Improved risk appetite weighs on dollar, Antipodean currencies lead gains within G10

GBP

The upbeat vibe in FX markets this morning is helping the pound recover this morning as it trades 0.3% higher against the dollar at the time of writing. GBPUSD now trades at levels not seen since Tuesday's open this time last week, with momentum on its side to start chipping away at reclaiming the ground lost after June's Fed meeting. Broader market sentiment is compounded by news that the UK is likely to unwind the last set of Covid-19 restrictions on June 19th. Speaking yesterday afternoon, Prime Minister Boris Johnson stated that social distancing and capacity constraints are likely to be lifted in mid-June, with an official decision to be announced on the 12th. This would see parts of the economy like nightclubs reopen, while sporting and other events will allow larger crowds to attend. While this only represents a small section of the UK economy, the signal it sends about the overall health backdrop is more important for investor and consumer sentiment, as highlighted in the pound's rally this morning. Later today at 09:30 BST, the construction PMI is released and is expected to moderate from 64.2 to 64.0 in June. However, yesterday's services and composite PMIs both exceeded expectations, suggesting there is a risk the construction PMI will also print on the higher side.

EUR

Although the improvement in risk sentiment meant the euro mildly rallied against safe-haven currencies USD, JPY and CHF, its procyclical characteristics were not enough to see the currency rally more broadly in the G10 space. German factory orders unexpectedly saw demand decline in May, according to this morning's data, which some may take as an uneven start to the country's economic recovery. Orders fell by 3.7% MoM, well below the consensus for a 0.9% increase. The headline figure was weighed down by a 6.7% MoM plunge in export orders, mainly as demand from countries outside of the eurozone faded over the last month. However, the slower inflow should not be a big issue for production in the near term as supply constraints have been holding back output relative to new orders. The weaker than expected data has likely contributed to the euro lagging the G10 move against the dollar this morning, however. For today, all eyes will be on the European Central Bank who will discuss their strategy review at a surprise meeting tonight. Discussions were initially launched by President Christine Lagarde in January 2020 but were delayed by the pandemic. The series of meetings this week will likely not be over tonight, but market participants will keep their eyes open for any headlines around the discussed key issues.

USD

The DXY index traded practically flat over the course of yesterday's session with US markets closed for the 4th of July holiday. The dollar did weaken mildly in some pairs, extending Friday's move after the mixed US jobs report which failed to fuel expectations of earlier policy normalisation, but its losses weren't shared across the whole G10 space. Focus remains on economic recovery stories outside of the US as markets gauge the risks of different virus variants delaying further reopening. Meanwhile, the temporary breakdown in OPEC+ negotiations will continue to be eyed by dollar traders as oil prices not only are an indicator of general risk sentiment, but crude oil being quoted in US dollars means movements in crude oil prices often generate realignment with the greenback, more so than with currencies of nations without large oil reserves. With the dollar being gently offered ahead of tomorrow's Federal Reserve meeting minutes, this trend may continue over the course of the day should the purchasing managers' index data at 14:45 and 15:00 BST prove insignificant for markets.

CAD

The Canadian dollar struggled to find a footing in yesterday's market. Despite no major headline news and limited action in oil markets, the loonie lagged the G10 move to sustain the largest losses against the dollar on the day. This morning, with oil sitting over 2% higher at just below $77 per barrel, the loonie is rallying with the G10 to retrace all of yesterday's losses. Economic data out of Canada yesterday centered around the central bank's Q2 Business Outlook Survey, where consumer confidence indicators rose to record highs as vaccine optimism filtered through into consumption plans. The vaccine effect didn't stop there, with senior managers reporting strong sales outlooks, elevated investment intentions, record hiring plans, capacity constraints, and rising expectations for wages and inflation. The results of the business outlook survey all but confirmed our expectations that the Bank of Canada will continue to taper its QE programme by C$1bn a week at their meeting on July 14th. However, despite the positive reading, it did little to move the loonie out of its rutt yesterday. Price action in the Canadian dollar may continue to be tentative until Friday's labour market report, which is likely to be the biggest signal as to whether the central bank can continue holding its optimistic outlook and lean on the hawkish side to continue tapering QE.

APAC

The Kiwi dollar has rallied over a percentage point in the Asian session as the New Zealand Institute of Economic Research Q2 survey showed a strong rebound in business optimism. The survey results prompted BNZ Wellington and Auckland Savings Bank to bring forward their expectation of a rate hike to November. The repricing of rate expectations is helping the Kiwi lead gains in the G10 space this morning. The rally isn't isolated to just NZD, however, with the Aussie dollar also trading 0.7% higher this morning. The Reserve Bank of Australia stated that it will continue purchasing government bonds after the completion of the current A$5bn a week programme expires in September, with purchases at a reduced rate of A$4bn a week until a review in mid-November. On top of that, the central bank stuck by its previous suggestion and retained the April 2024 bond as the yield target, allowing the November 2024 bond to rise 6 basis points to 0.43%. It now looks like the April bond will be the one used to exit yield curve control for the central bank, despite speculation that they could extend the programme to November given previous labour market uncertainty and the current uncertainty caused by Covid-19.

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