With the release of the US jobs numbers, three central bank meetings, and the resumption of critical Brexit talks, it’s a busy week for the markets. Recently, traders worldwide ignored very weak data on the way down, but the same might not hold true if the data holds positive surprises – which in turn presents an asymmetric risk for the dollar. Meanwhile, the ECB could expand its QE program but inconsistently, which may not hurt the euro. Neither the Reserve Bank of Australia nor the Bank of Canada is likely to act as those currencies could be driven mainly by risk sentiment and US-China tensions.
Could Friday`s Nonfarm payroll represents an asymmetric risk?
lately, the weak US economic data have been mostly ignored by the market, under the logic that the powerful stimulus plans from governments and central banks will set the stage for a quick recovery and the carnage has been signaled well in advance.
But while investors ignored the scary data on the way down, that might not be the case if the figures start to improve going forward. In this sense, the risks surrounding the dollar from the upcoming US employment data on Friday seem asymmetric and tilted to the upside.
Nonfarm payrolls are expected to fall by 8 million in May, far less than the 20.5 million plunges in April, but still a very concerning number. That’s expected to push the unemployment rate up to 19.5% from 14.7% in April.
If the reading came worse than expected, investors might shrug it off as just another piece of bad news for May, which everyone already knows was disastrous. Hence, if the dollar drops on the news, the drop could be relatively limited. On the contrary, if the data comes in better than expected, that might signal that even May – possibly the peak of the recession – wasn’t as disastrous as feared, and perhaps trigger a more powerful upside reaction in the dollar.
Ahead of Friday’s payrolls, there’s also the ISM manufacturing PMI for May on Monday, and the non-manufacturing index on Wednesday. The ADP employment report on the same day will give us a taste of what to expect from Friday’s official jobs data.
The ECB is likely to remain in catch-up mode next Thursday as the main event alongside global forces.
The European Central Bank (ECB) will decide on Thursday whether to expand its new QE program to fight the pandemic, and recent remarks by key officials like the governor of the Bank of France suggest that’s a strong possibility. At the current pace of bond purchases, the €750B Pandemic Emergency Purchase Program is already at about a 30% utilization rate. To counter added downside risk to the economy and to increase the longevity of the purchase program it will have to be expanded to perhaps well over €1 trillion: makling the real question is whether the ECB will enlarge it now or wait until a later meeting.
From a risk management perspective, it makes more sense for policy makers to act at the current time as developments in the economy have been tracking worse than the central bank anticipated. This was confirmed in remarks from ECB President Lagarde where she said that the recession has been deeper than initially expected. She also said that the central bank’s most pessimistic scenarios of a fall in GDP of 8-12%, with the mild scenario a 5% contraction, is outdated.
Waiting won’t achieve much. In fact, it could be disadvantageous as it might raise speculation about whether the program will be expanded at all, tightening financial conditions and undermining the ECB’s previous stimulus efforts.
Normally, more stimulus measures would lead to a negative reaction in the euro, but these aren’t normal times.
When the ECB first passed this pandemic QE back in March, the single currency actually rose on the news, as the additional stimulus diminished the risk of stress in vulnerable bond markets like Italy’s. It might be a similar story in the coming period, with the negative effects of lower interest rates will be overshadowed by the positive effects of fading financial risk. Yet, the bigger driver for the currency will be the talks among EU countries about the recovery fund which begin on June 16th.
Several macro releases may have little incremental effect. Purchasing managers’ indices from Spain and Italy on Tuesday will inform revisions to the May readings for Eurozone PMIs. German factory orders (Friday) and German jobs (Wednesday) offer additional stand-out risk. Switzerland releases Q1 GDP (Wednesday) and May CPI (Thursday).
RBA unlikely to move, all eyes on China tensions
Recently the latest remarks from the governor of the Reserve Bank of Australia (RBA) sounded surprisingly upbeat, where he indicated for a decline in jobs in which drops to 15% instead of 20% as originally feared. His tone wasn’t that of a central banker preparing to add more stimulus.
Markets also think the RBA is done with this recovery cycle, pricing in a very small probability for rate increases going forward, not rate cuts. If this cautious optimism is reflected in the upcoming RBA decision on Tuesday, the Australian dollar could edge a little bit higher against the dollar. That being said, the overall driver for the Aussie will be how risk sentiment develops, and how the tensions between the US and China develop.
On the economic front, Australia’s GDP numbers for Q1 are due Wednesday but are probably ‘old news’, as are Thursday’s retail sales for April, since a preliminary estimate has already been released.
Bank of Canada: Investors await new governor’s policies
Governor Poloz will deliver his final policy statement on Wednesday before passing the baton to incoming Governor Macklem. The BoC will announce its own decision on Wednesday - while no action is expected, investors may tune in to get a glimpse of the new governor’s views on policy.
Will the governor think of doing too much stimulus is better than doing too little? Or does he believe the BoC has done enough already? It will be a statement-only affair with no forecasts or press conference. No major policy changes are expected at this transition point
The governor will probably prefer to be on the dovish side for now. If he doesn’t rule out things like negative rates for example, that would argue for a negative reaction in the Loonie. In the bigger picture though, much will depend on how oil prices and risk appetite evolve.
Canada will also consider a trio of macro readings. The dominant print will be Friday’s jobs report for May. The Labour Force Survey is expected to register another one million drop in total employment and a 16% unemployment rate.
Brexit talks resume: brace for turbulence
Finally, in the UK the June 30 deadline will have all eyes on as the final Brexit negotiating round where Britain must decide whether it wants an extension to the transition period. If not, a no-deal Brexit at the end of the year becomes the default.
Prime Minister Boris Johnson has been adamant that he won’t seek an extension, and while this may be a negotiating tactic to extract concessions, it’s still difficult to have any confidence in the pound ahead of what promises to be a drama-packed month. If no-deal fears return, that could also undermine the euro, albeit to a lesser extent than the pound.