Wednesday is Big FX Data Day

Investors sold US dollars on Tuesday ahead of two very important economic releases – retail sales and the Beige Book. The overriding view is that nothing good will come out of these reports as the shutdown of non-essential businesses across the nation hits spending, creating ongoing concerns for the Federal Reserve. We expect every one of the Fed districts to report weaker economic activity and with the IMF warning of the worst recession since the Great Depression, none of their outlook will be optimistic.

Weak data is assumed in the US and many countries around the world but so are weak earnings which is why investors should take stock of today’s equity market movement. Stocks traded sharply higher despite JPMorgan and Wells Fargo’s big earnings disappointment. Johnson & Johnson also reported lower sales and cut their 2020 earnings outlook but their numbers beat low expectations and J&J surprised with an increased dividend. With many countries talking about restarting activity, investors are looking past weak Q1 results. Everyone has written off the first quarter and for the most part the second as well. Now with evidence of infections stabilizing in the US, investors are hoping that business activity will start to come back online in May or the latest June.

But the reality is that an economic restart in the US is weeks and possibly months away. There have been new flareups in countries that eased restrictions early – China reported its highest number of new cases in 6 weeks, South Korea is warning of “reactivation” in past patients, Singapore reported its biggest jump in new cases and there are hundreds of new flareups in Japan. Russia also warns that it could run out of hospital beds as cases spread across the country. So while there’s a sense of optimism in the markets, there’s still a lot of reasons for concern.

The Bank of Canada also has a monetary policy announcement on Wednesday. March was a very busy month for the central bank who was one of the first to deliver emergency easing. In 3 separate moves last month they took interest rates from 1.75% to a record low of 0.25%. They also unveiled a $5 billion asset purchase program. Even though the central bank could take interest rates to zero or negative, the room to ease further is limited because they’ve done so before. With that said, there’s flexibility in asset purchases. More than a million jobs lost last month and the IVEY PMI index falling to a record, the Bank of Canada needs to remain dovish and reassure investors that policy will be very accommodative. They’ll indicate that more can be done but how the Canadian dollar trades will depend on whether they address the issue of zero or negative rates. If they seem open to the idea, USD/CAD will head back to 1.40. If they don’t feel that it is necessary, we could see a deeper slide to the 50-day SMA near 1.3725.

Euro and sterling traded sharply higher. No data was released but the number of new cases continued to fall. While some attribute this to the Easter break, it has created new optimism. Countries across Europe are beginning to relax restrictions. Norway, Denmark, Czech Republic and Austria have all announced plans to relax rules in the coming weeks. Factories in Germany could restart work as early as April 20th. Even though border restrictions will remain in place for many countries, these are all steps in the right direction.