US Virus Cases Hit Record Highs, More FX Losses Likely

Equities consolidated on Thursday as the deluge of negative COVID-19 headlines were overshadowed by reports that US regulators will relax the Volcker Rule and allow banks to increase investments into venture capital funds and free up capital that would have otherwise been dedicated to derivatives trades. Risk aversion is in full swing with currencies extending their slide on Thursday after the US reported its single biggest increase in COVID-19 cases ever. Despite the Trump Administration’s attempt to downplay the risk of a second wave, the numbers tell a very different story. New virus cases in the three most populous US states hit record highs this week and while the death toll remains low, the spike in fatalities typically increases closer to the 2 week mark. As much as politicians may be trying to deny it, the curve is moving rapidly in the wrong direction. The President and the Governors who rushed reopening don’t want to reverse the reopening process but Americans themselves may choose to tighten their own quarantine measures. Restaurant reservations in California, Texas, Georgia and Florida have plunged in the wake and we expect more activities to follow.

The US is not the only country reporting increases in cases (although its trend is among the worst). Australia posted its largest one day increase in 2 months, prompting a rapid roll-out of mobile testing centers. With that said, they saw an increase of only 33 cases compared to 37,000 in the US on Wednesday. So while White House Advisor Kudlow said he still sees a V shaped recovery, investors need to tread more cautiously. April and May data will be good but the improvements will begin to wane in June. Durable goods rose more than expected last month but the trade deficit and jobless claims were worse than expected.

Nonetheless, the greenback caught a safe haven bid that helped extend its gains against the euro, the Japanese Yen and Swiss Franc. The resilience of USD/JPY has puzzled many. Stocks are down, Treasury yields have fallen and the most alarming rise in virus case load is in the US. Yet investors are snapping up US dollars because President Trump may find that the only way to reinvigorate his supporters is to criticize other countries and hype up protectionism by threatening fresh tariffs. We are beginning to see that already with warnings targeted at Canada, the EU and UK. Friday’s personal income and personal spending reports may not provide much direction as the sharp fall in earnings signals lower income while the big increase in retail sales supports personal spending. Ultimately we don’t think USD/JPY could resist broader risk aversion forces and will soon find its way back below 107.

The Australian and New Zealand dollars were the best performers. Australia reported its largest drop in job vacancies for the 3 months to May ever. New Zealand on the other hand reported a narrower trade surplus, although this change was driven by higher imports and exports. Both currencies also avoided losses thanks to market closures in China and Hong Kong. The Canadian dollar on the other hand remained softer after Fitch stripped Canada of its AAA rating. Between weak retail sales, lower oil prices, the threat of fresh aluminum tariffs by the US and now the ratings change, the Canadian dollar is poised for more losses with USD/CAD headed above 1.37.

Euro fell more than sterling despite a bigger improvement in Germany’s GfK consumer confidence index and a smaller improvement in the UK’s CBI retail sales report. Aside from the US’ tariff threat on the EU, the ECB minutes also suggest there’s no exit from Quantitative Easing anytime soon. Policymakers see weakening price pressures, downside growth risks and weak demand. As a result “all scenarios might turn out to be too optimistic for the latter part of the projection horizon.” ECB member Mersch seem to echo this sentiment when he said the recovery is shrouded in exceptional uncertainty.