Any renewed pickup in COVID-19 cases or US-China trade tensions could return a risk ‘off’ market

This week the German Constitutional court ruled that the European Central Bank (ECB) has three months to show that its Public Sector Purchase Programme (PSPP) is ‘proportionate’. The PSPP programme is the ECB’s Quantitative Easing programme and it being challenged raises complex constitutional questions for both Germany and the eurozone. This weighed heavily on the euro this week. Investor concerns about COVID19 and a potential flare up in US-China trade relations supported the Dollar with the Dollar Index rising above 100 midweek.

Key events from the past week

EURO: Germany clashes with the ECB, Tues, May 05. One main concern about the German Constitutional Court decision is that other countries like Austria and Hungary will be emboldened to question the ECB. This adds further reasons for euro selling alongside the bleak eurozone economic forecasts released this week.

GBP: BOE Interest Rate Decision,Thurs, May 07. The Bank of England (BoE) kept rates unchanged and didn’t add any extra Quantitative Easing (QE) supporting the GBP on Thursday. The BoE projected inflation rising up to 2% in 2022 further supporting the GBP midweek, but longer term EU-UK trade issues remain.

Coronavirus: Tensions emerge. US Secretary of State Pompeo said China was too slow to act regarding the virus and claimed that he had evidence ‘the virus came from a lab in China’. This created anxiety that US-China tensions on top of COVID19 struggles could turn risk sour. This is one area to watch going forward.

Key events for the coming week

NZD: RBNZ Interest Rate Decision, Weds, May 13. Expectations from the OIS contract prices are at 44% chance for no change in interest rates from 0.25%. New Zealand has some of the world’s lowest number of COVID19 cases and lifted its lockdown measures on April 27, this should be supportive for the NZD.

XAU/USD: Demand for gold grows. The World Gold Council reported gold Exchange Traded Funds (ETF’s) saw the highest quarterly inflows for four years amid global uncertainty and financial market volatility. Holdings reached a record high of 3,185t by the end of Q1. Will gold prices head for $1800 next?

Coronavirus: Watch out for the latest virus news. Easing lockdown restrictions across the world continue to support risk, but keep aware that any renewed pickup in COVID19 cases or US-China trade tensions this week could quickly return us to a risk ‘off’ market.

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