[VIDEO] Currency Point: The Funder and it risks


The EUR continues to be the weakest G10 currency for two reasons: 

  1. It remains a funding source currency thanks to the ECB’s ultra-low rates programmes 
  2. It is the face of the economic catastrophe that is COVID-19. 

The EUR felt some serious pressure last week as EU leaders failed to reach agreement on longer-term fiscal support, an issue that is likely to continue into this week. The long-term outlook for the EU is bleak as EU leaders continued to disagree on longer-term debt sharing. A short-term EUR540bn stimulus plan passed but member states continue to disagree on the longer-term rebuilding programs and are split on how to spread the financial burden. Italy and Spain want the EU as a whole to shoulder the burden of harder hit nations, something Germany and France are opposed to. 

Compounding the EUR’s issues was the collapse of the Eurozone’s April PMIs, which were even more dramatic than forecast. Services plunged to a staggering 11.7 from the although horrendous 26.4 in March and 52.6 in February, (yes expansion territory). The Eurozone manufacturing PMIs tumbled from 44.5 to 33.6. This fits with what most countries and regions have found, manufacturing has held up as services collapse under social distancing measures. 

The PMI reports made for very pessimistic reading warning of the second wave of COVID infections and a contraction of around -7.5% of GDP. 

All this saw the EUR/USD fell to $1.0756 it’s the lowest reading since March 24.

The movement in EUR/USD is even more amazing when you look at the data coming from the US which certainly is a picture of strength. US initial jobless claims rose another 4.4 million in the week to 18 April. This takes the five-week total to 26.5m, meaning approximately 1 in 6 working Americans are unemployed. Continuing claims as at 11 April totalled 16.0 million. 

April PMIs for the US was not as bad as their trans-Atlantic peers but still tough reading. Services fell sharply to 27 from 39.8 in March, manufacturing, however, was relatively steady at 36.9 from 44.5 in March. Yet there is no denying the forward indicators are very weak, signalling a “historically dramatic contraction” according to Markit. 

The preliminary March trade balance for Australia, showed a surge in exports however, it wasn’t seasonal adjustment so can’t place much weight on the data, but it was enough to push the AUD higher. AUD remained the strongest G10 for a second week with AUD/USD hitting $0.6406 near the end of last week. However, this week may bring it back to earth as the private capital expenditure release on Wednesday is likely to show a capitulation in future private investment which will be a huge drag for Australian GDP.

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Source - database | Page ID - 21604

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