Dollar Draws Strength from Coronavirus and Lower Financial Market Confidence in Euroland Economic Outlook

February 18, 2020

Share prices fell today by 1.5% in Hong Kong and South Korea, 1.4% in Japan and 1.0% in Taiwan. Equity markets are down in Europe by 0.9% in the U.K., 0.7% in Germany, 0.5% in France and 0.4% in Switzerland.

Risk aversion is also reflected in fixed income markets, where 10-year sovereign debt yields have declined by 4 basis points in the U.S., 3 bps in Japan and Britain, and 2 basis points in Germany.

WTI crude oil slumped 1.9% overnight, whereas the price of gold is 0.3% firmer.

Overnight dollar appreciation totals 0.7% against the kiwi, 0.5% versus the Australian dollar and Mexican peso, 0.3% relative to the Chinese renminbi, 0.2% vis-a-vis the euro and loonie and 0.1% against the Swiss franc. The New Zealand and Australian dollars slipped below 64 and 67 cents, respectively, and the renminbi moved above 7.000 per dollar. An overnight euro low of 1.0812 per USD constitutes its weakest level since late April 2017.

Investor concern about global growth especially in the Pacific Rim is mounting in tandem with the daily rise of reported coronavirus cases and deaths. Apple warned that first quarter results are likely to be below previous company forecasts. Walmart sales at end-2019 fell shy of expectations, too.

Germany’s ZEW expectations index, a gauge of financial analyst expectations had recovered from -44.1 last August to -2.1 in November, +10.7 in December, and +26.7 in January but relapsed to a 3-month low of +8.7 in February. The companion index of perceptions about current conditions dropped 6.2 points deeper into the red to print at a 2-month low of -15.7 in the most recent month. Readings for the ZEW expectations and current situation indices for all of the euro area likewise dropped in February to 3- and 2- month lows of +10.4 and -10.3.

Minutes from the Reserve Bank of Australia’s February 4th Board meeting indicate an easing bias. While officials acknowledge that ultra-low interest rates involve potential negative repercussions, the Board could cut the 0.75% official cash rate if assumed gradual rises in growth and inflation fail to materialize. There doesn’t necessarily need to be significant fresh deterioration to cause such a decision.

The dollar slid 0.3% against sterling. British labor statistics revealed

  • A smaller 5.5k January increase in jobless claims.
  • A continuing 45-year low of 3.8% in ILO-basis unemployment.
  • A rise of 180k in employment in the fourth quarter.
  • A 0.3 percentage point drop in on-year average weekly earnings growth to a 16-month low of 2.9%.
  • A fourth-quarter 0.3% quarterly increase in labor productivity last quarter, measured by output per hour worked. Compared to a year earlier, productivity was unchanged in 4Q. The on-year drop of 0.5% in 2Q19 had been the largest decline in five years.

Swedish unemployment rose to 7.5% in January from 6.5% a year earlier. The seasonally adjusted jobless rate was 7.0%.

Unemployment in Hong Kong rose to a 26-month high of 3.4% in November-January.

In the European Union, car sales swung from on-year rises in each month of 4Q19 ,including 21.7% in December, to a 12-month 7.5% decline in January. Sales were adversely affected by the exit of the U.K., sluggish demand in the region, and coronavirus-related disruptions to supply.

British car sales were 7.3% fewer in January than a year earlier.

Canadian manufacturing sales, orders, and inventories fell on month in December by 0.7%, 0.6%, and 0.3%. Manufacturing sales growth in 2019 as a whole averaged only 0.5%, down from 5.4% in 2018 and 6.0% in 2017.

In the U.S., the Empire State manufacturing index jumped 8.1 index points in February to a 9-month high of 12.9. Other U.S. data scheduled today for release are the National Association of Home Builders’ housing market index and Treasury-compiled capital flows known as TIC data.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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