Friday’s German data releases had little overall impact with coronavirus and degrees of risk aversion continuing to dominate. Euro-zone equity markets continued to decline sharply and German yields declined to fresh 4-month lows. The Euro pushed to fresh 3-week highs near 1.1050 before retreating again ahead of the New York open as overall volatility increased.
The US Chicago PMI index recovered to 49.0 for February from 42.9 as production increased to an 8-month high. Orders remained in contraction, however, and employment also declined. The important national ISM data is due on Monday.
The dollar recovered briefly during the New York session with the Euro dipping to near 1.0950, but there was a fresh reversal later in the day as the US currency came under fresh selling pressure from interest rate expectations and hit 3-week lows.
St Louis Fed President Bullard stated that it was too early to make a judgement, but that the Fed would be willing to act if there was a major US hit. Chair Powell also stated that the coronavirus poses evolving risks and that the Fed will use its tools and act as appropriate to support the economy. Futures markets priced in a 95% chance that the Fed would cut interest rates by 0.50% at the March policy meeting. Powell’s comments triggered further US selling with the Euro back near 1.1050 as US yields dropped. CFTC data indicated that long dollar positions had increased further, maintaining the risk of liquidation. Expectations of an imminent Fed rate cut pushed the Euro to highs around 1.1075 on Monday before a correction.
Risk appetite dominated during Friday with volatility spiking higher and there were sharp losses across all major bourses. The dollar attempted to stabilise near 108.50, but a further slide in Wall Street equities and fresh all-time lows in the 10-year bond yield at below 1.10% triggered lows near 107.50 before a tentative recovery as equities recovered from intra-day lows.
Chinese PMI data releases over the weekend were shocking with the manufacturing index declining to 35.7 from 50.0 previously while the non-manufacturing index slumped to 29.6 from 54.1 in January. Both figures were at record lows as activity was hammered by the coronavirus closures. The dollar opened sharply lower in Asia with 4-month lows around 107.30. China’s Caixin PMI manufacturing index declined to a record low of 40.3 from 51.1 previously with heavy damage in supply and demand. Business confidence strengthened, however, amid expectations that conditions would improve.
Expectations of global central bank support measures and Bank of Japan liquidity injections, were also important in underpinning risk conditions. Equity markets rallied and the dollar recovered to above 108.00 as volatility remained intense.
Bank of England Governor Carney warned that the coronavirus impact would have a negative impact on the economy, although it was too early to judge the impact. The comments were no surprise, but tended to limit Sterling support.
Weaker global risk appetite also had an important negative impact on the currency.as confidence in the economic outlook continued to weaken. Given the open UK economy and current account deficit vulnerabilities, the UK currency lost ground.
Sterling was undermined by month-end Euro demand during the day with selling pressure peaking around the London fix. The Euro strengthened sharply to highs near 0.8650 while the UK currency dipped to lows below 1.2750 before a recovery back above 1.2800. Further unease over trade talks were over-shadowed by global risk conditions and an increase in UK coronavirus cases. As global risk appetite recovered, the Euro retreated to near 0.8600 with Sterling trading above 1.2800.
The Swiss KOF business confidence index strengthened to 100.9 for February from 100.1 previously and above consensus forecasts.
The Euro dipped to lows below 1.0600 against the Swiss franc after the New York open as equity markets declined sharply, but there was a sharp reversal to the 1.0640 which increased speculation over National Bank intervention to prevent franc gains.
The bank stated that the coronavirus had increased economic risks and could bolster the franc’s safe-haven attractions. The Euro traded near 1.0650 on Monday with the dollar around 0.9650.