• Joel


Three key fundamental themes this week

1) USD and US data

USD is staging a decent rebound at the start of the week and is approaching for a re-test of the 94.00 mark, having been as low as 92.60 just last Thursday night. Many analysts are putting today’s (and Friday’s) recovery down to a combination of profit taking and stretched short-positioning (CFTC data last Friday showed a market VERY short USD).

Traders will now be thinking; will this rally be sold too?

One test of the “sell the rally” narrative that has prevailed for more than 6 weeks now will be this week’s large batch of US data.

We have already had US ISM Manufacturing data for July, which came out stronger than expected at 54.2 vs expectations for a reading of 53.6. New Orders, seen as the most forward looking of the sub-indices came in at 61.5, well above estimates for 55.1.

Next up we have ADP National Employment data on Wednesday; as ever, this data will be used by the market to help “calibrate” expectations going into the official jobs data at the end of the week. In that sense, a worse than expected number will (in the mind of the market) increase the prospect for a downside miss on in Friday’s official data, while an upside beat will increase the chances of a beat in the official data on Friday.

Then we have more from ISM on Thursday in the form of Non-Manufacturing PMI; High-frequency data has pointed to a slowdown in the rate at which the US economy has been recovering from the April lockdowns over the last six weeks, which seems to be a direct result of the fact that the rate at which the virus is spreading in the US has picked up substantially. Reopening plans in many states (most notably California, Texas and Florida) have all been halted, and in some cases, reversed. However, the impact of this is much more likely to be felt in the services sector, which relies more heavily upon close person-to-person contact than does the manufacturing sector. For this reason, the Non-manufacturing PMI is seen dropping in July.

Finally, we have the release of official jobs data or NFP for July; a pick up in weekly initial jobless claims numbers (the number of people registering for unemployment benefits per week) does not bode well for the July labour market report. Some are worried that a run of two very strong months for the US labour market (which saw over 5mln jobs added between the months of May and June) could be snapped, with jobs potentially lost net-net in July, a result of the pickup in Covid-19 cases in the US since late June and many states backtracking on their economic reopening plans.

2) AUD and the Reserve Bank of Australia

AUD has been getting hit hard today, amid rising concerns of the Australian Covid-19 outbreak; Victoria state declared a state of disaster with the state capital of Melbourne to be subjected to tougher restrictions including a curfew from 8pm-5am to at least September 13th. But most analysts do not expect the RBA to add to this downside impetus we have already seen to start the week.

Despite the recent worsening of the Covid-19 crisis in Victoria, Australia, the rest of the country continues to remain pretty much virus free and the economic recovery continues at a pace (boosted by strength in the Chinese economy, amid all the investment in infrastructure from the Chinese government). Thus, the RBA are likely to continue to sound upbeat on the economy.

As for the effect of recent AUD strength on the economy, “RBA officials have already said that the AUD is not trading far away from fair value and continued to signal a “hands-off” approach to the currency” says Credit Agricole. Thus it is unlikely the bank will make any attempts to sound “dovish” in an attempt to weaken AUD, as we have seen the RBNZ do in recent months.

Thus, if the RBA does maintain its upbeat outlook for the Australian economy, AUD is likely to remain somewhat supported. Of course, if not, for example if they are spooked by lockdowns in Victoria, then AUD might be hit quite hard.

3) GBP and the Bank of England

It’s been a shaky start to the week for GBP, with GBPUSD already testing 1.3000 to the downside (remember just last Thursday we were as high as 1.3150).

Many analysts saw last week’s rally from below 1.2800 as “unfounded” given a lack of improvement in UK domestic fundamentals; if anything things have gotten worse for the UK because 1) the clock is still ticking for deadlocked EU/UK negotiators to get a deal or the UK will be out of the EU on WTO trade rules at the end of the year, 2) Covid-19 second wave fears are really starting to pick up and 3) UK/China relations looked to have worsened further.

These factors have largely thus far failed to scupper demand for GBP, which has instead been hit by demand for USD at the start of this week. Further downside momentum could potentially come from this week’s BoE meeting.

Brexit uncertainty remains high, and is likely to be weighing on the UK’s post-Covid-19 economic recovery. The BoE likely know this, thus, most analysts think that the bank will indicate a stance where they are ready to add more stimulus to the UK economy if needed.

Moreover, “Deliberations about the benefits of negative policy rates at next week’s monetary policy meeting could also prove a drag to the currency” says Credit Agricole – note; the review on the pros and cons of negative rates at the BoE is set to conclude some time in H2 2020 and money markets already price in negative UK interest rates by the end of the year.

A dovish sounding BoE could be a big GBP negative this week. 



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