FX & market recap:
The risk-on rally paused yesterday after the results of the COVID-19 vaccine trials were questioned. Global sentiment is, however, proving resilient in early trading today, as markets continue to show complacency around rising US-China tensions (Trump’s letter to the WHO added more fuel to the fire). Meanwhile, China started to retaliate against another developed economy, Australia, by threatening tariffs after Australia asked for an investigation on COVID-19. Re-emerging signs of market nervousness could mean that pressure on the dollar (trading around this month’s lows) may ease, and that the yen should remain below 108.
Today, the main highlight in the calendar is the release of 29 April FOMC minutes, which should however have a quite limited market impact given some of the economic views are outdated and there has been plenty of Fedspeak in the past few weeks to delineate the Fed’s monetary policy stance.
Canadian dollar highlights:
BoC Deputy Governor Lane speaks on “Policies for the Great Global Shutdown and Beyond.” Headline inflation at 2.2% y/y in February is a distant memory, as we see it falling into negative territory at ‐0.1% y/y in April. Gasoline prices are a big part of the story. The BoC’s core measures fell to an average of 1.83% in March after being in a tight range around 2.0% for some time. Declines on the order of 0.3–0.4pp in these should not come as a surprise in April. USD/CAD managed to bounce off of key bottom support at 1.3856 yesterday, with resistance at 1.3949.
The news of France and Germany backing a coordinated fiscal response through the Recovery Fund was well-timed as it joined news of a potential vaccine in lifting EUR/USD after many unexciting sessions. The vaccine story remains hard to predict, but what the EUR needs now is to re-explore the 1.10 area and the above indicates that some solid consensus is building around the proposal. A failed agreement on the Fund bears the risk of markets switching from expectations on a coordinated fiscal effort to fears that differences within the EU Council may be irreconcilable. BTP spreads and the EUR should be the main victims of such a scenario. While such a delicate assessment is made, EUR/USD should remain around the 1.09 area.
British pound highlights:
Sterling found additional support yesterday on the news the UK will cut most of the tariffs (now in place due to common EU trade rules) after Brexit. This is arguably a quite expected measure and should hardly be able to provide more steam to GBP. By contrast, the under priced risk of no extension to the transition period appears a quite strong bearish argument. We expect GBP to re-enter a depreciation trend soon.
Asia Pacific highlights:
The Chinese government is assessing the possibility of imposing tariffs and customs delays on a number of Australian exports after the Australian government asked for an independent probe on the origin of the Covid-19. Tensions among the two countries are undoubtedly on the rise, with the potential downside for the Australian economy being very significant (China is the main source of demand for AU exports). For now, the market impact is contained, but AUD could lag other commodity currencies in the next few days.