Key currencies at a glance
Since the outbreak of COVID-19, currency market participants have paid less attention to economic data. However, in the wake of several important central bank decisions, we could see a return back to traditional fundamentals moving the market. Cambridge FX expect the key drivers to be:
- Central bank decisions in mid-September
- The flip between risk-on and risk-off sentiment
- Equity performance following all-time highs in August
- Any positive or negative news around COVID-19 disruption to economies
Here, Cambridge FX outline what to watch.
Sterling has enjoyed a remarkable resurgence through the last 6 weeks, but its rally comes on the heels of a broader US dollar decline. While there is scope for ongoing dollar softness, Brexit concerns and the economic effects of the pandemic will likely weigh on direction through the months ahead.
Positive economic data emerged from the UK in July. A strong recovery in petrol and clothing prices drove up UK inflation by more than expected as the opening of the UK and other global economies after Coronavirus lockdowns led to increased spending. The Consumer Price Index rose 1% year-on-year, above expectations. The increase in inflation is a reassuring stat to the UK government.
US dollar USD
In late August the US federal reserve announced a new strategy to increase employment and confirmed its tolerance for higher inflation, countering years of super-low inflation. This means that the Fed could allow inflation to pass 2% before adjusting policy which is likely to keep interest rates low for years to come and could lead to continued long-term dollar weakness.
Considering this year’s exceptional election circumstances, difficulties in rolling out fiscal stimulus, low consumer confidence and the extended equity market bull run, the US dollar is likely to continue to be vulnerable. For potential gains for the USD, keep an eye out for any news on fiscal stimulus or a correction in global equities, which could trigger a return to demand for the dollar as a safe-haven currency.
Europe has come together to provide huge stimulus and grants to countries stricken by the virus but there are suggestions among investors that the rally seen off the back of this positive news may have stalled. In the short term the euro will be susceptible to swings.
In the long term there are positive expectations for the currency. The long term make-or-break level for the EUR/USD rate continues at 1.18. The major risk to September outlook is the increasing concern around a second wave of infections. Daily new cases are increasing in Italy, France, Spain and Germany. Despite the concerns that a second wave of the Coronavirus will hit Europe, the EUR/USD should remain rangebound 1.1700 – 1.2080.
Australian dollar AUD
The Australian dollar climbed to 73 US cents in August, the highest level since December 2018, amid broad-based US dollar softness. Investor risk appetite, aided by the strength of the US stock market and positive US-China trade talks, has allowed the commodity currency to increase its gains. Commodity prices and a stronger Chinese yuan also supported the Australian dollar in August. Any news that will fuel optimism of a global economic rebound once the pandemic is under control is likely to underpin positive sentiment and help the AUD to rally. Having broken 72 US cents, the door is now open for the AUD to push toward 75 US cents in the coming months.
Japanese yen JPY
Despite USD weakness in August, the yen did not see growth from safe-haven demand and suffered losses. In August it was announced that the Prime Minister of Japan will stand down, ending his term as the longest-serving leader in the nation’s history. The announcement triggered volatility in the yen and will continue to contribute to an environment of uncertainty. Key points for potential leadership candidates will be how the country deals with the impact of COVID-19, the current deep economic downturn and disputes with its neighbours in China and South Korea.
Canadian dollar CAD
In August, the Canadian dollar strengthened amid USD weakness and as the U.S. and China indicated progress on their phase one trade deal, boosting appetite for riskier assets. An increase in the price of crude oil by about 8% in August has helped the currency to hold gains against the euro and the US dollar. Other positive news favoured the CAD; recent unemployment data exceeded expectations, dropping from 12.3% in June to 10.9% in July.
New Zealand dollar NZD
The New Zealand dollar usually moves with the Australian dollar, however, in August, it trailed its commodity currency peer. New Zealand consumer spending in the second quarter dropped by nearly 15%, a record decline and a sign of the damage lockdown measures have had on consumer spending. Although early indicators suggested a strong rebound through Q3, lockdowns in Auckland have added pressure on struggling economy and GDP estimates.
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