A feeble recovery in currencies

Currencies and equities attempted a comeback on Thursday after selling off sharply this week. While currencies rebounded, the Dow Jones Industrial Average which rose nearly 300 points intraday failed to hold onto its gains. Investors had been desperate for some good news which they found in the latest new home sales report. Economists predicted weaker housing market activity but more than a million new homes were sold in the month of August, the most since 2006. Record low interest rates and the exodus out of metropolitan cities fueled robust demand for new property.  While many question the durability of this demand, the housing market will be supported by the prospect of no rate hikes for the next few years. Investors also found comfort in the comments from Treasury Secretary Mnuchin who said he will resume talks with House Speaker Nancy Pelosi on another economic relief package. The Democrats floated a new $2.4 billion stimulus bill that includes new PPP aid. 

Comments from Federal Reserve President Bullard were also encouraging - he thinks a full economic recovery is possible by the end of 2020. With that said, his outlook is uniquely optimistic. Ongoing skepticism about the economy and the recovery is one main reasons why stocks could not hold the rally. Fed Chairman Powell’s comments were identical to recent days as he continued to call on the federal government to provide more stimulus. The dollar held onto its gains versus the Japanese Yen and extended higher for the fifth day in a row against the Swiss Franc. Tomorrow’s US durable goods report is not expected to have a significant impact on the greenback so currency traders should take cue from equities and Treasuries.

The biggest beneficiary of the improvement in risk appetite was the Canadian dollar. USD/CAD which rose briefly above 1.34 before the NY open found itself ending the day closer to 1.33.  Prime Minister Trudeau said the country is in a second wave but at 1,248 new cases on Tuesday, these numbers pale in comparison to the 16,096 cases reported in France today. The government has been quick to plan for more stimulus which should cushion the economy and foster ongoing recovery. 

Sterling was the second strongest currency thanks to the government’s new jobs support program. All of these measures are an attempt to ease the slowdown that will inevitably occur as the country undergoes a second wave. Like France, the UK reported the most new virus cases since the pandemic began. Worries about the economic outlook led central bank governor Bailey to remind everyone that negative interest rates is on the table.  

Stronger than expected business confidence helped euro shrug off a new record high in virus cases in France. At this rate, there’s no question that further restrictions are on their way.  Although EUR/USD sold off sharply this week and is prime for a relief rally, the path of least resistance for the currency is still lower. 

Meanwhile the weakest currency was the Australian dollar which fell for the fifth day in a row to its weakest level since July 20th. With no Australian economic reports scheduled for release, investors are positioning for easing. The ongoing lockdown in Melbourne will have a drastic impact on the economy. At 2.5 months, it’s one of the strictest and longest lockdowns in the world. Earlier this week, RBA Deputy Governor DeBelle talked about all of the options the central bank has at its disposal to increase stimulus and shared his desire for a lower currency. There’s scope for a rate cut and Quantitative Easing in October or November.  In contrast, the New Zealand dollar traded higher today despite the first trade deficit since 2006.