Most of the major currencies powered higher today even though stocks gave up part of Monday’s gains. USD/JPY rose above 108 but ended the NY session closer to 107.75. In fact, early rallies faded as the day progressed with EUR/USD and USD/JPY coming off their highs. According to the latest economic reports, US housing market activity contracted further in the month of April with housing starts falling 30% and building permits falling 20%. Of course this is no surprise because housing will be one of the sectors that suffer the most from COVID-19 and will take the longest to recover. Figures on new and existing home sales will be even worse. Federal Reserve Chairman Powell also spoke this morning and his comments were a little less upbeat. He warned that the economic recovery could be hampered without more state aid and that lasting unemployment can weigh on the economy for years. Given the audience and his desire to inspire them to provide greater fiscal support, his subdued tone is not a surprise.

Meanwhile, the tides are beginning to turn for the euro. For the past 6 weeks, EUR/USD has been consolidating near 1.08 but in the last 48 hours, the pair rose within 25 pips of 1.10. German and Eurozone investor confidence improved significantly in the month of May with the German ZEW survey jumping to 51 from 28.2. The data shows that existing sentiment is weak but expectations rose to their highest level since March 2015. It is clear that everyone is looking forward to the recovery and expect it to start soon. We saw a similar improvement in US consumer sentiment last Friday. Aside from early signs of a bottom in the Eurozone economy, investors were also pleased with Merkel and Macron’s proposal for a EUR 500 billion recovery fund on Monday. Countries across the Eurozone are beginning to ease travel restrictions which should encourage economic activity.  For all of these reasons, we believe that the recovery in EUR/USD is durable. That appears true as well on a technical basis with EUR/USD holding its breakout above 1.09. 

Mixed UK labor market numbers allowed sterling to participate in the rallies. Although more than 850K people lost their jobs in the month of April which was greater than expected, the unemployment rate improved and weekly earnings ex bonus fell less than expected. As we’ve seen in recent weeks for many of the major currencies, investors will latch onto any piece of good news. UK inflation data is due for release tomorrow and prices are expected to fall because according to the PMIs, not only were prices subdued in manufacturing but the “rate of decline in average charges among service providers was the fastest in the survey history.” However, CPI/PPI is generally less market moving than labor data so if today’s report failed to hurt sterling, softer inflation numbers may not do much either.

The best performing currencies were the New Zealand and Australian dollars.  Instead of falling, producer prices increased in the first quarter in New Zealand by 0.1% on an input basis and 0.4% for output. The Reserve Bank of Australia released the minutes from their last meeting and their willingness to scale up bond purchases if necessary has caused A$ to underperform. Also, China continues to add pressure on Australia with tariffs on barley and beef in retaliation for supporting WTO challenge. USD/CAD extended its slide despite lower oil prices. Canada releases their consumer price report tomorrow and prices are expected to fall sharply in April which could stem the currency pair’s slide.

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