NZD Soars To 5 Month Highs As NZ Beats Out COVID Twice

The US dollar fell to fresh lows against the euro, the Japanese Yen, and New Zealand dollar on Friday. This morning’s US 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 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 US when schools re-open 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 7 weeks before the US 2020 Presidential election, it will be difficult for stocks to sustain its gains.

The rise in virus cases in Europe should be a cause for concern for all EUR/USD traders. The ECB 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 BoE. Unlike the Fed, they haven’t made any major changes to their inflation strategy and unlike the BoE, they are 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 EUR/USD reversal. The 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.

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