Morning Commentary: Market Calm with a Side of Weakness

A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.

Market Calm with a Side of Weakness Share this story: Andrew Kositkun Foreign Exchange Head Trader

After the intense deleveraging experienced during March, FX markets have settled into a consolidative phase.  Despite this, the global economic backdrop remains stark with it tracking for the deepest recession since the Second World War.  Thankfully, there are some emerging signs of stabilization in data, and monetary and fiscal policy responses are still increasing.  Nevertheless, it is still prudent to remain defensive.  A key reason for this is the lack of visibility around the timing and shape of the recovery.  Most economists expect a rebound in the second half of the year but that doesn’t mean we get back to where we were pre-COVID-19.  Data out of China supports this concern as PMIs and retail sales have rebounded but show continued weakness in consumption.  Adding to this rebound uncertainty is the risk of a second wave of infections that continues to weigh on sentiment and confidence.  Last week also saw a ramp up in US-China tensions that has continued into this week.  The US administration has blamed China for the pandemic and took steps against China’s Huawei as well as accused China of spreading the virus.  Further adding to the strain is the likely scenario where China is unable to live up to the purchase agreement in the US-China Phase 1 deal.  On a broader level, policy rates around the world remain near zero.  This leaves differentiation between currencies more contingent on factors such as central bank stimulus activism, government indebtedness and external vulnerabilities (reliance on foreign capital etc.)  Against this backdrop, expect the FX market to be asymmetrical to risk with sell-offs sharper than rallies.  Liquidity also remains thin with market depth ~35% below pre-COVID-19 levels.  All this supports a defensive stand/further USD strength.  HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: Equity markets are up on vaccine hopes as an experimental vaccine from Moderna showed promising early signs.  US-China tensions continue to be elevated with White House officials accusing China of sending airline passengers to spread the virus.  For China’s part, it has been relatively subdued in its response ahead of this weekend’s National People’s Congress.  It is likely that Beijing wants to avoid adverse market movements ahead of the meeting and is saving its real retaliation for afterwards.  Chinese President Xi addressed the WHO’s decision-making body today as international leaders call for an investigation into the source of the virus.  Comments from BoE Chief Economist Andrew Haldane fed speculation about the possibility of negative rates in the UK.  Given the current state of the economy, it isn’t surprising that policy makers are considering all measures, even the extreme ones, so expressing the need to study negative rates shouldn’t be a surprise.  Given this, the bar for going negative remains high as BoE Governor Bailey’s push back on negative rates illustrates. Oil prices continue to move higher with WTI trading around a two month high.  Market data shows Chinese oil demand is almost back to pre-COVID-19 levels. Japan’s Q1 GDP came in better than expected with GDP contracting -3.4% against expectations for a -4.5% decline. The numbers showed broad based weakness offset by government consumption.  It should be noted that lockdowns were not in effect until April so Q1 relative strength should not be extrapolated out to Q2.

If we can help you with any Foreign Exchange needs, please email foreignexchange@cnb.com or call (800) 447‑4133. Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!

Follow City National Bank on social media:

Non-deposit investment products: • Are not FDIC insured, • Are not deposits or other obligations of City National Bank and are not guaranteed by City National Bank, and • Are subject to investment risks, including possible loss of the principal invested. This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.

Unsubscribe from this list  |  Update email preferences This message has been sent to bank@banking.offers.report. Please do not reply to this email. To ensure the delivery of future emails, please add foreignexchange@emails.cnb.com to your email address book or safe sender list. Copyright ©2020 City National Bank – All Rights Reserved. 350 South Grand Avenue, 12th Floor, Los Angeles, CA 90071 City National Bank is a subsidiary of Royal Bank of Canada. TERMS & CONDITIONS  |  PRIVACY STATEMENT NMLSR ID# 536994 | City National Bank Member FDIC