EUR / USD
According to the March flash data, the Euro-zone PMI manufacturing index declined to 44.8 from 49.2 previously and above market expectations, although it was still the weakest reading for over 7 years. The services-sector index declined very sharply to 28.4 from 52.6 which was the fastest monthly decline and the lowest reading on record. There was a sharp decline in orders as exports also dipped rapidly amid border restrictions. Industrial and service-sector prices declined with selling prices overall declining at the fastest pace since 2010. The data confirmed that a deep recession was likely in the Euro-zone economy. ECB President Lagarde was reported as saying that she supported Coronabonds issuance, but EU finance ministers struggled to find common ground.
The US PMI manufacturing index declined to 49.2 from 50.7 previously, although, as was the case for Europe, the real decline was larger given that the figure was inflated by a jump in delivery times. The services-sector index declined sharply to a record low of 39.1 from 49.4 previously with the composite output index also at a record low. There will be strong expectations of a further sharp downturn for the April data. The Philly Fed non-manufacturing index declined sharply to -12.8 from 36.1 the previous month with a sharp decline in new orders and a small decline in employment.
There was still strong underlying dollar demand and it regained ground during the New York session, although swap spreads continued to narrow and were much lower than seen last week. After pushing to highs above 1.0880, the single currency was unable to sustain gains and retreated to below the 1.0800 level. Dollar demand eased on Wednesday as measures to boost credit had an impact and the Euro was just above 1.0800 as commodity prices rallied.
After posting strong gains ahead of the New York open, US equity markets opened higher and made further strong gains into the European close. Confirmation that the Olympics due to be held in Japan this year would be postponed until next year had a negative impact on the Japanese currency. Money markets also indicated that dollar demand from Japanese banks was still very high. Yen demand remained weak and the dollar pushed to highs near 111.50. G7 members held a virtual meeting and reiterated that they will do whatever is necessary to restore confidence with little net impact.
Markets continued to monitor fiscal developments closely as Congress continued to edge closer to a substantial fiscal package. In Asia on Wednesday, there were reports that Administration and Senate Democrats had reached agreement on a $2.0trn package, but there will still need to vote in Congress and President Trump’s signature. There were also reports that the US Administration would defer trade tariffs for a 90-day period and Asian markets made strong gains. Minutes from the Bank of Japan meeting warned over a deep downturn and the dollar settled around 111.30 in early Europe.
The UK PMI manufacturing index declined to 48.0 for March from 51.7 the previous month which was above consensus forecasts, although the data was distorted by longer delivery times. The services-sector index declined to a record low of 35.7 from 53.2 the previous month as activity slumped in many sectors. Selling prices declined and employment was cut as business confidence dipped sharply. The headline CBI industrial orders index declined to -29 for March from -18 previously and business confidence declined to a 10-year low as export orders declined sharply and the underlying coronavirus impact intensified.
There was some speculation that the Bank of England would announce more aggressive quantitative easing measures at Thursday’s policy meeting which provided an element of currency support. Sterling pushed to highs around 1.1800 against the dollar before fading slightly while the Euro retreated to lows around 0.9150 before consolidation around 0.9175. Stronger global risk appetite also underpinned the UK currency and it traded close to 1.1850 on Wednesday. UK data will now be released at the European open and the headline CPI inflation rate edged lower to 1.7% from 1.8% with the core rate at 1.7% from 1.5% and the Euro traded around 0.9140.
A strong rally in global equity markets curbed potential defensive demand for the Swiss franc on Tuesday as underlying risk aversion eased. Gold registered very sharp gains for the second successive day, but the franc failed to make headway. There were further expectations that the National Bank was intervening to weaken the Swiss currency which also tended to deter buying interest. The Euro initially settled around 1.0575 before a move to the 1.0600 area while the dollar dipped to lows near 0.9720 before recovery to the 0.9800 area. There was little change on Wednesday as global equity-market gains curbed potential franc demand.