Currencies Rally as Stocks Soar on Vaccine, Powell Optimism

Investors have a number of reasons to feel optimistic at the start of this new trading week and their positive sentiment is reflected in the strong moves in equities and currencies. First and foremost, Moderna Therapeutics, an American biotech company reported very positive early stage human trial coronavirus vaccine results. All 45 participants who received the vaccine produced COVID-19 antibodies. There’s nothing more valuable than a medical solution but Moderna admitted that if all goes well, it will be early 2021 when a vaccine is ready for the market. Also, scientists have said its not clear that antibodies can provide sufficient protection since some patients were reinfected after recovering but none of this diminishes the hard work that is being done at biotech firms and the progress that is being made. This is the good news that the market has been waiting for all this time and it’s the only path to a durable recovery.

Investors also took comfort in some of the comments made in a 60 minutes interview by Federal Reserve Chairman Jerome Powell this weekend. He reassured investors that even though GDP could shrink 20%-30%, a depression is unlikely. He expects the economy to recover “steadily through the second half” and the recovery may stretch through the end of the year. The country will “get back to the place we were in February; we’ll get to an even better place than that. I’m highly confident of that. And it won’t take that long to get there.” The Fed also ruled out negative rates last week, which kicked off the rally in USD/JPY.

US data is beginning to show signs of a bottom as evidenced by Friday’s Empire State and University of Michigan Consumer Sentiment indices. Confidence improved in May after falling sharply in March and April. This week we expect a similar improvement in the Philadelphia Fed index and possibly even Markit Economics’ early PMI reports. Housing data should remain subdued and the FOMC minutes cautious but investors have looked past March/April weakness to May/June recoveries.

The best performing currencies were the Australian and New Zealand dollars. Despite the record low in New Zealand’s PMI services index, these high beta currencies are the biggest beneficiaries of improved risk appetite. US-China trade relations worsened after the US announced a tighter ban on Huawei chip sales and China warned that they are ready to retaliate against suppression. However AUD and NZD are up because Chinese President Xi said they did everything in their power to provide information on the crisis and they pledged $2 billion to help other countries respond to COVID-19 over the next 2 years. Xi also indicated that when a vaccine is developed, “it will be made a global public good.” While the market is focused on US vaccine progress, China has more vaccines in development than any other country and have tested more than 2,000 people. They are in Phase II and could move to Phase III in July or August. Moderna’s vaccine only in Phase I. With that said, minutes from the most recent Reserve Bank of Australia meeting are scheduled for release tonight and chances are, the central bank will remain cautious. The Canadian dollar rose 1% on the back of risk on flows and the 7% increase in oil prices.

Euro also soared against all of the major currencies during the NY session after German Chancellor Merkel and French President Macron proposed a 500 billion euro recovery fund to offer grants to countries and regions hit hardest by COVID-19. They are also considering giving the European Commission authorization to borrow money under the European Union’s name which puts them one step closer to Eurobonds because if approved this move would allow the EU to raise debt jointly. Germany’s ZEW survey is scheduled for release tomorrow and it will be interesting to see if investors look past current troubles to the recoveries in Europe as well. If the ZEW survey improves, we’ll see EURUSD head towards 1.10.

Sterling is up against the dollar but lagging behind other currencies ahead of UK labor data. Every country has reported major job losses and the UK will do the same this month as jobless claims are expected to rise by more than 600k in the month of April. Average hourly earnings could also sink with the unemployment rate expected to rise sharply. In the event that happens, sterling could fall sharply against euro and other major currencies.