· Dollar index dips to 11-week low as risk appetite improves
The U.S. dollar fell to an 11-week low against a basket of other currencies on Wednesday, on optimism that the worst of the economic downturn stemming from the global spread of the coronavirus is over.
The improving risk appetite has reduced demand for the greenback, which benefits from safe haven buying when markets are volatile and investors are reluctant to take risk.
The dollar index against a basket of major currencies fell 0.22% to 97.37, after earlier dropping as low as 97.28, the lowest since March 12.
U.S. data on Wednesday showed that U.S. private payrolls fell less than expected in May, suggesting layoffs were abating as businesses reopen, though the overall economy’s recovery from the COVID-19 pandemic will be slow.
U.S. services industry activity also pushed off an 11-year low in May, though businesses appeared in no rush to rehire workers as they reopen.
The greenback gained 0.03% against the Japanese yen to 108.69 yen, after earlier reaching 108.84 yen, the highest since April 9.
The Australian dollar, which has been one of the best performers from the increase in risk appetite, rose 0.23% to $0.6910, after earlier reaching $0.6983, the highest since Jan. 3.
The euro rose 0.40% to $1.1214, after getting as high as $1.1231, the highest since March 16.
Investors are focused on whether the European Central Bank will increase the size of its 750 billion euro ($669 billion) Pandemic Emergency Purchase Programme (PEPP) when it meets on Thursday.
Overnight euro implied volatility gauges jumped to 12%, their highest in one month, suggesting traders were preparing for moves bigger than usual in the common currency.
Data on Wednesday showed that euro zone businesses suffered another devastating contraction in activity in May and while there are signs the worst is over, it could be months before there is a return to growth.
Sterling rose on Wednesday to a one-month high though Brexit risks weighed on the currency.
· The bond market appears to be signaling the worst is over for the economy
The bond market has caught a tiny bit of the stock market’s optimism, and it’s selling off on the idea that the economy may have hit rock bottom in April.
Bond yields, which move opposite price, have been edging up, and on Wednesday they made a significant move higher off their relatively low base. The benchmark 10-year Treasury yield, which influences mortgages and other loans, rose to 0.77% from just under 0.70%. The 10-year was at 0.757, its highest level since April 13.
ADP’s private sector payrolls showed 2.76 million jobs were lost in May, while economists had expected to see more like 9 million lost jobs. The report is not an accurate guide to the government’s monthly employment report but it is watched for clues.
· Negative interest rates could be needed for a ‘V’ recovery, Fed economist says
Getting the U.S. economy back to strong growth could require negative interest rates, according to a St. Louis Federal Reserve economist.
As many economists dismiss the likelihood of the current record-breaking slump being followed by an equally aggressive recovery, central bank economist Yi Wen said in a paper on the St. Louis Fed’s website that achieving that kind of a rebound is necessary and possible.
The key, he said, is using aggressive stimulus even beyond what authorities deployed during the financial crisis, and that could include taking interest rates below zero.
· Senate passes bill to give businesses flexibility in spending coronavirus aid, sends it to Trump
The Senate passed a bill Wednesday to give small businesses more flexibility in how they spend federal loans given as part of a coronavirus aid program.
The chamber approved the measure by voice vote hours after Sen. Ron Johnson blocked a Democratic effort to unanimously approve it. The Wisconsin Republican got assurances assurances on making changes to the bill later. He has said he wants the loan system known as the Paycheck Protection Program to expire earlier than initially planned.
It now heads to President Donald Trump’s desk, as the House approved it last week.
· Trump administration bans Chinese passenger airlines from flying to U.S.
The Trump administration is banning Chinese passenger airlines from flying scheduled service to the U.S. starting later this month, a move aimed at ramping up pressure on China, which hasn’t allowed U.S. carriers to resume flights there, and threatens to further isolate the world’s two largest aviation markets from one another.
The order, published Wednesday, takes effect June 16, but it could be moved up.
· ECB set to scale up stimulus as new data could indicate a need to do more
The European Central Bank (ECB) is expected to increase its coronavirus crisis asset-purchase program at this week’s meeting, amid fears of falling inflation and the steepest economic contraction since World War II for the euro zone.
In March, the ECB unveiled its Pandemic Emergency Purchase Programme (PEPP), which will see it buy 750 billion euros ($819 billion) in euro zone government bonds this year. Analysts are now expecting it to increase that number.
“We see a 60% probability that the ECB will raise its asset purchase target on Thursday, probably by 500 billion euros,” Florian Hense, from Berenberg Economics, wrote in an analyst note.
“Gloomy staff projections for growth and inflation will make it easy to justify such as decision.”
· China-EU summit in Germany postponed due to coronavirus
A summit planned for September in Leipzig, Germany, between China and the European Union has been postponed because of the coronavirus, the German government said on Wednesday.
The decision was made after Chancellor Angela Merkel held separate phone calls with Chinese President Xi Jinping and European Council President Charles Michel, government spokesman Steffen Seibert said in a statement.
· Oil moves higher, hovers below $40 as doubts emerge over next step on OPEC cuts
Brent crude futures for August settled up 22 cents, or 0.6%, at $39.79 a barrel. The session high of $40.53 was the highest since March 6. West Texas Intermediate (WTI) crude for July rose 48 cents, to $37.29 a barrel.
Oil ended slightly higher on Wednesday but remained below the session’s early highs above $40 a barrel, the highest since March, retreating as doubts emerged about the timing and scale of a potential extension to the pact between OPEC and its allies to cut crude supplies.
Oil prices were supported by a drawdown in U.S. crude inventories in the latest week, but came under pressure as U.S. refined product inventories surged on tepid demand.
Saudi Arabia and Russia have a deal to extend oil output cuts by a month, but a policy meeting on Thursday rather than later in June is unlikely, sources said. Early in the session, oil fell when Bloomberg reported the Thursday meeting was in doubt.
Reference: Reuters, CNBC
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