Currencies Rally on Vaccine and Stimulus Hope

This new trading week kicked off with broad based gains for currencies. Every major currency pair from EUR/USD to USD/JPY moved higher as vaccine progress and stimulus talk sparked optimism. Investors were encouraged by the positive response from the vaccine developed by Oxford University and AstraZeneca. In their early stage human trial with more than 1,000 participants, it was found that the vaccine produced antibodies and killer T-cells that can last at least 2 months with no serious side effects. There are more than 100 vaccines being developed worldwide with at least 23 in human trials. As the positive news flow continues with it the hope that we’ll have a vaccine by the end of the year.  A vaccine would be a game changer for the markets that could lead to big gains for currencies and equities but distribution will become an immediate question and concern.

Another US stimulus package will also provide short term relief for the forex market. GOP leaders met with White House officials today to discuss including payroll tax cut and direct payments. The urgency is high as extra unemployment benefits expire at the end of this month – many economists fear that an income cliff will lead to spike in bankruptcies and drop in spending. With no major US economic reports on this week’s calendar, earnings, vaccine and stimulus headlines will drive FX trade. 

Meanwhile the EU Summit and their decision on a massive coronavirus stimulus package was the main focus. Talks between European leaders continued for a fourth day and they are getting close to a deal. Commission President Ursula von der Leyen said they are entering a crucial phase in the talks and things are moving in the right direction. However there’s still significant resistance from the frugal four who feel that it changes the complete fabric of the EU. They prefer more repayable loans rather than grants with terms and restrictions. So far, an agreement has not been reached but if its achieved, EUR/USD will hit 1.15. However if the talks break down, euro which has been in a consistent uptrend this month will sink in disappointment. The best performing currency today was sterling. There was UK economic data but improvements are expected in this week’s retail sales and PMI reports.

All three commodity currencies also gained strength versus the greenback. NZD led the gains which is no surprise given the consistent improvements in New Zealand data and the successful containment of COVID-19. They reported only 1 case yesterday. Like the manufacturing sector, the service sector returned to growth in the month of June. The PSI index jumped from 37.5 to 54.1, its highest reading since January. Tonight’s credit card spending data should show similar improvements. The Australian dollar will be in focus tonight with the RBA minutes and speech by RBA Governor Lowe on the calendar. The government will also be releasing its first economic and fiscal update since the coronavirus outbreak. Earlier this year, the country was at the cusp of eliminating COVID-19 but it is now seeing a surge in new cases that have led to border closures and fresh stay at home orders. The RBA won’t be happy with this trend as the return of restrictions curbs economic activity.  The Canadian dollar on the other hand is rising ahead of Tuesday’s retail sales report. With employment recovering strongly, retail sales are expected to rebound sharply in May. The 1.35 level is key support for USD/CAD, good numbers combined with risk appetite could drive the pair through this level to fresh 1 month lows. 

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