It was another week of acute turmoil in financial markets as governments across the world try to grapple with the coronavirus pandemic, with numbers of recorded cases and deaths rising sharply, particularly in Europe. Governments introduced new measures to force people to self-isolate and adopt social distancing and more are likely to come.
In a bid to mitigate the widespread economic cost of a collapse in domestic demand (and supply), and arguably to shore up plummeting equity markets, governments across the world beefed up fiscal stimulus measures while central banks in Australia, Canada, New Zealand, Norway, the UK and US and in many emerging market economies cut their policy rates further. Central banks in Australia, Eurozone, UK, US and Poland announced last week new quantitative easing measures and the Reserve Bank of New Zealand has followed suit today. Six major central banks also announced on Friday coordinated action to enhance liquidity in US Dollars by holding more frequent currency swap operations.
Global equity markets collapsed early in the week and while they stabilised on Thursday-Friday Asia Pacific and European indices are posting big losses in today’s session while futures indicate that US stock markets will open sharply down.
The insatiable demand for Dollars saw the currency appreciate a staggering 5% in trade-weighted terms last week to its strongest level in decades. The Dollar has appreciated a further 0.6% in the past 48 hours despite central banks’ announcement on enhanced swap lines and despite the US Senate failing yesterday to agree on a $1.6trn US fiscal rescue package.
Similarly the Euro made strong gains early in the week, also reaching multi-decade highs in trade-weighted terms. However, it has weakened about 1.2% since 18th March with the unwinding of short Euro positions having seemingly stalled, at least for now.
Conversely Sterling was under acute pressure, collapsing 3.7% between 13th and 18th March to a multi-decade low, with the Bank of England’s cumulative rate cuts of 65bp to a new record low of 0.10% doing little to arrest its currency’s slide. Sterling did stabilise on Thursday and rebounded 1.3% on Friday after the Chancellor of the Exchequer announced a fiscal package which would include underwriting 80% of UK workers’ wages up to £2,500/month. Sterling has been broadly stable since Friday.
The Australian and Kiwis Dollars have had similar paths. The Kiwi Dollar fell 3.4% early last week but has in trade-weighted terms been broadly stable since 18th March. The NZD/USD cross has fallen to 0.565 since the RBNZ’s announcement overnight that it would start QE but this mostly reflects US Dollar strength.
The safe-haven Swiss Franc has been broadly stable in the past fortnight, albeit at a five-year high. The Swiss National Bank of Switzerland kept its policy rate unchanged at -0.75% at its scheduled meeting, in line with expectations.