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Focus shifts to key central banks and coronavirus second wave |
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12th Jun 2020

Week ahead: Focus shifts to key central banks and coronavirus second wave

Volatility returned to the markets last week as participants digested the Federal Reserve interest rate decision and the growing risk of a second wave of coronavirus. In its decision, the Fed painted a dovish picture of the US economy, where the unemployment rate will remain at almost 10% in the next two years.

Meanwhile, CNN’s fear and greed index reached the highest level since March as euphoria returned to the markets. For example, shares in bankrupt companies like JC Penney, Hertz, and Chesapeake Energy spiked. Similarly, the valuation of Nikola, an electric truck company that is yet to sell a car, passed that of Ford, the iconic American manufacturer. The CBOE VIX index rose by more than 25% last week.
The Japanese yen spiked last week as several global risks started to emerge. First, the recent protests in the United States have reignited fears of a second wave of coronavirus infections in the country. Second, in a surprise move, North Korea closed its communication channel with the South, risking a new wave of conflict in the Peninsula. Meanwhile, tensions between the United States and China have continued.

This week, the Bank of Japan will deliver its interest rate decision. Analysts expect that the bank will take a cautious tone even as it leaves its policy unchanged. Analysts will be paying close attention to see whether it plans to lower rates further or even expand the pace of asset purchases.
The US dollar regained its strength shortly after the FOMC delivered its rates decision last week. The risk of a second wave of infection at a time when no drug or vaccine exists further drove investors to the dollar. This week, its performance will depend on key data due to be released. Analysts will watch these numbers for indications on whether the US economy is indeed recovering.

We will receive the New York manufacturing index and Treasury International Capital (TIC) data today. On Tuesday, retail sales, industrial production, manufacturing production, and capacity utilization data are due. Analysts expect that these numbers improved in May as more people went back to work. Other key important data from the US will be building permits, housing starts, and jobless claims.
The sterling has been relatively strong recently even as risks of a no-deal Brexit increase and the outlook for the US economy dampens. The currency will be put to the test this week. The BOE interest rate decision on Thursday will be the key mover. Analysts expect the central bank to leave interest rates unchanged and to increase its asset purchases. They will also read the MPC minutes for any clues about whether the bank is considering negative rates. Other key data that will move the pound are inflation and retail sales data.
As with the Japanese yen, the Swiss franc has been gaining because of the emerging risks. As expected, the trend has obviously not impressed the Swiss National Bank (SNB), which has always advocated for a weaker local currency. This week, the bank will likely attempt to indirectly devalue the currency when it delivers its rate decision on Thursday. The bank could achieve this by pushing interest rates deeper into the negative territory, reintroducing the peg, and even starting a new quantitative easing program.
The euro lost its momentum against the US dollar last week. This happened mostly because of the overall strength of the US dollar. This week, the currency will move because of several important economic data, including the German inflation and sentiment numbers that will be released tomorrow. On Wednesday, we will get the eurozone inflation data followed by the region’s current account numbers that will be released on Friday. A confirmation of improvement in the region is likely to push the currency higher.
The price of crude oil declined last week because of four reasons. First, on Monday, Saudi Arabia announced that it would end its voluntary cuts at the end of the month. Second, on Tuesday and Wednesday, data from the American Petroleum Institute (API) and Energy Information Administration (EIA) showed that US inventories were rising. Third, a report by OECD predicted that the world economy will have its worst recession in decades. This mattered to US stocks because it would mean a slowdown in demand.

Finally, there is a risk of a second wave of coronavirus infection, which would affect global demand. This week, we will watch out for the API and EIA information and coronavirus-related information.
Gold price bounced back after the dovish Federal Reserve pushed investors to risk assets. The price also rose because of the tumbling stock market. This week, the price of gold will move depending on the dollar-related economic data that will be released and the statements from key central banks.
The Canadian dollar declined last week mostly because of the falling oil prices and the stronger dollar. This week, a major driver of the loonie will be the Canadian consumer price data that will come out on Wednesday, new housing price index due out on Thursday, and crude oil inventory numbers expected for release on Tuesday and Wednesday.
This week, most of the focus in the trading community will be on key central banks and the key economic numbers. Most importantly, we will focus on the US, which has seen protests in the past two weeks. We will want to see whether these protests led to transmission of the disease. Also, we will watch out for geopolitical issues in the peninsula and between the US and the UK.