The U.S. Federal Reserve released details of its previously announced corporate bond-buying program yesterday. Equity, oil, and FX traders reacted like it was a cure for COVID-19. Wall Street recovered from a deep slide with the Dow Jones Industrial Average closing with a 0.62% gain.
The Fed is spending $250 billion to buy high-rated corporate bonds in a program announced March 23. The news washed away fears of another economic slowdown stemming from a second-wave COVID-19 outbreak. The rebound in US stock markets fueled a broad U.S. dollar selloff as safe-haven trades were unwound. The Canadian dollar climbed alongside the other commodity currencies.
Asia equity traders followed the U.S. lead. Japan’s Nikkei 225 index rose 4.88%, but it got a little help from the Bank of Japan, which left interest rates unchanged, but Governor Kuroda’s comments were positive.
He said: “Board members agreed that Japan’s economy is expected to improve in the somewhat long run as the impact from the pandemic subsides.” USDJPY traded cautiously in a 107.24-63 range.”
The Antipodean currencies were topsy-turvy. AUD/USD rallied from $0.6010 to $0.670 in Asia and then retreated to $0.6010 in Europe. Prices were supported by a modestly better tone in the Reserve Bank of Australia minutes from June 2, which suggested the “worst may be over.” NZD/USD tracked AUD/USD moves.
FX sentiment was a slightly positive ahead of Fed Chair Jerome Powell’s testimony to Congress this morning. He was expected to offer a somewhat better tone to his outlook than what he said at the previous Federal Open Market Committee press conference.
The monthly International Energy Agency oil market report was released today, and it was a tad optimistic. It said that there were signs that the market would reach a more stable footing later on this year. It said that oil demand would fall 8.1 million barrels/day in 2020 but grow by 5.7 million barrels/day in 02021. West Texas Intermediate oil prices climbed from $36.41/barrel to $38.33/b. That rally provided additional support to the Canadian dollar.
The European Union and the United Kingdom said that the Brexit transition period would not last beyond December 2020. That means the two sides need to come to a trade agreement before then, or risk a “no-trade deal” divorce.
U.S. Retail Sales rose 17.7% in May, well above forecasts and bolstering risk sentiment in the process.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians