The U.S. dollar fell to fresh lows against the euro, the Japanese Yen and New Zealand dollar Friday. This morning’s U.S. economic reports were mixed. Consumer sentiment improved in the month of September, but the current account deficit ballooned in the second quarter. The uptick in sentiment is a surprise considering that stocks declined and extra unemployment benefits expired for many Americans. However, this suggests there is still a lot of hope that a vaccine is right around the corner and economic activity will return to normal. Even though stocks are flat, the rally in the dollar is still a reflection of risk aversion because USD/JPY fell for the fifth day in a row to a one-year low. According to Fed President Neel Kashkari, the central bank should hold off raising interest rates until core inflation is 2% for approximately a year. He’s one of the most dovish members of the FOMC, but his outlook reflects the central bank’s lack of desire to change policy for the next few years.
It is this steady for long stance that causes the tug of war in currencies and equities. The global recovery is losing momentum, virus cases are on the rise in Europe and could spike in the U.S. when schools reopen, but as long as funding is cheap, stocks refuse to fall. At some point one of these factors will overshadow the other. With less than seven weeks before the U.S. 2020 presidential election, it will be difficult for stocks to sustain their gains.
The rise in virus cases in Europe should be a cause for concern for all EUR/USD traders. The European Central Bank is not worried about the level of the currency, but if new restrictions lead to a further slowdown, the central bank may have to alter its stance. Right now, the euro attracts buyers because the ECB’s policy is less dovish than the Fed and Bo
E. Unlike the Fed, it hasn’t made any major changes to its inflation strategy and, unlike the Bo
E, it is not at the cusp of lowering interest rates. Keep an eye on next week’s Eurozone PMI reports because a slowdown in service and manufacturing activity could be the key trigger for a EUR/USD reversal. Sterling is also at risk for a correction. Even though retail sales rose more than expected in the month of August, Bank of England dovishness and the serious prospect of a no-deal Brexit means GBP/USD should be trading closer to 1.27 than 1.30.
Meanwhile, it tells us something when the Australian dollar refuses to rally despite blockbuster labor market numbers this week. Between risk aversion, growing U.S.-China trade tensions (with a ban of Tik
Tok and We
Chat) and China-AU relations, the currency could see its first close below the 20-day SMA since Sept. 9, which may usher in a fresh wave of AUD/USD weakness. The Canadian dollar also declined on the back of softer retail sales. The New Zealand dollar on the other hand rose for the sixth consecutive trading day to a five-month high after the government reported no new COVID cases for the first time since Aug. 10. New Zealand has been at the forefront of combatting a first and second COVID wave and their success at eliminating the virus (twice!) is one of the main reasons why the New Zealand dollar is one of the most loved currencies and a lesson for many other nations.