Italian industry on its knees (Daily analysis 11.05.2020)

As a result of the pandemic and restrictions, March was not a good month for the economies. More and more new information is available on how deep the recession can be. This is evidenced by data on industrial production in Italy, which show a 29.3% drop.

Reduction by almost a third, and it could have been worse in April

The new week started with another disastrous eurozone data. According to Istat data, industrial production in Italy fell by 29.3% y/y in March - well above the 18.3% drop expected by economists. This is an even stronger fall than during the financial crisis a decade ago (-25.9%), and April could be even worse in this respect. Compared to a similar period a year ago, Italian industrial production in the Q1 shrank by 8.4%.

The market, like last week, is focused on the upcoming recovery following the gradual lifting of restrictions in most countries. However, economic activity growth is likely to be unevenly distributed. In the following weeks and months, when data for the period with fewer restrictions will be coming in, there will be slightly more significant changes in the valuation of individual currencies.

The main currencies are currently in a limited fluctuation range as more macro data are expected to give better indications of how the recovery path will evolve. A certain dose of unexpected uncertainty was introduced last week by the German constitutional court in its ruling on the ECB's asset purchase programme. Today, this matter was raised by German Chancellor Angela Merkel during the CDU party meeting. According to Bloomberg, she said that the decision of the court in Germany has "far-reaching consequences". However, she pointed out that a solution is possible if the ECB explains the validity of the programme.

Euro depreciates, dollar appreciates - higher risk aversion on Monday

Making the problem of the ECB's asset purchase programme more visible may worsen sentiment in the broader market. The changes in the morning were limited, although a slightly stronger dollar, higher yields of Treasury bonds and decreases in the main market indexes indicate an increased level of risk aversion. The EUR/USD quotations were about 0.2% below the Friday closing level just above the boundary of 1.08.

Increased risk aversion weakened the zloty today. However, these are still very limited changes in the context of recent weeks. The USD/PLN exchange rate was again at 4.22 (on Friday it was at 4.18), and the EUR/PLN exchange rate reached 4.56.

Today's weakness of the euro (data from Italy, the statement made by Merkel) combined with globally weaker sentiment also led to the franc's appreciation in relation to the euro: the EUR/CHF quotations fell back to about 1.051, which is the lower limit since the summer of 2015. This, in turn, increased the upward pressure on the CHF/PLN pair (about 4,336), which may be continued if the Swiss currency moves closer to its high in relation to the euro for 5 years. The calendar of macroeconomic events is still practically empty. Still, during the week, we will learn more readings from the eurozone economies, which may also have a significant impact on the EUR/CHF exchange rate - a drop below 1.05 again may occur.