- Rates: Fed helps to extend fragile stability, but eco impact yet to become clear
Yesterday’s Fed measures help to create some short term fragile stability. They could be a prelude for yield curve control. Longer term, we’re not out of the woods yet with lockdown measures keep getting stricter and longer. Today’s PMIs will paint a horrible picture. - Currencies: Dollar rally to show tentative sign of running into resistance
A new series of extraordinary measures of the Fed also slowed the bid for the dollar yesterday. Even so, the reaction/decline of the dollar was limited given the far-reaching nature of the Fed measures. Still, this morning, Asia markets are also showing signs of easing of stress, potentially slowing the run on USD liquidity.
The Sunrise Headlines
- US stocks dropped again with losses up to 3.04% (DJI) in another choppy session after the Senate failed again to push through the nearly $2tn coronavirus bill. Asian markets jump with Japan (7%) and South Korea (8.6%) leading gains.
- Japan’s services sector shrank at the fastest pace on record (32.7 vs. 46.8) in March and factory activity at its quickest in about a decade (44.8 vs. 47.8), Jibun Bank PMIs showed, as the corona outbreak hit demand at home & abroad.
- UK’s PM Johnson placed the UK on a three-week police-enforced lockdown with drastic new measures in the fight against the coronavirus outbreak. French PM Philippe announced stricter confinement rules and tougher penalties.
- SK announced new measures to stabilize markets. 20tn won will be deployed to buy corporate bonds and commercial paper and 10.7tn won to invest in stock indices. SK will also provide 17.8tn won for cash-strapped businesses.
- German officials are inclined to help Italy get through the coronavirus pandemic and are prepared to back an emergency loan from the euro area’s European Stability Mechanism bailout fund, Bloomberg reported.
- The IMF warned the looming recession caused by the coronavirus pandemic could be worse than the one triggered by the global crisis of 2008-2009 but world economic output should recover in 2021, it stated.
- Today’s economic calendar contains flash PMIs surveys that will provide an early read on the stark disruption caused by the pandemic. G7 foreign ministers meet to discuss the pandemic. Germany and the US tap the bond market
Currencies: Dollar Rally To Show Tentative Sign Of Running Into Resistance
Tentative sign of USD topping out?
Yesterday, the trade-weighted dollar initially held close to recent peak levels near 103. A new series of extraordinary measures by the Fed, including unlimited bond buying finally caused the dollar to ease off recent peak levels. Admittedly, USD correction was very limited given the magnitude of the Fed measures. Uncertainty on the organisation of the fiscal side of the story (cf. ongoing debate on the stimulus package in the US Congress) indicated that risk of a new flare-up in the risk-off trade/run on USD liquidity was still high. The trade-weighted dollar closed at 102.48. USD/JPY finished at 111.23. EUR/USD finished at 1.0726 compared to recent correction levels in the 1.0650 area.
This morning, Asian equity markets also show tentative signs of easing stress. The new Fed measures and the USD funding provided via swaps apparently are easing some of the strain parts of the FX markets. The yuan is gaining modest ground against the US dollar (USD/CNY 7.0775 area). USD/JPY is drifting lower (110.35 area) as tensions ease (the yen clearly lost part of its safe haven characteristics of late). EUR/USD tries to regain the 1.08 big figure).
The factors dominating global FX/USD trading will not be much different from previous days. Even so, we have the impression that markets are inclined to believe that yesterday’s Fed measures might help to address some of the hunt for USD liquidity. For example, a de facto cap on longer term US bond yields might ease distressed US Treasury selling and so ease the rush toward USD liquidity. On the euro side of the story, markets gradually will also look at the political commitment and the structure of the measures that will be put in place to support countries like Italy. Headlines on Germany being prepared to give a not that strict lifeline might be a tentative euro supportive. EUR/USD is currently testing the top of a ST range (1.0640/1.0840). A sustained break could be a first cautious sign that the run on the dollar is easing.
Yesterday, the technical rebound of sterling at the end of last week clearly came to an end. EUR/GBP even drifted back higher to close the day near the 0.93 handle. The UK is still in the phase of taking additional measures to address the spreading of the corona virus. As the UK was/is no front runner in this process, the point for markets to get some insights on the restart of economic activity is still quite far away. A (temporary) easing in the run on the dollar in theory should give sterling some relief. However, we don’t see a clear trigger for obvious sterling out performance against the euro in the short term.
EUR/USD trying to develop a bottoming pattern. 1.0840 a first technical reference
