PMI Day – Will FX Traders Care?

It has become abundantly clear over the past year that the market is driven by optimism. The COVID-19 pandemic dealt a major blow to every corner of the world but rather than worrying about how deep the impact will be on local economies, investors and central bankers are looking to the recovery. We saw that throughout the second half of 2020 and now into 2021. Yesterday’s record-breaking move in the S&P 500 is a sign that investors see the glass half full and this week, it is clear that central bankers do so as well.

U.S. dollar banknote with map

Image Source: Unsplash

This morning, the European Central Bank left monetary policy unchanged and said should “favorable financing conditions be maintained……the (PEPP) envelope need not be used in full.” Bank of Canada Governor Tiff Macklem shares a similar view when he said this morning that “if the economy plays out in line or stronger with our outlook, then the economy is not going to need as much quantitative easing stimulus over time.” These slightly less dovish comments helped the euro rebound from yesterday’s losses and drove USD/CAD to fresh 2.5-year lows intraday. Outside of the comment on the PEPP envelope, there was nothing revealing in the ECB statement or President Lagarde’s commentary. She avoided any direct criticism of the currency saying only that FX appreciation is a drag on inflation. The Bank of Japan left monetary policy unchanged but downgraded their economic assessment. They shaved 2020 GDP forecasts slightly, but raised their 2021 GDP forecast, attributing the increase to their view that despite high uncertainty, the economy will continue to pick up.

Looking ahead, PMI reports are scheduled for release from New Zealand, Australia, Eurozone, UK, and the US. New Zealand and Australian data should be better, reflecting their ongoing recovery. Both AUD and NZD extended their gains on Thursday following Australia’s latest employment report. Although job growth slowed to 50K from 90K, this increase was in line with expectations and accompanied by an improvement in the unemployment and participation rates. Tonight, New Zealand releases manufacturing PMI and consumer prices followed by Australia’s January flash PMI reports. With warm weather and low coronavirus cases, improvements are expected in both countries.

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