Risk Aversion Returns To FX, Bank of England Preview

Risk Aversion Returns To FX, Bank of England Preview

Kathy Lien  | Jun 17, 2020 22:15

There’s still a high level of anxiety in the financial markets as shown by the moves in currencies and equities. High beta currencies such as the euro, sterling and the Canadian dollar sold off, while the Swiss Franc and Japanese Yen held steady. Investors have a lot to be concerned about, from new lockdown measures in Beijing, skyrocketing virus cases in the U.S., expiring U.S. unemployment benefits to political and military tensions between China and India and, separately, North and South Korea. There was a brutal crash between Chinese and Indian soldiers at a border that prompted India’s prime minister to say its soldiers would not die in vain. North Korea on the other hand bombed a joint liaison office that it shares with South Korea. Growing military conflict in the Asia region is the last thing that the world – or the markets – need right now. However, today’s rally in stocks is a sign that investors are looking past these tensions because the chance they’ll actually blow up into a full-fledged military conflict is small. So instead, their focus continues to be on COVID-19 developments.
 
New coronavirus cases are rising across the globe, but investors are encouraged by reports that Dexamethasone, a commonly used steroid, can be used to reduce deaths in severely ill COVID-19 patients. As my colleague Boris Schlossberg noted, “Although globally cases of coronavirus continue to rise, the rate of deaths is beginning to decrease as medical professionals around the world find better protocols for treatment. The market may be signalling that it no longer fears the existential threat from COVID even if a vaccine is not developed any time soon, as the virus is now being viewed as a manageable infection rather than a terminal one.”
 
U.S. data was mildly disappointing, with housing starts and building permits rebounding less than expected in the month of May. Federal Reserve Chairman Jerome Powell’s warning of significant uncertainty for the recovery and the need for more Congressional spending resonates in the markets. This somber tone was maintained throughout his testimony on Wednesday, which explains USD/JPY’s resistance to gains despite strong retail sales last month. Given the unexpected improvement in the Empire State survey, Thursday’s Philadelphia Fed survey should also be better than expected, limiting the U.S. dollar’s slide.
 
The next 24 hours will be a busy ones, with the Bank of England’s monetary policy announcement, New Zealand GDP and Australian labor market numbers scheduled for release. Sterling has been holding up well against the U.S. dollar despite the prospect of further easing. GBP/USD has not closed below 1.25 in the last two weeks. Yesterday’s labor market report was weaker than expected, with average weekly earnings growth slowing and the claimant count dropping less than expected. Consumer price growth also slowed on an annualized basis as there was no uptick in monthly CPI.  At minimum, the market is looking for the central bank to increase its bond-buying program by 100 billion. However, it could also opt for a bigger move and increase its Quantitative Easing program by 200 billion to 250 billion pounds. The central bank is also more open to the idea of negative rates than other central banks, so if it boosts bond purchases more than expected and spurs speculation of negative interest rates, we could see GBP/USD break below 1.25 quickly and aggressively. If the central bank starts to downplay the need for negative rates and increases QE by only 100 billion pounds, sterling will rally. Judging from the performance of the UK economy since the last meeting, we think the Bank of England will opt for a more aggressive move. 
 
The Australian and New Zealand dollars are holding onto recent gains ahead of tonight’s reports. Like many other countries around the world, GDP is expected to contract in the first quarter. However, New Zealand beat out COVID-19 faster than any other country and completely removed social distancing requirements a week ago. So investors may not put much focus on Q1 data. In Australia, job losses are expected to moderate, but the only question is whether the numbers will be as good as economists anticipate. 
 
Last, but certainly not least, the Swiss National Bank also has a policy announcement on the calendar. No changes are expected as more relaxed restrictions in Europe ease the central bank’s concerns. 

Kathy Lien

Related Articles

Latest comments

Add a Comment
Please wait a minute before you try to comment again.
Discussion
Write a reply...
Please wait a minute before you try to comment again.

Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.

English (USA) English (India) English (Canada) English (Australia) English (South Africa) English (Philippines) English (Nigeria) Deutsch Español (España) Español (México) Français Italiano Nederlands Português (Portugal) Polski Português (Brasil) Русский Türkçe ‏العربية‏ Ελληνικά Svenska Suomi עברית 日本語 한국어 简体中文 繁體中文 Bahasa Indonesia Bahasa Melayu ไทย Tiếng Việt हिंदी
Sign out
Are you sure you want to sign out?
NoYes
CancelYes
Saving Changes

+

Download the Investing.com App

Get free real time quotes, charts and alerts on stocks, indices, currencies, commodities and bonds. Get free top of the line technical analysis/predictors.

Investing.com is better on the App!

More content, faster quotes and charts, and a smoother experience is available only on the App.