FX: China worries challenge early signs of global recovery

The US dollar traded higher against all of the major currencies today but its gains were modest as investors worry about ongoing US-China tensions. The Trump administration approved arms sales to Taiwan at the opposition of China and the Senate passed a bill that could delist Chinese companies from US exchanges if they cannot prove that they are not owned by the Chinese government. With that said, PMI reports across the globe reinforce early signs of a global recovery.  This should be no surprise considering that economic activity completely shutdown in April – so on a percentage basis, any recovery in May will be significant. It’s a completely different story of course on an absolute basis but PMIs are compared to the prior month. Even if some of the reports like Markit Economics’ US manufacturing PMI rises less than expected, investors are just happy that growth is moving in the right direction. In fact, across the globe we are seeing a faster recovery in services than manufacturing.

For the US the Philadelphia Fed manufacturing index rose to -43.1 from -56.6 against expectations for an increase to -40. Markit PMI manufacturing rose to 39.8, just shy of the 40 forecast. However services beat expectations rising to 36.9 from 26.7. Jobless claims dropped slightly less than expected but last month’s figure was also revised lower. Existing home sales and leading indicators were slightly better with both measures falling less than anticipated. Consumer confidence and new home sales are scheduled for release on Friday. Home sales should be subdued but a nice uptick in confidence for May could drive USD/JPY above 108.

We’ve been looking for EUR/USD to hit 1.10 all week and it finally happened today on the back of stronger Eurozone PMIs and weaker US jobless claims.  However, after hitting a high of 1.1008, the currency pair backed off and ended the day well off its highs. The tides are turning for the Eurozone economy but like the rest of world, services are leading the recovery.  While the Eurozone saw strong upticks in manufacturing and services PMI in April, in Germany, the region’s largest economy, the biggest surprise was services as the improvement in manufacturing fell short of expectations. Regardless, there’s been nothing but good news out of the region this week which explains the overall strength of the currency. 

In the UK on the other hand, manufacturing and service sector PMIs beat expectations. These figures helped sterling recover from its lows but GBP/USD was unable to muster any gains. The problem is that retail sales are scheduled for release tomorrow and double digit losses are expected. Economists are looking for consumer spending to fall -15% in the month of April after dropping -5% in March. This would mark the third straight month of declines in spending and the 5th of 6 months of lower spending.  This pattern alone explains the underperformance of sterling. UK officials are also talking openly about the possibility of negative interest rates with Bank of England Governor Bailey noting that he’s changed his position a bit and they shouldn’t rule out anything.

Over the next 24 hours, the commodity currencies will remain in focus with New Zealand and Canadian retail sales numbers scheduled for release. The persistent rise in oil prices helped the Canadian dollar hold onto its gains but with tomorrow’s report, we’ll finally see how badly spending was hurt by COVID-19 in March. Last month’s report was for February so there was next to no impact from the virus and in March, we’ll see the first signs of weakness. The same is true for New Zealand who reports first quarter data – between RBNZ bearishness and the economic shutdown in Q1, spending should be lower.