Ebury: Commodity currencies bounce back as strong economic data offsets US COVID fears

Risk assets worldwide continue to trade without a clear directional pattern, as stocks, credit and oil bounce around current levels. Economic news on most major currency areas continues to surprise to the upside. The latest burst of good news came from the US June employment report. Offsetting this optimism is the grim contagion news from the US, where new cases numbers continue to print daily records. Reopening measures are being walked back in many states, though on the positive side deaths from the virus are not increasing massively for now.

G10 commodity currencies, led by the Norwegian Krona, led the way, joined by Latin American ones like the Colombian peso. The latter had been badly bruised since the pandemic began and it seems like traders are starting to see some value there. The week's loser was the Russian ruble, down on fresh US sanction jitters and a massive dividend payment from Rosneft.

Next week will be relatively quiet in terms of traditional data. Markets will be focused on the daily COVID figures out of the US and high-frequency indicators of economic activity, in particular weekly jobless data.

GBP

Optimism over the progressive easing of lockdown measures in the US outweighed Brexit worries last week, buoying Sterling against both the Euro and the US dollar.With a light data calendar on tap for this week, we expect Sterling to remain largely range bound. Over the medium term, however, we expect Sterling to perform well as the economy continues to rebound and markets become confident that local lockdowns will not have a significant effect on the recovery.

EUR

Economic data in the Eurozone continue to outperform expectations. The PMI index of business activity rose more than expected in June, to 48.5. It must be remembered that a number below 50 is historically consistent with continued contraction, but it is likely that the massive swings of the last  few months have rendered the absolute levels in this index less informative. We will have to wait for production and sales numbers for June to be released to get a clearer picture of the state of the recovery. As we expected, the German parliament backed the ECB in its dispute with German constitutional judges, and peripheral spreads continue to come down in response to these developments.A series of high level political meetings (Eurogroup and ECOFIN) are likely top boost this optimism further this week, and we see scope for a Euro rally.

USD

The June payroll report delivered another positive surprise to markets. June saw the recovery of another 4.8 million jobs, well above expectations, and the May number was revised upward to 2.7 million. Optimism about these numbers were somewhat tempered by the fact that the surveys are completed mid-month, and therefore do not reflect yet the rise in infection numbers and reversal of reopening measures in some states later in the month. We have not seen the US dollar react strongly to  adverse trends in US COVID contagion yet. The interplay between the dollar's dual roles as a safe haven and indicator of the health of the US economy will surely dominate trading as we go into the summer months.