Equities and currencies traded higher today after Dr. Anthony Fauci, director of U.S. National Institute of Allergy and Infectious Diseases, said there could be a COVID-19 turnaround next week. Fauci noted that the U.S. death toll is now lower than initially thought, a sign that the curve may be flattening. The response in currencies have been mixed, with the U.S. dollar strengthening against the euro, Canadian dollar, Swiss Franc and Japanese Yen but slipping against sterling, the Australian and New Zealand dollars. This price action suggests that investors are not convinced that the gains are sustainable, particularly after New York State reported the largest daily increase in positive cases to date.
On Tuesday, President Donald Trump talked about reopening parts of the economy in four to six weeks, which is possible but that doesn’t diminish the damage done to the corporate sector, which will take time to recover. The good news is that the U.S. can watch China’s comeback and how its process of restarting social and economic activity affects the number of COVID-19 cases. If the country successfully avoids a second wave, there’s hope for the rest of the world. But if the number of cases surge, forcing parts of the country back into lockdown, then it would be safe to assume that a restart of the U.S. economy will be delayed as well.
The muted performance of the U.S. dollar is also a reflection of the March scheduled and unscheduled FOMC minutes. Their economic outlook deteriorated sharply last month and their economic projections have been downgraded significantly, which is no surprise considering that the central bank acted quickly to cut interest rates to zero and restart Quantitative Easing. With that said, the impact on the dollar was nominal because the central bank's dovish outlook was largely discounted by the market.
Tomorrow, we could see some big moves in currencies. The U.S. dollar remains in focus with jobless claims, inflation and consumer sentiment numbers scheduled for release. Between lower oil prices and a strong dollar, PPI is expected to slide. The University of Michigan sentiment index should also fall sharply as states settle into lockdown mode. But the main focus will be on the OPEC meeting. Oil prices are down 50% year to date after Saudi Arabia increased production. Investors will be eager to see if the price war between Saudi Arabia and Russia will end with an agreement by all parties to cut world production by 10 million barrels. All signs are pointing that way as Russian President Vladimir Putin seems willing to play ball but its unclear how Saudi Arabia feels. This will be a crucial meeting for the oil market, the Canadian dollar and likely risk appetite. In many ways, it could supersede the impact of Canadian labor market numbers, which are also due for release tomorrow. Given the sharp decline in the employment component of the IVEY PMI index, significant job losses are expected for the month of March. If OPEC leaves production unchanged and labor data is weak, we could see USD/CAD head for a move back above 1.42. If they cut production, USD/CAD could sink below 1.40.
G20 leaders are also meeting to discuss the health and economic emergencies caused by COVID-19. Many leaders are looking for coordinated action and while there could be steps taken on the health-care front, including increased health-care spending, very little coordination is expected on an economic front.
Meanwhile, the weakest currency today is the euro, which was hit from all sides. Spain reported the highest daily increase in coronavirus cases and deaths in four days. The ECB said it has an obligation to keep rates low for a long period of time, while leading Germany economic forecast institutes see the economy shrinking as much as 10% in the second quarter. German trade numbers are due for release tomorrow – softer data could accelerate the slide in the currency. UK industrial production, trade and monthly GDP numbers are also due for release and, with manufacturing PMI plunging, retail sales and trade activity weakening, a string of softer numbers are expected that could renew the slide in GBP.