European Union leaders finally reached a $2-trillion deal to rebuild their economy, sending the euro to a six-month high above 1.15. This historic agreement appeases all parties with a nearly equal mix of loans and grants. It will go a long way in boosting growth for a region already in the midst of recovery. Unlike the U.S. and other countries or regions, Europe has managed to keep virus cases low as it reopened. The Eurozone economy has taken a turn for the better, data is improving and this stimulus package will provide a big cushion to the recovery. With the U.S. economic outlook growing more uncertain, these steps to insure a stronger recovery has and should continue to drive the euro higher. As growth divergences become more apparent, stronger currency trends could emerge. With that said, EUR/USD has been in a consistent uptrend for the past month and now that it’s broken above 1.15, there’s minor resistance at 1.16 and more significant resistance above 1.17. As a risk currency, it should benefit from any positive vaccine news and U.S. stimulus talk.
The U.S. dollar on the other hand traded lower against all of the major currencies. There was no U.S. data, and stocks rallied, but investors are less interested in buying dollars given ongoing concerns about the U.S. economic outlook. The July 31 extra unemployment benefit expiration date is quickly approaching and without a clear plan to provide ongoing support to the U.S. economy, the dollar could become less attractive. The White House wants a payroll tax cut and there are significant differences on whether that’s the best way to cushion the economy from another downturn. Companies are not adding workers for a variety of reasons and reducing payrolls taxes may not encourage more spending and hiring. Existing home sales from the U.S. are scheduled for release tomorrow, and we expect a recovery in housing market activity.
The Australian and New Zealand dollars are on a tear with A$ rising to its strongest level in more than a year (February 2019 to be precise). While the Reserve Bank and Governor Lowe expressed concerns about the labor market and the restrictions in Victoria, none of that mattered as the government extended its wage subsidy program for another six months to the end of March. This program, which provided a biweekly payment of A$1,500 to more than 3.5 million workers of businesses struggling to keep employees on, went a long way in cushioning the blow for consumers and businesses. Although the actual payment for the next few months will decline and have two tiers based on hours worked, it was a welcomed relief for the RBA and AUD traders. The Australian dollar will remain in focus as Treasury is scheduled to deliver an economic and fiscal update on Thursday. Meanwhile, it was no surprise that credit card spending increased in New Zealand during the month of June. The country continues to lead the region’s recovery.
Retail sales in Canada also turned positive, but the 18.7% increase in May after the 25% decline in April was weaker than expected. Nonetheless, the loonie still traded higher on the back of U.S. dollar weakness. Canadian CPI numbers are due for release on Wednesday. Further improvements are expected as oil prices rebound. Sterling lagged behind EUR, AUD and NZD as public sector finances came in lower in June. GBP also suffered from EUR/GBP buying.