The race for a COVID-19 vaccine is in high gear and as more companies leap into the effort, the rally in currencies and equities reflect the market’s hope for a medical solution to the worst economic and social crisis in modern history. It decimated the economy and claimed the lives of more than 350,000 people, but with curves peaking and countries reopening, many investors hope that the worst is behind us. The risk of a second wave is serious but it may be some time before that becomes a major concern. Investor sentiment became so depressed at the onset of the virus that we’re seeing fierce rallies on good news. Novavax (NASDAQ:NVAX) started its first human study, which follows last week’s positive reports from Moderna (NASDAQ:MRNA). Merck (NYSE:MRK) also joined the race with plans to start clinical trials this year. While many experts say that a vaccine is still 12 months away, the progress towards a medical solution to the pandemic is enough to bolster investor sentiment.
The improvement in risk appetite drove investors out of the U.S. dollar into other major currencies. U.S. data was actually better than expected, with new home sales turning positive and consumer confidence improving. Economists expected new home sales to fall at a faster pace in April, dropping 23%, but instead sales rose by 0.6%, which is a sign that lower interest rates provided the housing market with much needed support. Consumer confidence rebounded slightly less than anticipated, but the uptick was enough to stem the slide in USD/JPY. The Federal Reserve’s Beige Book report is scheduled for release later this afternoon.
The New Zealand and Australian dollars were the best performers, with NZD leading the gains. NZD is normally more sensitive than other currencies to risk appetite, but stronger than expected trade data provided further justification for its gains. The Australian dollar rallied even though tensions between China and Australia continue to grow, with China’s Commerce minister confirming that the 80% tariff on Australian barley is tied to Canberra’s trade investigations. He said: "Since the establishment of diplomatic relations between China and Australia (in 1972), China has only launched (one) trade remedy investigation against Australia, which is the anti-dumping and anti-subsidy case against Australian barley. During the same period, Australia initiated 100 trade remedy investigations against China."
Thanks to the ongoing recovery in oil, the Canadian dollar rose to its strongest level in two months. There are no Canadian economic reports scheduled for release until the end of the week, so the main focus will be on comments from the Bank of Canada. Governor Stephen Poloz and Deputy Governor Carolyn Wilkins speak later this afternoon before the Senate Standing Committee.
Despite talk of more stimulus from the central bank, EUR/USD headed back towards 1.10. ECB member François Villeroy described the central bank’s Pandemic Emergency Purchase Program as a “masterpiece,” and said it “will very probably need to go even further.” There’s also talk that the central bank could continue to buy bonds without the participation of the Bundesbank. Data was better with German business confidence and GfK consumer confidence index improving in May. The IFO business climate index climbed to 79.5 from 74.2, which was slightly better than expected. The current assessment actually declined but expectations rose more than expected.
Sterling also traded sharply higher, but the magnitude of its recovery is more surprising since the underlying economy is weaker and Brexit talks are going nowhere. Nonetheless, improvements in the CBI distributive trades survey and slightly upbeat comments from Bank of England Chief Economist Andy Haldane supported the currency. He said the outcomes are a shade better than their scenario but that’s about where his optimism ended. Haldane still sees a 20% contraction in Q2 with fewer stabilization in jobs. In fact, he doesn’t think the labor market will return to pre-COVID levels until 2023. The BoE is still reviewing evidence of the effectiveness of negative rates, though, he said, to be clear, reviewing and doing are separate things.