Eurozone at risk (Daily analysis 6.05.2020)

Disastrous macroeconomic data and new European Commission projections weaken the euro and strengthen the dollar. The EC also warns against the uneven impact of the virus on the eurozone, deepening the economic gap, which may pose a threat to the future of the common currency area.

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

• 2:15 p.m.: Change in employment in the non-farm sector in April in the USA according to ADP (estimates: a decrease by 21 million).

Zone of inequality

In the morning, the final data of the PMI service sector indexes (and aggregated) for the eurozone for April were published. They did not differ significantly from the preliminary readings - they were 0.3 points higher for services (12 points) and by 0.1 pts for aggregated (13.6 points), although with such low ranges, such changes are not significant. Also, when the final PMI data were published, the data of the peripheral economies of the eurozone were also presented: the activity index in the services sector in Spain fell to 7.1 points (10 points were expected).

The drop is not surprising, although a reading below 10 points shows the scale of the recession in the economy and the virtual cessation of the services sector. In his comment on the report, Paul Smith, a Director for Economic Indices at IHS Markit, pointed out that PMI data indicate that the economy is shrinking at a quarterly rate of 7%. However, he pointed out that this may be a conservative scale of GDP decline.

The European Commission also added a little bit of pessimism to the entire eurozone today. In new projections, the European Commission said that the economy of the entire area could shrink by 7.7% this year (and grow by 6.3% next year). However, the pandemic has affected the economy on an unequal level; hence the scale of the recession and the way out of it will also be different. Forecasts for Italy and Spain, i.e. the countries most affected by the virus in the eurozone and with the greatest restrictions, assume a contraction of over 9% this year. And this may also be a conservative forecast, subject to a considerable degree of uncertainty.

The European Commission also warned that such inequality in the negative effects on the economies poses a threat to the stability of the eurozone. This is not something the market was not aware of. However, combined with PMI's disastrous data, yesterday's ruling by the constitutional court in Germany, and a record fall in orders in German industry (a drop by 15.6% on a monthly basis - the strongest in at least 30 years), it made the general sentiment in the market slightly worse.

Demand for the dollar is back

Given these conditions, the euro weakened again and the dollar strengthened. The EUR/USD fell back below 1.08 before midday. This also put pressure on the zloty's basket, which was depreciating slightly against the main currencies. The day-to-day changes are still within a minimal fluctuation range - the USD/PLN exchange rate exceeded 4.20, and the EUR/PLN exchange rate fluctuated around 4.53-4.54.

The foreign exchange market is currently in a transitional phase and awaits the economic impact of the gradual easing of restrictions. As restrictions have varied from country to country and are being lifted to different degrees, imbalances between economies may increase volatility later in the year. Given the scale and pace of the depreciation, this tends to favour the currencies of emerging countries (with some exceptions), including the zloty.