Safe haven flows and RBA to be of interest

With the US Non-farm Payrolls reading for June reaching new highs and the US unemployment rate dropping, we are about to enter the new week. On a fundamental level, the past week was characterised by the continuous daily spikes of COVID-19 cases in the US as well as the deterioration of the US-Sino relationships. In the coming week we expect financial releases to take a back seat and more fundamental issues to take the spotlight. At the same time, we tend to focus on RBA’s interest rate decision as the main monetary policy event of the week.

USD – US-Sino relationships and COVID-19 to create safe-haven flows

US financial releases showed an increase of economic activity in the US manufacturing sector, feeding hopes for the rebound of the US economy. Also, the drop of the US unemployment rate, as well as the record high figure of Non-Farm Payrolls tended to show that the situation in the US employment market is steadily improving, yet the markets did not seem so impressed. A possible reason for the market’s lack of reaction could also be the continuous increase of COVID-19 new daily cases reported. It’s characteristic how daily new cases topped 55k on Thursday, while various states had to halt or even reverse the reopening of their economies. As for the US-Sino relationships, tension could escalate further. The US Senate in a rare bipartisan unity, unanimously passed legislation to punish banks doing business with Chinese officials who implement the new Chinese security law in Hong Kong, and the bill was sent to President Trump to sign it. On the monetary front, scheduled speeches by Fed officials throughout the week could affect the USD’s direction as well. As for financial releases we expect them to be in the back seat for the coming week, yet still some of them could create interest. On Monday, we get the US ISM non-manufacturing PMI for June, while on Thursday we get the weekly US initial jobless claims figure and on Friday the PPI rate for June.

GBP – Brexit front and center

Brexit negotiations do not seem to be going well. It was characteristic that this week’s negotiations ended a day earlier than expected, with both parties agreeing that substantial differences persist. EU’s top negotiator Barnier, was reported rejecting UK plans for the banking sector after Brexit, practically underscoring the EU’s leverage in the negotiations once again. We tend to maintain little expectations for further progress at the current stage and if so, the situation could weigh on the pound. As the stakes and uncertainty are high, the issue tends to be dominant fundamentally for the pound. On the inner political scene, the UK government pledged to provide further fiscal stimulus for the UK economy with an investment in infrastructure, as PM Johnson stated, “We cannot continue simply to be prisoners of this crisis”. Yet the amount of 5 billion pounds mentioned didn’t seem to thrill the markets. UK’s finance minister Sunak is to deliver an economic update next Wednesday and could gather substantial interest. As for financial releases, we get Monday’s UK’s construction PMI for June as well as the Halifax House Prices rate for the same month on Tuesday.

EUR – Fiscal stimulus to be the eye of a storm

The failure on behalf of the EU to approve the €750 billion fiscal stimulus until now, seems to disappoint EUR traders. Germany’s Chancellor Merkel and French President Macron seem to present a united front against the “frugal four” (Austria, Denmark, Sweden and the Netherlands) which oppose the plan. It should be noted that disagreements tend to persist on the actual amount of the stimulus, as well as on the proportion of how much is to be given in grants and how much in loans. Statements made by both leaders were intense, almost setting the dillemma before EU leaders to accept the €750 billion fiscal stimulus plan or face the consequences. We could see next Thursday’s Eurogroup meeting creating some headlines on the issue. On the monetary front worries tend to intensify, as within the ECB a debate seems to be brewing as to how far the bank’s PEPP should actually go. As for financial releases we tend to underscore on Monday, Germany’s industrial orders for May as well as Eurozone’s Sentix Index for July and retail sales for May. On Tuesday we get Germany’s industrial output for May, while on Thursday Germany’s trade balance for the same month.

AUD – Market sentiment and RBA to move the Aussie

The Aussie seems poised to end the week slightly higher against the USD yet more may be required to convince traders for the presence of the bulls. Financial releases from Australia and China tended to be quite positive for the AUD in the past few days and could boost RBA’s confidence ahead of its interest rate decision. The decision is due out on Tuesday’s Asian session and the bank is widely expected to remain on hold at +0.25%. Currently AUD OIS by 98.7% and the bank’s forward guidance seem to agree with such a scenario. Given the last meeting’s slight optimism that “it is possible that the depth of the downturn will be less than earlier expected” we could see the bank keeping its QE program intact, without any further expansion for the time being. The GDP contraction for Q1 and rise of the unemployment rate could create some worries yet may be balanced by the rise of the PMIs in June and the acceleration of retail sales in May. We would not be surprised to see the bank reiterating how expensive the AUD is and its possible adverse effects on exports. We maintain our worries for the commodity currency as the tensions in the US-Sino relationships seem to be on the rise, while also the Australian-Chinese relationships have seen better days in the past.

CAD – Oil market and employment data in focus

CAD seems to maintain its sideways movement against the USD over the past few days despite the recent better than expected trading data for May, as exports jumped, and the trading deficit neared zero. Analysts tended to note that activity picked up, yet at the same time underscored that uncertainty, also deriving from the COVID-19 outbreak in Canada’s southern neighbour, remains high. For the coming week we tend to eye two financial releases related to the Loonie, specifically the Ivey PMI for June on Tuesday and on Friday, June’s employment data. Especially, should the unemployment rate retreat from May’s record high rate of 13.7% and the Canadian economy recover even more jobs than May we could see the Loonie getting some support as the Canadian employment market would start bottoming out. We intend also to keep an eye over the oil market as it tends to substantially influence the CAD. Should a possible recovery of the global economy, finally start boosting the demand of oil and its prices, we may see the CAD benefiting as well, yet doubts currently about an actual increase of oil demand seem to be still present.

General Comment

USD’s initiative over its counterparts may be somewhat moderated in the coming week, as high impact US financial releases like last week’s employment report seem to be lacking from the calendar. Nevertheless, we expect fundamental issues such as the reopening of the US economy, the US-Sino relationships as well as the spreading of COVID-19 in the US to create ripple effects for the rest of the world. Hence the safe haven qualities of the USD may come to the rescue once again, should there be any escalation of the tensions in the US-Sino relationships. The same applies, should worries for the reopening of the US economy intensify due to the increased spreading of COVID-19 in the US. In general, we could note that more fundamental issues may be in play next week for the markets in other parts of the world as well. A clear example could be Brexit for the GBP and any indications of progress in the negotiations with the EU could provide substantial support for the pound and vice versa.

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