Forex Freakap - USD Slides Amid Covid-19 Treatment Optimism
Another choppy day of difficult trading conditions. Markets started the European session with a risk off bias, with European equities opening in the red and USD extending on yesterday’s gains.
However, during the European session (and start of the US session) markets shifted into a much more upbeat tone, with European equities closing near highs of the day, US bourses and crude oil markets trading solidly in the green.
Giving sentiment a boost today was news from US drugmaker Gilead; they announced that their data on Remdesivir (as a Covid-19 treatment) was associated with an improvement in clinical recovery and a 62% reduction in risk of mortality. Moreover, 74.4% of treated patients recovered by day 14 (vs 59% of patients receiving standard of care).
Former FDA Commissioner Gottlieb commented that the Gilead data “is very encouraging but needs to be confirmed in a prospective trial. It appears to be a retrospective analysis of the phase III data using historical matched controls, suggesting a survival benefit in severe Covid-19 patients.” In other words, great news, but we cannot be 100% sure just yet if Remdesivir is actually as good as we think it might be.
The improvement in risk appetite saw USD give back its overnight gains and some; DXY is now trading only just above the 96.50 mark, with traders eyeing lows of the week in the mid-96.20s.
Indeed, on the week, USD is decisively lower. Given that risk assets such as US equities are not decisively higher, I would argue that the reasoning for USD weakness has less to do with general risk appetite and more to do with US related fundamentals (such as dovish Fed commentary/worsening Covid-19 outbreak) combined with growing optimism amongst some of its largest trade-weighted G10 rivals (strength in CNY amid the big rally in Chinese equities, strength in EUR ahead of next week’s EU27 Finance minister talks and strength in GBP following Brexit optimism and Rishi Sunak’s economic announcements).
The softening of USD throughout today’s session has facilitated EUR and GBP to make decent gains; EURUSD is decisively back above the 1.1300 handle, while GBPUSD is a whisker away from yesterday’s near 1.2670 highs. These two are amongst the G10 outperformers today, and could be receiving a boost on the above-mentioned positives (i.e. strength in EUR ahead of next week’s EU27 Finance minister talks and strength in GBP following Brexit optimism and Rishi Sunak’s economic announcements).
But aside from the weaker USD and stronger EUR & GBP, FX markets are not screaming of “risk on today”. Indeed, AUD and CAD sit at the bottom of the G10 performance table, despite fairly healthy gains in equity markets. Meanwhile, JPY is amongst the G10 outperformers.
AUD looks to be finally feeling the weight of concerns regarding the outbreak of Covid-19 in Victoria, which has led to lockdowns. Here are some other factors that I noted to the members this morning, when markets were in risk off mode, that have likely been weighing on sentiment;
1) US coronavirus cases rose by above 60k for a 2nd consecutive record daily increase, while the death toll is showing clear signs of picking up, having risen by 838 yesterday. Record deaths were recorded in California, as well as record new cases in Texas of above 10.7k. Rising daily deaths should be more of a concern for markets than rising daily infections, as they create higher levels of fear and more support for lockdown measures, which will further slow the US economic recovery.
2) Democratic Presidential Nominee Biden, the strong favourite to win the US Presidential Election in November, made markets nervous with his speech on the economy last night. He confirmed that he would raise corporation tax back to 28% from 21% (as expected), but scared the US stock market somewhat by pledging to “end the era of shareholder capitalism”. Note; The probability of Trump being re‐elected (37.9%) slipped slightly further in prediction markets yesterday, after the Supreme Court’s decision on his financial records yesterday.
3) Fears are again being triggered that trade tensions between the US and EU could escalate; reports last night suggested that the US is thinking about releasing a new tariff list against France on imports of goods worth around $500-700mln. Potential target items reportedly include French wine, cheese, and handbags and the announcement could come as soon as today. French Finance Minister Le Maire this morning said that France will not change its digital tax plans due to US tariff threats.
4) US/China relations tensions continue to simmer; China has decided to take reciprocal measures against relevant US institutions and individuals in relation to Xinjiang, reported the Global Times. This comes after the US yesterday enacted sanctions on 4 Chinese individuals for human rights abuses including the Xinjiang security bureau director and a top member of the Chinese Communist Party. Separately, the US is planning a South China Sea announcement next week, according to sources.
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