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Reassessment

A dose of reality

Whether or not the tragic Covid-19 pandemic is running out of steam, as investors seemed to think on Monday, volatility remains a salient feature of the FX market. Yesterday, investors were less obviously confident. Oil put the flighty Norwegian krone in first place but the euro and Swiss franc shared second.

While the end of Wuhan’s lock down struck a positive note, it is clear to all that containment measures cannot simply be turned off. Some restrictions remain in place and the threat of renewed infection is a distinct possibility. Those who on Monday were preparing to celebrate the return of normal life in Austria and Denmark must have tempered their euphoria, if Tuesday’s price action is anything to go by. Share prices are not much lower but they are down, not up.

Investors in need of a counterpoint to their optimism need look no further than the stream of gloom that flows from economic forecasters. The UN’s International Labour Organisation expects 195 million full-time-equivalent jobs to be lost globally in the second quarter, with 40% of the world’s workers affected. France’s economy shrank by around 6% in the first quarter according to the Banque de France’s estimate. A Reuters poll concurred that Japan’s economy would shrink by 0.9% in Q1 and by 1.5% in Q2. Goldman Sachs is even more pessimistic, predicting a 6.3% contraction this quarter.

 

Europe dithers

When EU finance ministers held a teleconference yesterday they failed to come up with a solution to the fiscal problem of Covid-19. It was not a complete surprise: Italy and the Netherlands have staunchly contradictory opinions on how – and indeed whether – collective stimulus should be delivered. The ministers will try again tomorrow.

The Eurogroup’s failure to agree did less damage to the euro than the Banque de France’s forecast. This morning it dropped half a US cent, neutralising yesterday’s gain. Sterling was a touch higher on the day, on average, picking up half a US cent and half a Japanese yen. The pound took a cent and a half, 0.7%, off Tuesday’s weakest performer, the NZ dollar.

There was little on Tuesday’s agenda that related to the current Covid-19 era. One figure that did was March’s NFIB index of US small-company business optimism. It dived eight points to 96.4, the largest monthly drop since the series began in 1986. Another was Canada’s Ivey purchasing managers’ index, which more than halved in March from 54.1 to 26.0.

 

FOMC minutes

The theoretical highlight of today’s agenda is the minutes of the Federal Open Market Committee meetings which took place in March. They are certainly Coronavirus-current but their impact will be muted by the vast volume of water that has flowed under the bridge since the last meeting.

The 1.7% monthly decline in Australian mortgage approvals reported this morning made no difference to the Aussie. Nor did the slowdown in Norwegian inflation from 0.9% to 0.7% have any implications for NOK interest rates or the krone.

This morning South Africa reports on business confidence for March and there will be auctions of 10-year UK and German government bonds. Canadian housing starts and building permits come after lunch and Britain’s RICS house price balance prints at midnight. On Thursday morning the figures come out for UK trade and output in February; another historical footnote. 

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