News & analysis

G10 FX has had an eventful day so far, with the US dollar remaining bid and up against the whole G10 except for NOK. NZD and AUD were in the green briefly in the early hours of the morning after Chinese PMI data printed much better than expected, but this resilience proved short lived and both currencies have since sold off against the greenback. On the whole risk appetite seems to be fairly stable, with equities generally in the green, and US financial conditions indicators remaining stable. 

Crude Oil is some $2.5 a barrel higher (although in percentage terms that’s a more impressive 13.6%) after Donald Trump and Vladamir Putin discussed the oil price rout on a phone call. The durability of this rally looks seriously questionable, as the source of the supply glut that is threatening crude oil markets is a serious price war between Saudi Arabia and Russia, and therefore not something the US President will be able to easily influence.

Looking ahead to this afternoon, we get some of the first material coronavirus data from the US economy, with Chicago PMI due out at 14:45 and conference board consumer confidence out at 15:00 GMT. Both releases are fairly solid leading indicators, so a severe miss may take some of the edge off the dollar.

 

USD remains bid across the G10 board, with quarter-end dynamics most likely in play

 

Low price growth in the Eurozone will also ‘stay at home’

Flash March CPI data across the Eurozone started to show the economic hit from coronavirus. Both headline and core prints underperformed expectations by 0,1pp in the area as a whole, while the overall figures in France and Spain were particularly disappointing, at 0.4 and 0.3 percentage points below consensus respectively. The main drag in eurozone headline inflation was the hit to energy prices of -4.3%, with the March YoY print falling to 0.7% from 1.2% in February. The core reading was down 0.2pp to 1%, driven by the slowdown in services inflation to 1.3% from 1.6% previously, while core manufacturing inflation remained flat at 0.5%.

 

Unsurprising shock on EU inflation figures are yet to turn even uglier

Looking ahead, the inflation outlook is grim…

Energy prices are set to remain subdued for a while, with crude oil prices recently recording a 17-year low amid a price war between major producers and shrunk global demand. The domestic manufacturing sector was already in bad shape prior to the coronavirus outbreak, while services, the Eurozone leading sector until then, faces slow recovery prospects on an extended timespan for activity resumption. While unemployment policies are meant to support consumer´s income in the short term, uncertainty on the length of the economic deadlock might bring a higher-than-expected toll on demand. April´s CPI print in particular is set to fall further, as per the muted effect of the Easter holiday due to the epidemic. The figure might even underrepresent this panorama as Eurostat has already warned on potential data collection disruptions.

The WHO signalled yesterday that the coronavirus might be near its peak in Europe. But even under the best of scenarios for the evolution of the pandemic going forward, low inflation prospects in the eurozone are deeply rooted in market’s pricing. The 5Y5Y euro inflation forward swaps recently implied the lowest-ever inflation expectations in the eurozone, close to 0.7%; slightly lifted by ECB´s extended QE program to 0.96% at present. This translates into an even longer horizon for accommodative monetary policy, which in turn filters on lower euro pricing expectations for the medium term horizon.

 

Unconstrained QE program barely lifts long-term inflation expectations in the eurozone

There is still a wildcard on the prospects for the euro in the shape of fiscal support, yet inconclusive. Over the last few days, EU leaders failed to agree on concrete plans to deploy fiscal aid in the area. The center of the debate is placed on the so-called “coronabonds”, a joint debt instrument to finance short-term spending needs aimed at suppressing the sharp interest rate differentials some states face. Issuing coronabonds would be in the best interest for largely-hit countries like Italy, Spain and France, whereas fiscal-conservative states like Germany and the Netherlands oppose the initiative. The Euro group President Mario Centeno sent a letter calling for new avenues of discussion while warning that coordinated action is both needed for a smooth economic recovery and, ultimately, for the survival of the European Union as a bloc.

While we remain cautious on the possibility of such an instrument being implemented – as per the resistance it has historically faced – the debate will be resumed next week on a video call by EU leaders in full.

 

Authors:
Olivia Alvarez Mendez, FX Market Analyst
Ranko Berich, Head of Market Analysis

 

 

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