Monex: Markets resume battle against virus with central bank policy on the front-line
Monex: Markets resume battle against virus with central bank policy on the front-line
Ranko Berich, Head of Research at Monex Europe comments on the exchange rates of the euro, the US dollar and Asian currencies.
USD
The US dollar is weakening this morning after Friday’s historic trading day saw a huge risk sell-off affect currencies, fixed income, and equities, with equities rallying at the absolute end of the day on hopes of aggressive monetary easing from the Federal Reserve. Fed Chair Jerome Powell released a dramatic statement late in the US trading session, promising to “act as appropriate” to the virus’s evolving risk, in a clear signal that rate cuts were more likely than not. Fears of a severe shock to global growth due to coronavirus were the cause of the sell-off, as it became clear that the virus would not be easily contained in Q1, as many central banks previously expected. The seismic scale of the adjustment in market expectations on Friday means that overnight index swap pricing now implies expectations of 50 basis points of rate cuts at the March Federal Open Markets Committee meeting. This is a tall order for the Fed to fulfil. Given the utter carnage in US and global equity markets last week, the mild improvement in risk appetite seen this morning may prove fragile if the virus outbreak continues to spread and intensify globally, or the economic costs of containment turn out to be even worse than expected.
EUR
The euro extended gains against the dollar this morning, reaching levels not seen in a month as the greenback weakened following comments from Federal Reserve Chairman Jerome Powell late on Friday. The further spread of the virus and its looming economic threat led to several eurozone members announcing expansionary fiscal policy measures. Italy’s Finance Minister Roberto Gualtieri told La Repubblica newspaper the Italian government will “adopt measures to support the economy for all the sectors affected across the country”, as the government plans to spend 3.6 billion euros on, among other things, tax credits and individual business support to help cushion the economic impact on especially the northern part of the country. Comments from German Finance Minister Olaf Scholz on temporarily suspending the debt brake gave markets hopes of a spending splurge in Germany as well. However, the question remains if this idea will succeed at a national, rather than merely a local level. A two-thirds majority is needed in the German Parliament to change the debt brake, and the German political establishment has shown extensive resistance in using expansionary fiscal measures.
FX Elsewhere
Investor’s eyes were fixated on developments in Asia over the weekend with key Chinese and South Korean economic data released, while comments from Bank of Japan Governor Kuroda this morning helped to stabilise equity markets and trim the bond rally. Saturday morning’s data showed both the official Chinese manufacturing and non-manufacturing indices hit record lows for February with readings of 35.7 and 29.6 respectively. Trade data from South Korea highlighted increased exports, predominantly due to calendar effects as the February period had 3 more days, but worryingly showed an 11.7% decline in exports per day. Fears were compounded with this morning’s release of the Caixin manufacturing index - a private PMI surveying SME’s as opposed to state-owned entities like the official measure. The index fell to 40.3, again the worst reading since the financial crisis, as production, new work, and staffing levels fell to their lowest point in the index’s recorded 16-years history as containment policies took their toll. Despite this string of negative data, both the Chinese yuan and Korean won are rallying today. KRW sits 1.7% higher on the day at the time of writing as investors were seen closing out long positions in USD futures according to a trader at Samsung securities. Overall, sentiment in Asian assets is marginally improving as the rest of the world battles the virulence of the virus. Sentiment was likely boosted by Kuroda’s pledge to provide ample liquidity and ensure stability in financial markets. The comments put pressure on 10-year JGB futures as investors were reminded that a rate cut by the central bank remains a last resort.