Dreadful data from Germany and France (Daily analysis 22.03.2019)

22.03.2019 12:45|Marcin Lipka

The European Union gives the UK two extra weeks to vote on Prime Minister Theresa May's Brexit plan in the House of Commons. Surprisingly weak PMI readings from Germany. The zloty weakens and the EUR/PLN moves to the range of 4.29-4.30, and the dollar returns to the 3.80 PLN level.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

  • A lack of macro data may noticeably impact the analyzed currency pairs.

Horrible result of European industry

It would seem that the main market information during the last hours is reports on Brexit. However, these reports were replaced in their importance by surprisingly poor PMI results for European industry. The index for this sector fell to its lowest level in almost 6 years, reaching 47.7 points.

It was hard to expect such a devastating result. Before the publication of the IHS Markit survey results, the EUR/USD quotations increased, because most of the bad information should already be discounted, and the biggest economic slowdown took place at the turn of 2018-2019.

The biggest surprise from the report was probably the fall to just 44.7 points of the German PMI for the industry. This is the lowest reading in 79 months and a level close to the lows of the eurozone debt crisis in 2012. In addition, industrial orders decreased the most since April 2009, i.e. since the highest level of the financial crisis. As a reminder, the index for German industry had a record value of 63.3 points only 15 months ago.

On the other hand, the situation in German services looks much better (index at 54.9), which suggests that the internal situation is relatively good. Industry, on the other hand, reflects conditions abroad. This is confirmed by the general conclusions for the eurozone as a whole. Weak indexes and pessimistic expectations are primarily the result of lower growth forecasts and fears focused mainly on political uncertainty, trade wars and Brexit. IHS Markit stresses that "the automotive sector remains a key area of the expected downturn".

Weak data from the services sector also came from France, but it seems that in Germany we had the biggest negative surprise. Moreover, the partial data (only the eurozone and Germany and France are mentioned in the initial PMI) were quite good for countries outside the heart of the eurozone. Production was clearly reflected in them, and the employment subindex looks better.

The euro, probably due to the scale of the negative surprise, reacted with panic to PMI readings. The EUR/USD exchange rate fell below the 1.1300. German bonds, in turn, temporarily reached negative yields on instruments maturing in 10-years, reminding investors of the low inflationary pressure in the eurozone and the chances of the ECB maintaining an extremely mild monetary policy.

Emotions around Brexit

Yesterday afternoon, there was a clear increase in the threat that the Union was going to confront the United Kingdom in the context of Brexit. This was particularly true in the case of the French position. Germany, on the other hand, according to press reports, wanted to avoid worsening the already difficult situation. The final version that was closer to Berlin was adopted by 27 countries.

Premier Theresa May was given another chance to push her plan through the divided House of Commons. By 12 April, it must determine whether an agreement negotiated with the EU is being implemented or whether a different compromise will have to be found. The date of 29 March is therefore forgotten, and at this point, it is completely unimportant.

12 April is not a coincidental date, because until then the United Kingdom has to determine whether it participates in elections to the European Parliament. If the House of Commons has not managed to reach an agreement by this point in time (for the time being there are no signs that the Eurosceptic Tories or the DUP will support the May solution), then it seems that early elections in the Islands are inevitable. The current parliament can only say what it does not want (a chaotic Brexit). However, it is not in a position to put forward any concept that would have the support of parliamentarians. For the time being, the UK wants to hold a vote next week, but given that the deadline has been postponed to 12 April, key decisions can only emerge more closely to that date. The pound has responded positively to this information. The remaining uncertainties do not change (the fall of the May government, early elections, the next referendum or the va banque game till the deadline, which is now set for April 12th.

External pressure on the zloty

The zloty, along with other currencies of the region, was not able to resist pressure from exceptionally weak data from Germany and the economic downturn in the eurozone as a whole. As a result, the EUR/PLN exchange rate moved from 4.28-4.29 to 4.29-4.30. The pound is also clearly more expensive, which is a result of its global strengthening and the weakness of the Polish currency. The dollar was supported by the weak euro and strengthened to the zloty, returning to the 3.80 level.

Concerns about the eurozone economy were negated by positive signals for the zloty from the Fed. We will also see what the next weeks will bring, but the race for the weakest currency between the euro, the pound and the dollar is starting to be won again by the first one. This is usually unfavourable information for the zloty, which in practice is independent of internal information from Poland.


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This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without the written permission from Cinkciarz.pl Sp. z o.o is prohibited.

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