Recovery Signs Encourage Safe Haven Flows Out of Dollar

The US dollar is trading lower against all of the major currencies this morning. Stocks and 10 year Treasury yields perked up again on the back of strong results from Lowe’s and Target. Lowe’s reported 11.2% increase in same store sales in Q1 while Target said strong online shopping fueled 10.8% rise in same store sales last month. Results such as these reinforce the market’s view that the worst is behind us. With more states reopening, oil prices recovering and progress on vaccine development, investors are finding more and more reasons to be optimistic, which helps to fuel the recovery in currencies and equities.

With that said, the dollar is on its backfoot ahead of this afternoon’s FOMC minutes because back in April, the Federal Reserve expressed major concerns about the economic toll of COVID-19. At last month’s meeting, the Fed said the virus poses big risks over the medium term and the crisis will weigh heavily on economic activity. In response, rates will need to remain on hold until they are confident that the economy is back on track. Fed Chairman Powell provided additional clarification in his press conference – he warned that the jobless rate could hit double digits in the next report and Q2 economic activity will fall at an unprecedented rate. They remain committed to using a full range of tools and will continue to use their powers forcefully. Since then, Powell has been slightly more upbeat and ruled out negative interest rates as an option. If investors are willing to look past ugly April data, they will most likely look past last month’s Fed concerns.

US stocks are poised for a strong triple digit open and this move has been particularly positive for the Australian and New Zealand dollars. NZD is up 1% after Reserve Bank of Governor Orr downplayed the possibility of negative rates. In a speech last night, he said their strategy is to keep the yield curve low or flat but at this point, the “RBNZ doesn’t want to go to negative rate,” They are prepared to do so and its one option “but a lot later.” On Monday, RBNZ Assistant Governor Hawkesby said the central bank may not need to raise the size of their Quantitative Easing program. We’re surprised by the quick shift in guidance and given the 2 cent rally in NZD/USD this week, the market as a whole feels the same as well.

The Australian dollar shrugged off weaker leading indicators in April in favor of a possibility recovery in PMis in May. CBA releases May manufacturing and service sector data tonight and improvements are likely as Australia reopened parts of its economy this month. They eased lockdown restrictions sooner than Europe and the US, where early May data already showed signs of a bottom. The continued recovery in oil helped the Canadian dollar shrug off a larger than expected decline in consumer prices. The real test for USD/CAD will be Friday’s retail sales report.

Of all the major currencies, sterling is the laggard. UK inflation data was slightly weaker than expected with consumer prices falling -0.2% in April vs. -0.1% forecast. PPI input dropped -5.1% while PPI output fell -0.7%. The data could have been worse but it was enough to keep sterling under pressure. Tomorrow’s PMI reports will be the main focus. If the UK doesn’t see a recovery like other countries, then sterling is really in trouble. Last but not least euro is up for the fourth day in a row. No economic reports were released overnight but as we wrote in yesterday’s note, the tides are turning for euro.