The ‘Second Wave’ is looming as the next ‘event’ in the COVID-19 crisis. As nations reopen their respective economies and allow citizens to ‘mingle’, the expectation is the increase in COVID-19 cases. Just look the increases seen in South Korea and Japan.
But what is concerning for FX and equities is the US’ reopening ‘style’ and speed. It appears to be early and without regulations, which lead to the US’ Head of Infectious Diseases, Dr. Anthony Fauci, warning a Senate at his testimony that easing restrictions too early could:
‘trigger an outbreak that you may not be able to control, which in fact, paradoxically, will set you back, not only leading to some suffering and death that could be avoided but could even set you back on the road to try to get economic recovery.’
The issue for markets with this point is: how do you price this risk? How do you evaluate future flow direction on possible health risks? Is the ‘Second Wave’ manageable or will it overwhelm national health systems?
FX is certainly trying to price this in.
However, there is one other point that continues to ring in our ears when we look at momentum and performance after the March lows.
“Whatever it takes” – In the post-GFC world, markets have learnt that central governments and banks will do everything and anything to ‘stabilise and support’ their respective economies.
This push-pull between the ‘risk’ and the ‘support mechanisms’ has seen FX pairs somewhat stabilise in the past 8 weeks, but there have been some trends that have materialised around the USD.
European currencies continue to trade in bands around the USD.
EUR/USD is holding between $1.065 and $1.095. It is currently in the upper band at $1.088 but has not fully tested resistance.
GBP/USD, however, is starting to see further easing, something we’ve considered last week as the UK remains in a state of lockdown and suffers through some of the worst cases of COVID-19. At $1.226, it’s an underperformer. With the Bank of England announcing it’s prepared to provide further assistance including negative rates, GBP is likely to be near the bottom performer of the G10 over the coming period.
USD/JPY has been slowly easing through April and May and although it bounced at the start of the week to ¥107.5, it is looking to ease back to ¥106.
AUD/USD is now within inches of it pre-COVID crash of $0.66, however it is struggling to really test this level and with the employment data likely to be weak in the extreme, the rise in the pair may finally easy off.
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