Currencies recover on COVID-19 stimulus talk

At the start of the New York trading session, all of the major currency pairs from EUR/USD to USD/JPY were headed lower. That was the trend for most of the morning, but mid day, Senator Chuck Schumer said Senate Majority Leader Mitch McConnell has agreed to restart coronavirus stimulus talk. Investors cheered this news, sending stocks back into positive territory. Currencies followed suit with euro, sterling and other major currencies erasing all of its losses to end the day higher versus the greenback. Although USD/JPY and USD/CHF lost value, their sell-off were moderated by the turnaround in risk. 

The Philadelphia Fed index and existing home sales report also show the US economy performing better than expected. While manufacturing activity in the Philadelphia region slowed, it was not as bad as expected. Existing home sales also beat expectations, rising 4.3% against -1.2% forecast. There’s no question that the fourth quarter will be a tough one for the US but slowing from a higher base could be good news. Regardless, investors are selling dollars and this trend could continue in the near term as more states apply restrictions. Yesterday the market reacted negatively to New York City’s decision to close schools and today, stocks fell when Mayor Blasio said indoor dining could be closed in the next week or two.  As the US heads into the Thanksgiving holiday, which is time of family gatherings, states are trying to take steps that can hopefully prevent the virus from spiraling out of control in December. 

Euro continues to be one of the biggest beneficiaries of US dollar weakness. Thanks to the restrictions taken by European governments, the virus is spreading more slowly. If they turn things around before Christmas and business activity can resume in a less restrictive way, the rally in the currency would be justified which is what investors are banking on. Sterling also recovered earlier losses despite the European Union’s decision to suspend Brexit talks after a team member tested positive for COVID-19. UK retail sales are due for release tomorrow and given the decline in spending report by the British Retail Consortium, the risk is to the downside. Europe began closures in October so October and November data from the UK and Eurozone should be particularly ugly.

All three commodity currencies turned positive by the end of the NY session. Canadian retail sales are scheduled for release tomorrow and given the rise in wholesale sales, improvement in labor market conditions and uptick in consumer prices, we are looking for stronger numbers that could extend losses in USD/CAD. Australia reported blowout labor data with more than 178K jobs created last month. To put this into context, economists anticipated 30K decline. What makes the report even more impressive is the fact that there was solid upticks in full and part time employment and an increase in participation. This is a direct result of easing restrictions in Victoria and is something European nations can look forward to when they get the second virus wave under control.