FX Matters – Recovery and second wave fears; GBP and CAD up | Article – HSBC VisionGo
In June, markets focused on the possible speed of economic recovery following lockdowns while also weighing the possibility of a second wave of COVID-19. There were some signs of life in economic data, such as the US non-farm payrolls, but there was also a substantial increase in the numbers of new cases being reported in some US states.
GBP underperforms… again
GBP-USD rose 0.5% in June. The GBP’s biggest gain for June came on the first day of the month, rising 1.2%. This was catalysed by global risk-on sentiment but also aided by UK Chancellor Rishi Sunak’s pledge to continue to support the economy via the furlough scheme (which is designed to help people put on leave because of the coronavirus outbreak, and prevent mass redundancies). 11 June saw the biggest loss for the GBP which fell 1.1%. This move was tied to the global risk-off sentiment which prevailed following a gloomy testimony from the Federal Reserve (Fed) and worrying COVID-19 data. On 18 June, the Bank of England (BOE) announced an additional GBP100bn of QE, in line with expectations, alongside forecasts of a further decline in inflation. Despite initially jumping on the announcement, the GBP ended the day down 1%.
There was little respite for the UK economy. On 12 June, UK monthly GDP data for April showed a record 20.4% fall, likewise April industrial production data contracted 20.3% MoM, and the GBP declined 0.5% against the USD after a knee-jerk reaction higher. However, there was some positivity in the May retail sales which posted a monthly gain of 10.2% compared to expectations of 4.1%. Furthermore, PMI data on 23 June surpassed expectations and the manufacturing PMI was above 50, indicating expansionary conditions. This led to a 0.4% appreciation in GBP-USD. However, the GBP continued to slide into the end of the month as UK Prime Minister Boris Johnson committed to spending large sums to jumpstart the economy. Announcements of local lockdowns as coronavirus cases bounced in certain locations likely dampened the GBP sentiment into month-end.
In Brexit, UK Prime Minister Boris Johnson and President of the European Commission Ursula von der Leyen met via video conference and agreed to an additional six weeks of intensive Brexit negotiations. This helped the GBP as it reduced the mounting risk that the UK was heading for a cliff-edge exit from the transition period at the end of 2020. By the end of month deadline, no extension was agreed to the transition period.
Canada: No negative rates help the CAD finish positive
USD-CAD fell 1.5% over the month. On 1 June, the CAD appreciated sharply following a broad risk-on move across FX markets, leading to a 1.5% fall in USD-CAD. This appreciation of the CAD largely sustained until sentiment switched on 11 June, when USD-CAD rose 1.6%. Furthermore, the 8.2% fall in WTI crude oil prices on 11 June weighed on the CAD. Thereafter, price action was choppy, albeit USD-CAD did fall following the Bank of Canada (BOC) Governor Macklem’s comments on 22 June that he saw 0.25% as the effective lower bound for interest rates, effectively ruling out negative rates. Canada’s economic data for June was mixed with the May unemployment rate at 13.7% being lower than expected; however, CPI declined with prices falling 0.4% YoY and retail sales for April dropped 26.4% MoM.