Some semblance of normalcy returns to currency markets

Currency markets experienced a relatively calm week, which is a welcome change after the Covid-related convulsions of the past two months. G10 currencies ended up within 1% of where they started the week, with the exception of the Norwegian Krona, battered by the sell off in oil prices. The main exceptions were emerging market currencies either exposed to the oil prices (Colombian and Mexican Pesos) or those with particularly fragile fundamentals (South African Rand, Turkish Lira). As some countries start to ease up their Covid lockdown restrictions, markets will focus on the evolution of contagion data there. Preliminary April PMI indices of business activity will be released in the Eurozone, the US and the UK, providing a near-real time read on economic weakness. The numbers are likely to be so low that their usefulness will be limited. More important will be the weekly jobless numbers out of the US, which will shed further light on the damage done to the US labor market. GBPAfter a relatively quiet April, this week is likely to see some serious volatility in Sterling. We will see the first batch of economic data fully reflecting the damage wreaked by the crisis. In addition to the MI indice mentioned above, Tuesday we will see labor data for Tuesday.March jobless claims are likely to set an all time record. The drop in March retail sales out Thursday will also get much attention. The numbers are likely to be dismal, but it's worth pointing out that expectations are already very low. EURWhile the April PMI indices are certain to be a market focus on Thursday, they are likely to be so low that a few points up or down will not contain that much information. We are seeing some jitters around the Thursday Eurogroup meeting and Friday's review of Italian sovereign rating by S&P. We think concerns about either are overstated. Existing ECB facilities, in particular the newly minted PEPP, are enough to carry Italy and Spain through whatever fiscal stimulus is needed to get over the crisis, and we expect S&P to acknowledge this reality and keep Italy's rating unchanged, which will be a clear positive for the common currency going into the following week. USDUS retail sales were down 8.1% in March, and another 5.25 million jobs were lost due to the Covid crisis in the week. We think the scale of labor market damage we are seeing in the US will dwarf similar numbers out of the Eurozone. In this case, more rigid European employment rules and higher difficulty inlaying off staff may prove a blessing. On the plus side, the massive enhancement to traditionally stingy US jobless benefits approved by Congress in response to the crisis will mitigate the job destruction to some extent. We continue to see a lower US dollar against European currencies. --

Enrique Diaz Alvarez

Chief Risk Officer