This week’s FX trading opportunities begin Tuesday

This is a busy week for the forex market and the opportunities begin on Tuesday with the Reserve Bank of Australia’s monetary policy announcement and the US’ non-manufacturing ISM reports.  There are two central bank meetings on this week’s calendar along with labor market data from New Zealand, US and Canada.  Of all these reports, non-farm payrolls on Friday will be the most market moving as the US is expected to report the worst month for job losses ever. However before we get to the end of the week report, the US dollar and the broader financial markets will be taking their cue from the White House and other economic reports that can give us insight to NFPs like non-manufacturing ISM and ADP.  

Currencies and equities traded lower during the first half of the NY session but recovered its losses by the end of the day. The big story in the today is the escalating tensions between the US and China. President Trump accused China of suppressing and covering up the virus – he said “we’re going to be giving a very strong report as to exactly what we think happened,” and “tariffs would be the ultimate punishment” on China. The UK joined in pressuring China to answer questions over the coronavirus outbreak. A renewed trade war is the last thing the global economy needs right now but as it stands, it certainly seems that the relationship between US and China will deteriorate further in the days ahead.  Warren Buffet also sold all of Berkshire Hathaway’s airline holdings sending a wave of panic across the financial markets. Investors are worried that these actions represent the legendary investors’ view that there has been a permanent shift for certain industries.  Lastly, the prospect of soft economic data from all corners of the world including tomorrow’s US non-manufacturing ISM report also contributed to the weaker tone of stocks on Monday. 

The greenback was mixed with the dollar strengthening versus the euro, sterling Swiss Franc and New Zealand dollar but weakening against the Japanese Yen, Australian and Canadian dollars. The White House is talking about more stimulus and if this topic gains traction, it could mitigate the declines in currencies and equities. Treasury Secretary Mnuchin said this morning that Trump is prepared to back additional stimulus if needed and the President himself said on Sunday that he will advocate for payroll tax cut in the next stimulus bill.

The main focus tonight will be on the Reserve Bank of Australia rate decision. Investors were hesitant to drive AUD lower ahead of the Reserve Bank’s monetary policy announcement. The RBA won’t be looking to change interest rates, but the central bank’s economic forecasts which are due on Friday. After cutting rates twice in March, the RBA should feel that policy is appropriate for the time being especially as they begin to slowly ease lockdown restrictions. Yet the tone of the RBA statement should be cautious because as recently as late April, Governor Lowe said national output could fall by around 10% in the first half of the year with unemployment likely to hit 10% by June.  On the bright side, he also said that this is more likely a period of economic contraction than recession. 

Sterling should remain under pressure ahead of the Bank of England’s monetary policy announcement and Quarterly Inflation Report. Between COVID-19 and the stressed trade negotiations between the EU and UK, the central bank will have no choice but to lower their economic projections. This is not a big week for euro but investors should be watching  the headlines closely as Chancellor Merkel discusses reopening the German economy with state leaders on Wednesday. If nothing meaningful comes out of that, euro will trade on the market’s appetite for US dollars.

Last but certainly not least, this is a big week for the Canadian dollar. On Friday, the loonie tanked after Trudeau chose Tiff Macklem to succeed Governor Poloz. In a speech following the announcement, Macklem suggested that he would be open to idea of negative interest rates.  Canada’s calendar kicks off with trade data on Tuesday, IVEY PMI on Thursday and April labor market numbers on Friday. All of these reports are expected to show the stress that COVID-19 has had on Canada’s economy.