The Morning Commentary: Have We Peaked?

Foreign Exchange - Morning Commentary
Have We Peaked?
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Of the four major hotspot states (Arizona, California, Florida and Texas), the 7-day moving average number of new cases has fallen in all states but California.  While these four states have improved on net, these gains have been offset by upticks in other parts of the country.  Further, the national average for positive tests is decreasing but remains elevated at 8.0% versus the trough of 4.5% on June 9.  Meanwhile, deaths continue to rise and with the lag between cases and deaths, this trend will unfortunately continue. 

On the national level, the virus appears to have peaked.  Cases are roughly double what they were at the April peak, but this is partially due to enhanced testing.  The US is currently conducting three times more tests than it was back in May when nationwide testing data first became available.  The fact that deaths are less than half of what they were in March/April suggests the number of new cases now could be lower than the “true” number in March/April.  Regardless, the spike in cases has been economically damaging as evidenced by mobility and credit card spending data. 

Looking forward, the economic outlook will depend on three variables: the rate at which cases decrease, the standards that will prompt policy makers to ease restrictions and get people spending again, and the magnitude of the economic rebound after the surge passes. 

On the first factor, uncertainty remains high.  It took about seven weeks from peak to trough, but there are mitigating factors this time around.  On one hand, testing was increasing faster in May than it is now.  On the other hand, the change in economic engagement has shifted less than in spring.  What is clear is that the climb up is faster than the descent down and the curve is not symmetric.  

Regarding consumer engagement, there are too many variables—public policy, testing, views on mask wearing, demographics of who is getting sick etc.—to estimate whether consumers are more reactive to deaths or cases.  But on a broad level, there is a lagged response with mobility and spending so economic reengagement will likely lag too. 

Finally, on the magnitude of the economic rebound, the outlook doesn’t appear to be optimistic.  The initial reopening benefited from pent up demand and the subsequent pullback has been relatively small.  There are also rising risks for policy disappointment with lawmakers struggling to agree on new measures as some parts of the CARES Act expire.
  • The USD remains under pressure with the FOMC set to announce its latest rate decision later today.  Market consensus is for the Fed to keep its rate unchanged while it reviews its forward guidance and asset purchases.  The USD has weakened on the FOMC decision day 8 straight times. 
  • Talks over the Phase 4 stimulus plan continue to be contentious.  While the market assumption remains that a deal will get done, the contentious nature of negotiations opens up a range of possible outcomes, including a prolonged delay.  The Republican stance on retaining liability protections for businesses remains one of the key sticking points.
  • Australian Q2 CPI slightly beat expectations as it fell by -1.9% against expectations for a -2.0% drop.  The RBA has pledged to keep its policy accommodative for the foreseeable future. 
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