This new trading week kicked off with fresh gains for equities but a rally in stocks failed to translate into strength for currencies. The Dow Jones Industrial Average moved higher for the seventh day in a row but most Japanese Yen crosses, including USD/JPY, failed to push higher. In fact, USD/JPY, which traded to 106.20 at the start of the New York session, rejected 106.00 by the end of the day.
The sell-off in EUR/JPY in particular sends some interesting signals about the broader market. First, it tells us currency traders are not as optimistic as equity investors. USD/JPY’s inability to rise despite Friday’s better jobs report and U.S. President Donald Trump’s weekend executive orders is a sign that FX traders still think the U.S. recovery is losing momentum. They don’t see the latest steps taken by Trump, which include re-allocating FEMA funds to pay for extra unemployment benefits and deferring (not suspending) payroll taxes from Sept. 1, as helping the U.S. economy much. It also suggests that FX traders feel the rest of world won’t be spared from the troubles in the U.S. Europe’s ability to contain the virus paved the way for a potentially sustainable recovery, but having appreciated significantly in July, investors discounted much of these improvements. They are now worried about the spillover effects of the troubles in the U.S. and the troubles they are causing with the rest of the world.
Between Trump’s Tik
Tok ban and the U.S. Health Secretary’s visit to Taiwan, China-U.S. tensions hit new heights in recent weeks. At the end of last week, the U.S. also sanctioned 11 high-level Hong Kong officials and, over the weekend, China responded with sanctions of 11 U.S. officials, including two Senators, and sent their fighter jets across the midline of Taiwan’s Strait. While most of the steps will amount to no more than muscle flexing by the world’s two largest economies, no one wins from the deterioration in U.S.-China relations, especially during this precarious time in the global economy when both countries are at the forefront of vaccine development. The worst thing that could happen is this broken relationship deters the country that develops the vaccine from sharing the medical knowledge with the other.
However, the persistent gains in stocks also reflects the market’s confidence that the U.S. economy is rounding the corner and vaccine developments will happen in the U.S. New virus cases are down from July highs, with case levels improving materially in Florida and Texas. Just today, Florida reported the lowest number of new virus cases since June. This is a far cry from New Zealand, which just reported 100 days of zero community transmission. But that’s another country with different leadership. If virus cases peaked last month, then the setback in the U.S. recovery could be shallow. Also, while Friday’s self-imposed deadline for a stimulus deal passed, it should only be a matter of time before an agreement is reached because the consequences are just too severe for it not to happen.
Everyone should watch headlines out of Washington, but in the meantime U.S. retail sales, Germany’s ZEW survey, UK, Australian labor market numbers, UK Q2 GDP and the Reserve Bank of New Zealand’s monetary policy announcement will be the main focus for forex traders. The second quarter was hard for many countries, and the UK should be no exception. According to the PMIs, UK labor market conditions also weakened in July, while the same measures for Australia improved. Germany’s economy continues to recover, but it will be interesting to see whether investor sentiment is affected by troubles abroad. U.S. retail sales in July should increase and the RBNZ has every reason to be less pessimistic.