Since the beginning of the year, EURUSD has been drifting lower with the move accelerating over the past two weeks. YTD, EURUSD has fallen more in the first ~6 weeks of the year than it did during the entirety of 2019.
While there has always been concern around the economic health of the single market, recent price action implies that markets are becoming more and more concerned about deepening economic challenges. German Q4 GDP came out flat last week and there is risk for contraction in Q1 2020. Keep in mind that Europe's export-oriented economy makes it more vulnerable to the SARS-CoV-2 outbreak, and the resignation of Angela Merkel's chosen successor raises the possibility of early elections depending on who ultimately is elected to head the Christian Democratic Union.
The euro's decline this past week was likely accelerated by the market's unwind of euro long positions that were built in anticipation of an economic recovery that hasn't materialized. Another factor that could be adding to euro pressure is central bank buying. Normally, central banks maintain a constant portfolio by selling strong currencies and buying weak ones. If central banks are not as active as they were last year, the euro would lose one of the factors supporting it last year.
Another area to watch is investment inflows. Europe has enjoyed strong structural inflows into its equity markets as well as corporate FDI. For now, these inflows represent support for the euro, however they are not immune to economic reality. Should the Eurozone have a third consecutive year of economic disappointment, the repatriation of these foreign funds could turn a strength into a liability.
Last week, the euro slid to its lowest level since early 2017 and has declined for two straight weeks. The euro is being hit by concerns over politics and economic underperformance. These concerns have only been amplified by SARS-CoV-2 virus concerns. Likely, the markets are revaluing the euro to account for the possibility of an extended period of economic softness. To this point, German Q4 GDP came in flat and SARS-CoV-2 uncertainty makes contraction in Q1 2020 a very real possibility. The trend is still for EURUSD to move lower, but after the big move over the last two weeks, we could be in for some near term consolidation.
Sterling was higher on the week with PM Johnson's cabinet reshuffle playing a key role. Sajid Javid's resignation and Rishi Sunak's promotion to chancellor of the exchequer has led to believe that more fiscal support could be on the way due to Sunak's more amendable view on fiscal stimulus. Moreover, Sunak's promotion is seen to more closely align with the Treasury and executive government. While these are positive developments, from a pro-growth policy perspective, caution on this growth optimism is advisable as the UK and EU remain far apart on trade talks, raising hard Brexit risks.
USDJPY was broadly flat over the past week. Flow data continues to show strong demand for foreign investors with the portion of unhedged flows rising. As a safe haven currency, expect the SARS-CoV-2 virus to continue to play a role determining yen movement although a drop in the infection rate gives optimism. Moreover, the structural nature of investment outflows should limit yen appreciation. Expect consolidation until the markets gain greater clarity on the coronavirus.
Last week, Canada was in the middle of a "data lull" but that ends this week with monthly reports on manufacturing sales, CPI and retail sales. This should round out the picture on what Canadian Q4 GDP will be like. For now, Canadian data appears to be solidifying (see recent jobs report), but the CAD is not immune to risk off events, leaving it vulnerable to SARS-CoV-2 virus headlines.
The coronavirus outbreak continues to dominate the headlines. The end of last week saw a spike in confirmed cases that was predominately attributed to a change in testing protocols. Keep an eye on the infection rate for confirmation that last week's spike in confirmed cases was truly accounting related and that the infection rate in slowing. For now, the CNY appears to be stabilizing with further easing providing support. Expect this stability to continue absent any materially negative virus headlines.
Last week, RBA Gov. Lowe reiterated his view that the economy is at a turning point and the virus impact is expected to be limited. The RBA minutes, set for release this week, will be looked at for confirmation of this relatively optimistic view. Additionally, the Aussie jobs report and PMI readings will be key indicators of the economy's health and, ultimately the path forward for the RBA. The AUD remains one of the most cyclically exposed currencies so while there remain signs that the outbreak may be peaking, headline risks still remain making it prudent to see how the dust settles.
MAJOR CENTRAL BANK ACTIVITY THIS WEEK
Expectations for rates to be cut by 0.50% to 10.75%
Expectations for rates to be cut by 0.25% to 4.75%
KEY MARKET MOVING ECONOMIC RELEASES
United States and Canada
US Empire Manufacturing
Expectations for a 5.0 print
Expectations for a 0.1% increase
US Manufacturing and Services PMI
Expectations for a 51.5 and 53.5 print, respectively
Canadian Manufacturing Sales
Expectations for a 0.8% increase
Canadian CPI MoM
Expectations for a 0.2% increase
Canadian Retail Sales MoM
Expectations for a 0.1% increase
EZ Consumer Confidence
Expectations for a -8.2 print
EZ Manufacturing and Services PMI
Expectations for a 47.5 and 52.3 print, respectively
UK Jobs Report
Expectations for a 170K print
UK CPI MoM
Expectations for a -0.4% decline
UK Manufacturing and Services PMI
Expectations for a 49.7 and 53.4 print, respectively
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