Dollar falls as global response to crisis buoys markets
The enormous volatility in ﬁnancial markets continues, but at least now it comes in the form of two-way moves, rather than the relentless falls of the previous week.
Stocks and credit rebounded worldwide as gargantuan programmes of monetary and ﬁscal stimulus were announced on both sides of the Atlantic. As a safe-haven, the dollar moved in the opposite direction, falling sharply against every other G10 currency and most emerging market ones.
This week, markets will be driven by three main factors. First, the evolution of the coronavirus infection in the different countries, particularly the US, where the infection is gathering speed. Second, the extent of the damage apparent in the leading economic indicators. Third, the announcement of economic support measures for individuals and businesses from the various affected US states. All in all, we see scope for a continuation of the euro rally, as US news takes a turn for the worse while early signs emerge that the epidemic in Europe is no longer growing exponentially.
Sterling was the best-performing major currency last week. Somewhat surprisingly, it is now up against the US dollar over the past two weeks. This is partly the result of the general volatility and near-dislocated markets, but also a warm market reception to the economic support programmes for SMEs (from Johnson’s government) and large companies (Bank of England). The Bank of England didn’t announce any fresh stimulus measures at its meeting on Thursday, although it did suggest that it stands ready to act further, should conditions in the market or UK economy warrant.
We’ll get little news that will reﬂect the impact of the crisis this week, but clearly the drop to record lows of two weeks ago has cleared out most speculative longs and we expect sterling to be relatively resilient in the next couple of weeks.
The sharp rebound of the common currency last week owed little to any news from the Eurozone and was mostly a reﬂection of the general rebound in risk aversion. The economic news we did have out of the Euro Area was unsurprisingly disastrous, with the March PMI numbers falling to record low levels. While this was also the case in both the UK and the US, the Eurozone economy has, so far, appeared the most exposed of the three to the crisis.
This week we will see an important data point that is receiving little attention. The inﬂation numbers for March will already reﬂect the impact of the crisis. It will be interesting to see whether the collapse in demand or the contraction of supply brought about by the lockdowns have the largest impact in prices. We will also remain focused on the details of support programs for individuals and SMEs, as these will be key to the shape of any future rebound from the upcoming recession.
The coronavirus crisis has now hit the US with full force. The US is now presenting the largest amount of new cases every day, in spite of still limited testing. The chaotic response by federal and some state authorities has certainly not helped. In addition, the crisis has now spread to the economy, as the lockdowns sent weekly claims for unemployment beneﬁts to its highest ever level by far, well over three million, up from just a couple of hundred thousand two weeks ago.
We are likely to receive another eye-popping number when the number of jobs lost by the economy in March are published in the monthly payroll report this coming Friday. There is a good chance that the relative worsening of the crisis in the US, compared to the tentative stabilisation we are seeing on the new contagion numbers in Europe, will prove a headwind for the US dollar next week.
Similarly to most other currencies, the Swiss franc rebounded against the dollar last week, although depreciated against the euro, ending the week at the now key 1.06 level. Part of this depreciation can be linked to improving global sentiment, which hurt the safe-havens and enabled a rebound of those perceived as more ‘risky’.
As in the past few weeks, we have also observed an increase in the sight deposits in the weekly SNB data, which suggests the central bank once again stepped in to prevent franc strength. This time the increase in total sight deposits was 11.6 bln CHF, roughly twice the size of the increase from the previous week and the largest jump since early-2015, suggesting that the central bank is getting serious about limiting the upside for the franc.
In terms of the economic readings, since the ‘hard data’ is mostly outdated, it’s worth keeping an eye on the survey and activity indicators. Last week we received the CS-CFA index describing economic expectations, which fell to the lowest level in 5 years in March. This week, in addition to today’s KOF leading economic sentiment indicator (which dropped sharply, but turned out better-than-expected) we’ll receive the March manufacturing PMI on Wednesday. On Thursday, we’ll also get the CPI reading for March, expected to drop to -0.5% from -0.1%, which would bring the price gauge to its lowest level since early-2016. Nonetheless, we think that the franc should react more to shifts in global sentiment than domestic news.
As one of the more sensitive currencies to the recent sell-off, the Aussie dollar has subsequently been one of the best performers amid the increase in appetite for risk. The currency rebounded approximately 6% last week and is now back trading around its highest level in a fortnight.
Similarly to many of its major peers, there wasn’t much in terms of domestic news that drove the currency higher, with the rally having more to do with broad US dollar weakness. We did, however, have the ﬁrst real sign of the economic impact on the Australian economy from the current crisis in the form of the March services PMI. In line with the rest of the developed world thus far, the index tanked to an all-time low level, falling to 39.8 this month from February’s 49.0.
The Australian economy was, somewhat remarkably, one of the few economies in the world to emerge from the 08/09 crisis without having tipped into recession. It appears the world’s longest boom soon be coming to an end, particularly if the aforementioned PMI data is anything to go by.
Another sharp decline in oil prices, down over a third in value in just one week, didn’t stop the Canadian dollar in its tracks last week, nor did the Bank of Canada’s Friday rate cut. CAD ended the week near a two-week high, although the aforementioned developments did somewhat limit the extent of the currency’s rally.
The main headline out last week was the BoC’s emergency rate cut on Friday. Policymakers voted to slash rates by another 50 basis points, taking the main rate to 0.25%, the level they deem as the effective lower bound. Similarly to many of its major peers, the bank also launched their QE programme and will begin purchasing a ‘minimum’ of $5 billion per week until the crisis is over. Governor Poloz stated ‘we want to make sure that we’ve got a great market function and indeed that the economy has a great foundation for growth when activity resumes.’ He also stated that there were tools available in the central banks toolkit. This, we think, could include an increase in the pace of asset purchases, given the now limited room for further rate cuts.