FX: Will The Global Recovery Shine This Week?

For the past few weeks investors have been focused on the U.S. recovery and its impact on the U.S. dollar. They were sorely disappointed when nonfarm payrolls and retail sales came out well under expectations. But so far the U.S. dollar’s losses have been limited. Even stocks, which declined on Monday, are off last week’s lows. This nonchalant attitude stems from the market’s confidence in the global recovery. While some Asia countries tightened coronavirus restrictions, European nations are easing them. The UK kicked off the week with fewer restrictions on travel and indoor dining. In the euro area, Spain ended its curfew last Sunday. Today, Italy said it would phase out its curfew over the next week. On Wednesday, France will move back its curfew to 9 p.m. from 7 p.m. as restaurants and cafés reopen outdoor seating. This will be pushed out further to 11 p.m. on June 9 if case numbers continue to fall.

The global recovery could shine this week, especially in Europe. Some of the most important economic reports on this week’s calendar are Eurozone and UK PMIs. From the UK, labor market, consumer spending and retail sales numbers are also due for release. On balance, all of these reports should be stronger. Despite widespread lockdowns in March and April, German businesses grew more confident. UK data should be particularly good, with the government reopening pub gardens and shops in mid-April. The euro and sterling are our favorite currencies this week as we look for EUR/USD to test 1.22 and GBP/USD to hit 1.42.

The lack of market-moving U.S. data should also help the euro and sterling climb higher. The last nonfarm payrolls and retail sales reports were very weak, but there’s no doubt that the U.S. economy is recovering and the positive momentum will continue. Even the Empire State index, which beat expectations but declined from the previous month, fell primarily on supply constraints. In the near term, we expect weakness in USD/JPY, with a likely move below 109. In the long term, U.S. data will improve, which will revive demand for U.S. dollars.

Japan releases first quarter GDP and PMI numbers this week. Having just expanded its state of emergency over the weekend to more prefectures, Japan could be one of the last major economies to recover. Japan has the world’s oldest population and yet less than 1% are fully vaccinated. The Japanese have long been skeptical of vaccines, and with a successful campaign to bring down COVID-19 cases last year, the uptake rate will be very slow. The longer it takes for the country to vaccinate its population, the more delayed the recovery.

The best performing currency today was the Canadian dollar, which is at the cusp of hitting a six-year high versus the greenback. Although housing starts declined, the hopes for an economic recovery drove oil and the Canadian dollar higher. Canadian inflation data is due for release this week and, like the U.S., a sharp increase in prices is expected for the month of April. Meanwhile, disappointing consumer spending numbers in China and the sell-off in stocks drove the Australian and New Zealand dollars lower. Service sector activity in New Zealand picked up in April, but the prior decline in manufacturing activity continued to haunt the currency.