, incomes and businesses.

Their official forecasts are due for release on Friday but broadly, the central bank expects the economy to contract 10% in the first half of the year, fall 6% over the year and for the jobless rate to peak at 10% in the coming months and settle above 7% at the end of next year. While these forecasts are grim and Australian PMIs were revised slightly lower, AUD rallied as the central bank did not signal an immediate need for additional easing. Australian retail sales are scheduled for release.

The CAD also rebounded on better than expected trade data and higher oil prices. The price of oil rose to its highest level in 3 weeks supporting the move in the currency. The NZD was in focus with quarterly labor market numbers. Economists are looking for the jobless rate to spike but New Zealand’s labor market numbers may not be terrible because the data is for the first quarter and NZ’s lockdown began on March 25, the very last week of Q1. The economy is also reopening so investors may look past weakness.


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