EUR / USD
The final Euro-zone PMI manufacturing reading declined to 33.4 from the flash reading of 33.6 and confirmed at a record low. The indices for France and Italy declined to record lows with indices in other countries all at the lowest level for 11 years. New orders continued to slump and employment also declined sharply with overall business sentiment at a record low which will cause fresh concern over the outlook.
The Euro-zone Sentix investor confidence index secured only a marginal recovery to -41.8 for May from -42.9 the previous month and below consensus forecasts of -33.5 as underlying confidence in the Euro-zone outlook remained weak despite gradual moves to ease economic restrictions.
Italy eased lockdown restrictions slightly on Monday with around 4.5mn employees allowed to return to work, but there were still concerns over the risk of a second wave of infections. According to the ECB’s panel of professional forecasters, GDP is likely to decline by 5.5% for 2020 before recovery of 4.3% next year.
The New York business conditions index declined to 4.3 for May from 12.9 the previous month and a reading of 50.2 in March. Factory orders declined 10.3% for March, compared with consensus forecasts of a 9.8% decline. There was also increasing evidence of underlying dollar demand as money markets showed an element of strain. The dollar maintained a firm underlying tone with the Euro retreating to the 1.0910 area in late Europe.
Markets will monitor the German Constitutional Court ruling on Tuesday in case limits are put on the Bundesbank’s ability to participate in the bond-buying programme while a surprise decision to block purchases would be likely to weaken the Euro sharply and it was held just above 1.0900 in early Europe
An editorial in the China Times, run by the Communist Party, stated that US Secretary of State Pompeo was bluffing in his claims against China and called on Washington to present its evidence. There were media reports that the five-eyes intelligence consortium led by the US stated that China had deliberately suppressed or destroyed evidence of the coronavirus outbreak, but there was no confirmation of the report. Underlying tensions remained high, especially with concerns that the US could look to impose fresh trade sanctions on China and an internal Chinese document warned of an international backlash against the country.
Richmond Fed President Barkin stated that more workers were at risk of leaving the workforce without more support. Overall, the dollar gained support from increased risk aversion as equity markets declined. The yen, however, was also resilient with the US currency retreating to the 106.70 area.
There were further underlying concerns over US-China trade tensions with the Administration accelerating plans to shift global supply chains away from China. The yuan recovered ground in offshore trading which provided an element of relief and risk appetite held steady, but the dollar was held just above 106.50.
In the latest Bank of England auction, dollar demand increased to the highest level since April 1st, although there was no auction on Friday which may have increased underlying demand. The 3-month Sterling-dollar cross-currency basis swap has returned to negative territory in the past week, indicating a renewed increase in demand for dollars. Sterling was also undermined by the more fragile tone surrounding global risk appetite as well as a lack of underlying confidence in fundamentals.
The UK currency declined to lows near 1.2400 against the dollar around the New York open. Risk appetite recovered later in US trading with oil prices also making headway and the UK currency rallied to near 1.2450 while the Euro retreated to near 0.8750. Risk conditions held steady on Tuesday with oil prices making further limited gains. There were, however, further concerns over the underlying UK outlook and upward pressure on the budget deficit with the CBI warning that the small company outlook was the weakest for 30 years. The UK currency edged higher to 1.2465 against the dollar in early Europe with the Euro just below 0.8750.
The Swiss PMI manufacturing index declined to 40.7 for April from 43.7 the previous month, although this was above consensus forecasts. Latest National Bank data recorded an increase in sight deposits to CHF663.8bn in the latest week from CHF650.7bn. This was the largest weekly increase since the franc peg was broken in 2015 and indicated that franc sales had been stepped up in order to curb Swiss currency gains. The Euro was unable to gain any support, especially with weaker risk appetite, and weakened to the 1.0520 area against the franc with the dollar settling just below 0.9650. There will be further concerns that the franc has not weakened significantly despite heavy intervention by the central bank. The franc weakened marginally on Tuesday amid a risk recovery with the dollar just above 0.9650.