Surging US COVID-19 cases finally caught up to the greenback this week. USD/JPY broke support on Friday with the US dollar trading lower against most of the major currencies. Aside from the Japanese Yen, the New Zealand dollar, euro and sterling benefitted the most from US dollar weakness. The Swiss Franc, Australian and Canadian dollars remained under pressure on Friday. US producer prices unexpectedly declined in June contributing to the sell-off in the dollar. No major US economic reports were released this week but that changes in the week ahead with retail sales, Empire State, Philadelphia Fed and June University of Michigan consumer sentiment reports scheduled along with the Federal Reserve’s Beige Book.  Retail sales should be stronger because reopenings continued in June but the manufacturing and consumer sentiment numbers could be weaker as they reflect the impact of tighter restrictions on business activity.

There’s a lot of data next week but divergences in virus cases along with government responses should continue to play the most important role on currency movements. The outperformance of NZD has been a direct result of the country’s successful containment of COVID-19 with new cases in the single digits since mid-April. In Eurozone nations hit the hardest by the virus in March, there’s been no sign of a second wave and for the UK a new round of stimulus has investors looking forward to a more moderate contraction in economic activity. However even as some countries get COVID-19 under control, new flareups are being reported across the globe in Australia, HK and Japan.  As long as there’s a risk of a global second wave, rallies in currencies and equities will be limited.  Still, with borders shut, some countries will fare better than others and their currencies will outperform as they attract investors. 

Looking ahead, economic data should be as important as the number of COVID-19 cases next week. Aside from US retail sales, the Empire State and Philadelphia Fed surveys, Chinese trade and Q2 GDP will have a general impact on risk appetite and currencies. For euro in particular, we’ll be watching the European Central Bank’s monetary policy announcement and the German ZEW survey.  No changes in monetary policy is expected from the ECB. The central bank will be pleased with recent virus developments in the Eurozone but the burgeoning US pandemic causes concerns as there can be no full-fledged EZ recovery without a US recovery. 

The Bank of Canada also has a monetary policy announcement. They are in a very similar situation as the ECB where domestically, virus cases are on the decline and the economy is recovering. However their proximity to the US is a major problem and will keep the border closed for a longer period of time. Canadian employment numbers were released on Friday and ….

A long list of market moving UK economic reports are also scheduled for release. Inflation, employment, monthly GDP and trade numbers are on the calendar. The announcement of more stimulus fueled gains in sterling this week but data will decide whether those gains are sustainable. Improvements are expected but with PMIs reporting further cutbacks in services and manufacturing activity, the labor market numbers may not inspire much confidence.

For the Australian dollar, the focus will be on Chinese data and then Aussie labor market numbers. New Zealand has PMI and second quarter inflation numbers scheduled for release.  Even if Australia reports better jobs numbers, the lockdown in Victoria will discount any improvements.

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