Dollar Soft as Market Sentiment Buoyed by the Fed, Italy, and the Senate

  • There has been some positive news on the medical front; markets continue to digest the Fed’s bazooka moment; we are seeing some knee-jerk selling of the dollar
  • Reports suggest compromise on the Senate-led aid bill is near; Markit reports March US PMIs
  • Eurozone and UK flash PMIs were reported; UK Prime Minister Boris Johnson has finally succumbed to the internal and external pressure to impose a strict lockdown
  • National Bank of Hungary is expected to keep rates steady
  • Japan reported flash PMIs; New Zealand continues to lead global efforts to mitigate the economic impact of the virus spread
  • Korea announced a massive stimulus package; Philippine central bank cut reserve requirements

The dollar is broadly weaker against the majors as market sentiment improves on a veritable trifecta of positive news.  Nokkie and sterling are outperforming, while yen and Loonie are underperforming.  EM currencies are broadly firmer.  MXN and HUF are outperforming, while TWD and INR are underperforming.  MSCI Asia Pacific was up 4.8% on the day, with the Nikkei rising 7.1%.  MSCI EM is up 4.5% so far today, with the Shanghai Composite rising 2.3%.  Euro Stoxx 600 is up 5.2% near midday, while US futures are pointing to a higher open after trading was suspended for limit up.  10-year UST yields are up 4 bp at 0.82%, while the 3-month to 10-year spread is up 4 bp to stand at +86 bp.  Commodity prices are mostly higher, with Brent oil up 4.0%, copper up 1.5%, and gold up 3.2%.

There has been some positive news on the medical front. Italy looks to be turning a corner as it appears to be seeing a decline in the rates of both confirmed cases and deaths over the last couple of days.  Let’s hope the trend continues. Confirmed cases in the US continues to rise sharply due to more vigorous testing. In China, Hubei province announced it will start to normalize transport in early April, lifting the quarantine as new infections drop to zero.

Markets continue to digest the Fed’s bazooka moment.  We will be sending out a longer piece on the Fed’s actions later today and the implications for the dollar.  President Trump said he called Fed Chair Powell to thank him for his actions to support the economy.  Risk sentiment has improved, but we cannot say it is purely due to the Fed.  We noted improve virus numbers out of Italy above, while it appears that a compromise stimulus bill may be announced this morning (see below).

We are seeing some knee-jerk selling of the dollar.  Will the selling be sustained?  Virtually every major central bank is engaging in QE with zero rates.  As such, all currencies are on a level playing field and we so we have to go back to looking at the fundamentals.  This sequence will key.  Which countries have taken the measures needed to limit the virus spread?  Which countries will emerge fastest from this slump?  And looking way into the future, then which countries will be able to emerge from these emergency policy settings earliest?  The situation is fluid but we should know more over the next few weeks.



Reports suggest a compromise on the Senate-led aid bill is near.  After a tense day, it appears offers and counteroffers were exchanged Monday afternoon and led Senate Minority Leader Schumer to convene Democrats on a conference call to say a deal was near.  Several issues remain unresolved, however.  Talks between Schumer and Treasury Secretary Mnuchin went on until nearly midnight, leading to some optimism that a deal could be announced this morning.  Elsewhere, House Democrats are crafting their own legislation, though there is no guarantee that the Republican-led Senate will pass it.  House Speaker Pelosi unveiled a $2.5 trln package last night that has more protections for workers but is considerably less friendly to financial institutions.  It’s possible that some of her provisions will work their way into the Senate bill.

The regional Fed manufacturing surveys for March will continue to roll out this week.  Richmond Fed reports today and is expected at -15 vs. -2 in February.  This will be followed by Kansas City Thursday and is expected at -10 vs. 5 in February.  Last week, Empire survey came in at -21.5 vs. 3.0 expected and 12.9 in February, while the Philly Fed survey came in at -12.7 vs. 8.0 expected and 36.7 in February.

Markit reports preliminary March US PMI readings today.  Manufacturing PMI is expected at 43.5 vs. 50.7 in February, while services PMI is expected at 42.0 vs. 49.4 in February.  PMI readings out of Europe and Japan (see below) show that the services sector is so far taking a bigger hit from the coronavirus than manufacturing.  February new homes sales (-1.8% m/m expected) will also be reported today.

Mexico mid-March CPI is expected to rise 3.68% y/y vs. 3.52% in mid-February.  Banco de Mexico delivered a surprise 50 bp cut to 6.5% late Friday afternoon, choosing to move ahead of this Thursday’s planned meeting.  Further easing will be seen in the coming weeks.



PMI readings today start to show the magnitude of the damage the virus will inflict on the European economies, especially on the services sides. The headline eurozone manufacturing PMI came in at 44.8 vs. 39.0 expected, services PMI came in at 28.4 vs. 39.5 expected, and the composite came in at 31.4 vs. 38.8 expected.  Both Germany and France showed a similar dynamic, with manufacturing PMIs coming in better than expected at 45.7 and 42.9, respectively, and services PMIs coming in lower than expected at 34.5 and 29.0, respectively.   We will get Italy and Spain readings with the final PMI report due out April 1.

UK also reported preliminary March PMI readings.  Here too, services fared much worse than manufacturing.  Manufacturing PMI came in better than expected at 48.0 vs. 45.0 expected and 51.7 in February, services came in much worse at 35.7 vs. 45.0 expected and 53.2 in February, and the composite crashed to 37.1 vs. 45.0 expected and 53.0 in February.

UK Prime Minister Boris Johnson has finally succumbed to the internal and external pressure to impose a strict lockdown in the UK. All non-essential shops and commerce will be closed to for at least 3 weeks and people will be unable to leave their home for any non-essential reason bar one form of exercise.  

National Bank of Hungary is expected to keep rates steady.  Inflation was 4.4% y/y in February, well above the 2-4% target range.  However, the focus is clearly on supporting growth now.  With other regional central banks already easing aggressively, we believe there is a significant risk of a dovish surprise here.



Japan preliminary March PMI readings came in very weak.  Manufacturing fell to 44.8 from 47.8 in February, but services slid even more to 32.7 from 46.8 in February.  This dragged the composite PMI down to 35.8 from 47.0 in February.  February department store sales were also reported and showed considerable weakness.  Tokyo sales contracted -12.8% y/y vs. -2.4% in January, while nationwide sales contracted -12.2% y/y vs. -3.1% in January.

Korea’s government announced a massive stimulus package, doubling the previous measures. President Moon’s is now at KRW100 trln ($80 bln), including KRW20 trln earmarked for bond market stabilization, KRW 10.7 trln to support equities, and KRW17.8 trln committed to assist domestic companies. The funds are due to launch in early April. The Kospi shot up 8.6% and is now back above the key support levels from November 2009 (1519.40 – 1543.24), while yields were rock solid across the curve.

New Zealand continues to lead global efforts to mitigate the economic impact of the virus spread.  The RBNZ is working with banks to provide a 6-month mortgage relief scheme to residents and SMEs. Core funding ratios for banks were reduced, and a NZD6.25 bln guarantee scheme will also be implemented to support SMEs, while large companies will be provided with more bespoke solutions. RBNZ Governor Orr is considering broadening the scope of its recently announced QE program, mentioning corporate bonds and local government debt. The current QE program covers NZD30 bln of medium- to long-term government debt, roughly constituting 40-50% of the available supply. The Kiwi led gains vs the US dollar for most of the session, briefly trading above 0.58 and gaining some breathing space from the recent lows. Levels to watch are resistance at 0.5916 (March 17 low) and support at 0.5470.

The Philippine central bank announced a 200 bp reduction in large banks’ reserve requirements. The banks affected (accounting for over 90% of the deposit base) will see their RRR fall to 12%, unlocking the equivalent of $3.9 bln in liquidity. This follows a 50 bp cut in the policy rate last week to 3.25% and a large scale bond purchase program to support liquidity and government spending. Reports suggest that more fiscal measures are on the way.