FX Update: Euro pounding on breakdown levels ahead of EU council meet

The EU Council meeting today will dominate market attention for global markets, as the tail risk outcomes would be sufficiently large to wash over global markets. A Politico “Playbook” offers a run through of the many confusing moving parts here. As we have stated before and on this morning’s Saxo Market Call podcast, we are looking for signaling on the degree of solidarity more than the technical nature of whatever is agreed today. The setup certainly appears to be one of a debate on basic principles and mechanisms of funding rather than the prospects for a package of any given magnitude. The stakes could not be bigger, and the market will not take kind to an obvious fudge, much less an Italy or a Spain walking out of the talks in a huff. The most positive scenario would be the EU lining up to support Spain’s creative solution. The meeting is scheduled to begin at 1300 GMT.

Already this morning, we have EURUSD breaking below 1.0800 after an apocalyptic set of April flash PMIs (is there really an information value in these, given the known fact of a total shutdown?. The May data cycle will be the first one of any relevance for most countries, although after today’s US weekly initial jobless claims, that weekly data series will gain increasing relevance as portions of the US are trying to begin opening up already now.

Bad news almost all around on Covid19, as the Roche CEO poured cold water on the hopes for the rapid expansion of quality testing and the timeline for a vaccine, and as China is struggling with new outbreaks that are forcing regional shutdowns.

HUF and PLN

CEE watchers should note that things are getting interesting in Hungary and Poland as the two countries look for ways to fund their responses to the Covid19 crisis. Poland has funded some of its spending with rather opaque “private placements” of billions in spending that may be a kind of stealth monetization – watching the PLN exchange rate closely, as well as spreads on sovereign debt denominated in EUR (few signs of strain in recent days). Hungary, meanwhile, may be looking to tap global markets to the tune of EUR 4 billion, an interesting test of the market’s assessment of the country’s creditworthiness after it has slipped into one-man rule by decree. Coming into this crisis, both of the countries were running steeply negative real rates, with CPI rising above 4% while policy rates were well below, and in Poland’s case, have been cut further.

Chart: EURUSD
EURUSD is having a look below the key 1.0800 area, although the recent nominal lows have not yet been broken and the key price action will be in the wake of whatever takes place at today’s EU Council meeting. A close below together with a clear sense of aggravated existential strains arguably opens up for a test of the 1.0350 lows and potentially parity eventually.