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Mohammed Al Tajir - Manager, FX Analytics and Product Development
Published Date: 16 February 2020
The dollar was mixed last week, as markets became a bit more nuanced about how they see coronavirus playing out and also began to take on board other issues affecting individual currency pairs once again. This is not to say that the risks and uncertainty have gone away however. A change to the diagnosis methodology led to a nearly 30% jump in new reported cases of coronavirus in China raising further questions over the extent to which China’s economy will be affected by the outbreak. The Chinese government maintained that they will meet their growth target of ‘around 6%’ for this year despite the economic disruption caused by the virus, but we feel that growth will be closer to 5.5% now, which will continue to keep upward pressure on USDCNY. Markets will not see official data that could show some impact of the virus until the 29th February, when the official Chinese PMI data is released, but they will have to wait until the middle of March for some harder data, such as retail sales and industrial production. Until then ongoing uncertainty over China's handling of the virus, weak growth data out of Europe, and weaker than expected U.S. sales (0.3% m/m) and production (-0.3% m/m) figures at the end of last week will maintain a degree of caution.
Perhaps the most striking feature of last week was the softness of the EUR, which was the weakest currency against the USD falling over 1.0%. We noted last week that the Eurozone, and in particular Germany, are amongst the most vulnerable region’s to the downturn in China, especially with its factory sector already struggling before the virus outbreak. Data last week confirmed that sector’s continued weakness into December, with industrial output in the Eurozone falling 2.1% during the month, the sharpest decline since 2016, with broad-based declines in the largest economies. Furthermore, German real GDP was flat in Q4, highlighting its lack of momentum at the turn of the year, which bodes badly for how it will react when the virus impact hits. The first confidence numbers for February are due out this week and are likely to reflect virus effects, tilting the risks to the downside. ECB comments last week were cautious about the impact with the ECB's Chief Economist Philip Lane talking about a "pretty short-term hit" on the economy as spending plans are cancelled and postponed. Fed Chair Powell also said that the effects of the coronavirus are being ‘closely monitored’, but we would anticipate some ratcheting up of concern expressed by policy-makers so long as the news flow shows little abatement in the numbers of infections and deaths.
Also of note last week was the recovery in GBP despite the resignation of Chancellor of Exchequer Sajid Javid on Thursday who was replaced by his Deputy Rishi Sunak. GBP was in fact the strongest currency over the week, rising by 1.2% against the USD. Sajid’s departure was seen opening the way for a more expansionary budget next month, including the financing of some major infrastructure plans, which also put upward pressure under yields. While GDP data showed the UK economy stagnant in Q4, the GDP data at the end of the year showed an improvement in activity (0.3% m/m in December) and early indications from 2020 surveys are also encouraging that a corner is being turned.
Source: Bloomberg, Emirates NBD Research
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