25-Mar-2020

1) Dollar Ends Lower On Fed Unlimited QE Hope
2) EUR/USD: Intra-Day News and Views and Data to Be Released Today
3) Asia Open: Markets Post Positive Results

1) Dollar Ends Lower On Fed Unlimited QE Hope

The greenback pared its losses made in Asia and Europe and ended lower against majority of its peers on Tuesday, except for safe-haven Japanese yen due to renewed risk-appetite on hopes that U.S. government will pass the Federal Reserve’s unlimited quantitative easing program together with strong recovery in the U.S. Treasury yields and as U.S. stocks posted their largest 1 day gains since 1933 (Dow Jones closed higher by 2112 points or 11.37%).

Versus the Japanese yen, although dollar initially fell to 110.09 in Asian morning on profit-taking, price found renewed buying and rose to 110.94 in Europe on recovery in U.S. Treasury yields and stock futures before retreating to 110.30 but later to rallied to a fresh 4-week high of 111.71 on USD’s strength in New York session before moving broadly sideways.

The single currency went through a roller-coaster ride. Price found renewed buying at 1.0723 in Australia and rose to 1.0822 in Asian morning before retreating to 1.0777. The pair then jumped to 1.0865 at European open and ratcheted higher to +an intra-day high of 1.0887 but only to pare its gains and weakened to 1.0747 in New York afternoon on USD’s strength.

Reuters reported euro zone business activity has crumbled in March as the coronavirus pandemic sweeping across Europe and the world wreaks havoc and shops, restaurants and offices pull down the shutters, a survey showed on Tuesday. IHS Market’s Euro Zone Composite Flash Purchasing Managers’ Index (PMI), seen as a good gauge of economic health, plummeted to a record low of 31.4 this month from February’s 51.6, by far its biggest one-month fall since the survey began in mid-1998.

That reading was below all forecasts in a Reuter’s poll which had a median prediction of 38.8.    Factories were less badly impacted, with the manufacturing PMI dropping to 44.8 from 49.2 – its lowest since July 2012 but above expectations in the Reuters poll for 39.0.

The British pound rallied in tandem with euro from 1.1492 in Australia to 1.1657 in Asian morning and then later rallied to 1.1790 in Europe on cross-buying in sterling before retreating to 1.1685 at New York open on profit-taking. Despite gaining to session highs of 1.1800, cable then weakened to 1.1713 on USD’s strength and then moved sideways.

Reuters reported Britain’s economy is shrinking at a record pace, faster than during the 2008-09 financial crisis, as businesses across the services sector shut up shop in face of the coronavirus, a survey showed on Tuesday.    Conducted last week before the government ordered the closure of all pubs, restaurants and other businesses open to the public late on Friday, the monthly Purchasing Managers’ Index points to the economy shrinking at a quarterly rate of 1.5-2.0%.

The flash composite PMI – which includes about 85% of firms in the full survey – sank to 37.1 from 53.0, its lowest since the survey started in January 1998 and below all forecasts in a Reuters poll of economists. The services component sank to 35.7 from 53.2, also a record low.    The manufacturing activity PMI fell by less, to 48.0 from 51.7. IHS Market said this reflected an upward distortion, due to the positive impact on the index of lengthening delays from suppliers – usually a sign of a sharp rise in demand, but in this case caused by the coronavirus.

In other news, Reuters reported EU regulators expect more member states to provide support to companies hit by the impact of coronavirus in the coming days, Europe’s competition chief told Reuters on Tuesday, days after clearing billions of Euros for such plans in Germany, France and Portugal.     Margre the Vestager said easing the bloc’s strict state aid rules for now was essential to deal with the aftermath of the coronavirus crisis, with many economists forecasting a recession.

Thousands of companies across Europe, in particular small- and medium-sized businesses, have been hit by lockdowns aimed at limiting the spread of the virus, with many facing losses and forced to cut staff.        EU governments in turn have responded with a series of measures, most of which will need to be vetted by Vestager to ensure that no company gets an unfair advantage.

On the data front, Reuters reported the coronavirus outbreak has plunged business activity in Germany’s private sector to the lowest level since the global financial crisis in 2009, driven by a record contraction in the service sector, a survey showed on Tuesday. Market’s flash composite Purchasing Managers’ Index (PMI), which tracks the manufacturing and services sectors that together account for more than two-thirds of the economy, tumbled to 37.2 in March from 50.7 in February.

This undershot the consensus forecast of analysts who had expected a drop to 40.6 in a Reuter’s poll – although their forecasts ranged all the way from 47.0 down to 31.0, reflecting huge uncertainty over the impact of the pandemic.

2) EUR/USD: Intra-Day News and Views and Data to Be Released Today

EUR/USD – 1.0817. The single swung wildly in hectic trading on Tuesday. Price initially gained to 1.0822 in Asian morning before rallying to session highs at 1.0887 due partly to cross-buying of euro especially vs sterling.

However, the pair erased its gains and tumbled to 1.0747 in New York afternoon due to USD’s broad-based strength on the surge in U.S. stocks. Price then found renewed buying there and rebounded to 1.0823 in Asia today before stabilizing.

Although price has recovered after yesterday’s selloff from 1.0887 to 1.0747 and minor consolidation would be seen, as said move signals up move from Monday’s near 3-year trough at 1.0637 has made a temporary top there, downside bias remains. Offers are now seen at 1.0830/40 with stops building up above their whilst initial bids are noted at 1.0720/30.

3) Asia Open: Markets Post Positive Results

The S&P surged 9.4% Tuesday and media reports say the Dow Jones registered its best day since 1933, rising 11.4%. European and Asian equities rose as well, oil slipped and gold rose by 2.2%.

A final decision on a US fiscal stimulus package remains elusive; US Treasury Secretary Mnuchin said the deal is within striking distance, with media reports suggesting an agreement could be made within hours. The size of the package under consideration remains consistent with recent media reporting at around $2tn (10% of US GDP).

US equities are rallying on expectations of a substantial bipartisan deal which may be just a few hours away. But in “buy the rumor, sell the news” fashion, the stock market could easily take another sharp leg lower once the good news is out and investors conclude that it won’t be enough (yet) to address what’s going on in the real economy.

With that said, given the enormity of the package it will most certainly be initially well-received and should be sufficient to buttress “Main Street” from falling into a worst-case depression type scenario, especially with the Fed prepared to monetize all the US government’s debt.

The reason why it’s critical to get this US Aid package wrapped up quickly, and in a huge way, is that, in contrast to Europe, the US social and economic parachutes and automatic fiscal stabilizers are much weaker. This means hundreds of thousands of US workers might get laid off every day congress dithers. But with no unemployment and health benefits, and in the absence of a quick and useful government safety net, the economic impact will be much worse in the US than in Europe.

E-minis have been surging all day long on the anticipation of the deal as the markets are still revelling in the Fed’s crisis response which was nothing short of spectacular, given that they’re prepared to monetize infinite amounts of government debt.

Looking at flows overnight, it appears the Fed effectively addressed market plumbing issues while providing a whole range of liquidity backstops. And the proof is in the pudding as, slowly but surely, liquidity is starting to return to futures markets which seemed to trough last Thursday when a lot of traders turned their algo and machines off.