The U.S. dollar kicked off the second week of June lower against all of the major currencies today. Last week, we had three monetary policy announcements, nonfarm payrolls and Canada’s employment report on the calendar. This week, the Federal Reserve’s monetary policy announcement is the only big event, with a smattering of less market-moving economic releases. The U.S. dollar will be in focus as investors wait to see if the Fed is moved by recent data developments. While it has been revealed by the Bureau of Labor Statistics that 2.7 million people were incorrectly categorized, understating the unemployment rate by 3 percentage points, there’s no question the labor market is stabilizing. Still, the U.S. economy is on the road to recovery and with prior Payroll Protection Program rehiring requirements, we suspect more jobs were recovered at the end of May. Today’s decline was triggered by the National Bureau of Economic Research’s announcement that the U.S. economy fell into recession in February. This breaking release from the nation’s official economic arbiter along with reports that U.S. President Donald Trump plans to sign a bill pressuring China over Uighurs sent USD/JPY plunging lower. The weakness was not limited to the Yen, as the greenback slipped against all major currencies.
Come Wednesday, we are looking for a more upbeat tone from Fed Chairman Jerome Powell that could revive the greenback’s rally. Monetary policy needs to remain accommodative but at this stage, there’s no need for more stimulus, especially negative rates. If Powell suggests that the contraction will be shallower than anticipated or the scenario is less severe, the dollar will rise. However, if he remains cautious, emphasizing the risk of a second virus wave, the dollar will fall. One of the most important questions that Powell will be asked is whether the worst is over. His response could have a huge impact on the greenback. The central bank’s latest economic projections, which could now confirm a Q1 recession, will be important. The U.S. dollar traded lower against most of the major currencies on Monday, with the New Zealand and Australian dollars leading the gains. USD/JPY completely shrugged off the market’s appetite for risk and continued gains in U.S. stocks.
After pulling back on Friday, the euro extended its gains despite weaker data. German industrial production dropped more than expected in April, with activity contracting 17.9%. This was not only a back-to-back decline but also the worst dip ever. March and April were tough months for manufacturing, which was hit hard by lockdown measures. Despite the improvements in PMIs, tomorrow’s trade data should be softer as well as they reflect conditions in April. ECB President Christine Lagarde also said the central bank's quick measures prevented depressed, deflationary conditions. UK-EU trade talks are going nowhere and, with no major UK economic reports until Friday, when industrial production and trade data are released, sterling will trade primarily on the market’s appetite for U.S. dollars and risk flows. GBP/USD rallied on the back of broad based U.S. dollar weakness.
The New Zealand and Australian dollars were the best performers, with the Canadian dollar trailing not far behind. NZD/USD is up for six straight days, while AUD/USD is up for eight, the longest stretch of gains since the rally that began at the end of December 2017.
Chinese trade data was much better than expected, with the country’s surplus hitting a record high of $63 billion. However, this was purely a function of lower imports and exports and not an improvement in economic activity. Nonetheless, these numbers were enough to catapult NZD and AUD higher as New Zealand ends social distancing completely after eliminating COVID-19. In the last two weeks, there’s been no new cases, which is a sign that if done properly, the virus can be eradicated with no vaccine. Unfortunately, these numbers only show the New Zealand’s government’s effectiveness and not the ability of other countries to follow suit. The situation in Australia is very similar with no more than 26 cases a day since April 20. Social distancing measures are still in place but the government is actively talking about easing restrictions. The Canadian dollar extended its gains versus the greenback on the back of stronger housing starts, which rose for the first time this year.