FX Update – May 8 – Jobs Day


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By: Stuart Cowell

The Yen has continued to soften against the commodity currencies and, to a lesser extent, most other currencies, although concurrent Dollar weakness has left USDJPY on a steady footing. This has come amid rallying stock markets, which are pricing-in a reopening of major economies from virus-containing lockdowns. Markets (at least equity and forex markets) are overlooking dismal data (such as a 6% plunge in Japanese household spending, in data released today, and an expected 16% plunge in U.S. April unemployment, in data released later) as being backward looking. Yesterday’s unexpected 8.2% y/y rise in Chinese exports in April, contrary to the median forecast for a 14.1% contraction, was a tonic for investors, while news that the US and China have agreed to strengthen cooperation in trade talks has gone down well, too.

This backdrop has seen the some of the Yen’s built-in safe-haven premium unwind. USDJPY has been settled in the mid 106.00s, thanks to dollar weakness, while EURJPY has extended its rebound gains from three-and-a-half-year lows for a second day, today reaching a two-day peak of 115.46. AUDUSD rallied by nearly 1% to a four-day high at 0.6961.

While the US and China are being pragmatic on the trade front, tensions between the two economic superpowers remain tense, with the Trump administration ratcheting up its accusations against China about the origin of the coronavirus pandemic. Reports last week suggested that the White House is considering taking a number of measures against China, including new tariffs. It should be obvious that Trump motives for blaming China are high six-months out from a presidential election, though the fraying relations is more than just electoral politics. The US, and other Western nations, have been growing uneasy about China’s power in multilateral organisations, such as the World Health Organisation and World Bank, feeling a need to reassert itself. Aside from geopolitics, there is also a risk that markets are pricing in a too optimistic view on the potential for a strong rebound. Most economies are unlikely to return to pre-pandemic normality until such time there is a vaccine or a cure for the Covid-19 disease that the coronavirus causes.

Markets await a record US and Canadian jobs day.

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