Morning Commentary: Where to Next?

Foreign Exchange - Morning Commentary
Where to Next?
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
The foreign exchange markets remain stuck in tight ranges as they search for direction.  Volatility has also dropped from its peak in March but still remains elevated relative to pre-COVID levels. 

For now, economic data is improving across all of the G10.  The US is leading the pack of major economies and the Eurozone is showing signs of improvement.  While economic numbers are trending in the right direction, many sectors are starting from very low or zero production.  This means that base effects will have a powerful impact, distorting the picture and making it difficult to assess the actual pace of the recovery and the road forward.

COVID-19 infection numbers continue to send mix signals.  Infection rates continue to rise in the US but this is occurring mostly among the young which has lowered the mortality rate.  In Europe and Asia, the picture is cautiously optimistic.  Europe has a relatively low infection rate and appears to be stabilizing while Asia continues to show signs of improvement. 

Looking forward, here are three key variables that will determine where markets are heading.
  1. In the US, will the young start to infect the old? Rising infections is expected as re-opening continues.  If the mortality rate remains constrained, risk sentiment should remain supported.
  2. Can Europe control its infection rate?  Europe has outperformed the US in controlling the virus due to stricter measures, but the virus hasn’t been eliminated.  As Europe re-opens the infection rate will pick up. 
  3. Once base effects have faded, what shape will the data represent?
Beyond the virus, there are also questions around the European recovery fund as we head toward the July 17-18 EU Summit.  Specifically, markets will be watching to see how much grant money is given and what criteria will be used to distribute money.  While some dilution from the EC’s proposal is expected, too much dilution will dent risk sentiment.    
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • Global COVID cases topped 10 million over the weekend with deaths topping 500,000.  In the US, Texas is quickly becoming the center of the outbreak, and there are signs that new hotspots are popping up in Australia, Japan and Austria. 
  • In person, Brexit talks kicked off again today.  These are the first in person talks since March with the backdrop remaining one of little compromise and tight deadline.  Assuming there isn’t a change of heart, there won’t be an extension.  Near term, there will be five rounds of weekly talks, but given the lack of progress thus far, skepticism around the ability to strike a deal by the end of the year is warranted.      
  • In the UK, Labour leader Keir Starmer has surpassed PM Boris Johnson in the latest opinion polls with 37% preferring Starmer to 35% in favor of Johnson.  59% of the population disapproved of the government’s handling of the COVID crisis with 54% feeling the country was coming out of lockdowns too quickly.  In France, Macron also received some bad news with his party doing poorly in local elections.   
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