Forex traders were unfazed by weak data on Friday with currencies and equities extending their recoveries. Consumer spending stagnated in the month of April after soaring in March. Excluding the costs of autos, which have risen significantly in recent months, spending experienced an unexpected decline of -0.8% against 0.7% forecast. Industrial production growth also slowed and the University of Michigan’s consumer sentiment index plunged to 82.8 from 88.3. Economists were looking for sentiment to improve on the back of the record breaking moves in stocks.
While this month’s economic reports show the U.S. recovery losing momentum, it is far from a peak as recovery prospects continue to improve. The muted reaction to Friday’s economic reports indicates that investors are positive on the economy and market opportunities but high beta currencies like euro, the Canadian, New Zealand and Australian dollars are benefitting the most. Commodity prices are strong and inflation is generally a bigger problem for these central banks. The euro area is just beginning to ease restrictions while large parts of Canada remain in lockdown. According to Ontario Premier Ford, the region’s stay at home order will remain in place until at least June 2nd.
Yet the Canadian dollar is one of the strongest currencies because the Bank of Canada, being one of the first to taper sent a very strong signal to the market about confidence in their recovery. There’s no question that when Canada comes back, growth will be very robust. Investors are so optimistic that they shrugged off Bank of Canada Governor Macklem’s comments about the appreciation in the currency. He said they needed to ensure that the appreciation did not affect exports. The New Zealand dollar, the day’s best performer soared despite weaker manufacturing activity. The decline in the country’s PMI index to 58.4 in April from 68.3 lifted the currency by reducing rate cut bets.
Looking ahead, we don’t see any near term threats to the risk recovery. We have another busy week to look forward to with Chinese retail sales data, Japanese Q1 GDP, UK and Australian labor market numbers, UK and Canadian inflation reports, FOMC minutes, UK, Canadian and Australian retail sales along with May PMI numbers from the Eurozone and UK. Inflationary pressures are running hot across the globe and all of next week’s reports should reflect that. Some central banks will be more eager to react than others and those currencies will appreciate the most.
Kathy Lien Managing Director of FX Strategy BK Asset Management