The spread of the coronavirus, which the WHO on 11th March upgraded to a pandemic, continued to overwhelmingly dominate headlines last week. Global equity markets collapsed, with many recording their largest daily sell-offs since the 2008 financial crisis or even the 1987 crash, before staging a recovery on Friday. The price of crude oil, which had fallen over 20% on 8th March after OPEC and Russia failed to agree on oil-supply cuts, was broadly stable around $35/barrel.
Global FX volatility spiked to levels not seen since the UK referendum in June 2016 and major currencies’ performance has been far from uniform. This can be attributed to the fast-changing, at times self-reinforcing and often unpredictable inter-play between i) the spread of the coronavirus, ii) the draconian steps which governments have taken, iii) central banks’ monetary policy easing, liquidity and macro-prudential measures and iv) brutal moves in equity, oil and government bond markets.
Macro data releases have been largely ignored in recent weeks and the Dollar and Euro have been behaving like safe-haven currencies, appreciating 3.6% and 1.2% respectively in trade-weighted terms last week.
The Dollar is at its strongest level in at least 14 years, seemingly immune to the growing criticism directed at the US government’s response to the coronavirus.
The Federal Reserve yesterday evening announced at an emergency meeting that it was cutting its policy rate 100bp to 0.25% and re-launching asset purchases (Treasuries and mortgage-backed securities) to the tune of $700bn. The Bank of Canada, Bank of England, Bank of Japan, European Central Bank, Federal Reserve and Swiss National Bank also announced a 25bp cut to standing US Dollar liquidity swap lines. However, S&P 500 futures were limit-down in yesterday’s session (-5%).
The Euro, which is up 4% year-to-date, is now at a 17month-high. The monetary policy easing measures which the ECB announced on Thursday seemingly underwhelmed markets but did little to arrest the Euro’s uptrend.
The Swiss Franc, which has been rapidly rising since early December, is now at the level which prevailed in late-January 2015 after the Swiss National Bank let its currency go in the face of overwhelming appreciation pressures.
Conversely, Sterling had a tough week, losing about 4.4% in trade-weighted terms, although it has recovered 0.6% over the weekend. GBP/USD held its ground around 1.29 on 11th March despite the Bank of England announcing a 50bp inter-meeting rate cut (to 0.25%) only hours before the Chancellor of the Exchequer announced his annual budget. It was by all intents a budget focussed on providing short-term and medium-term relief to the UK economy, with old fiscal prudence rules sidelined for now.
However, concerns about rising infection rates in the UK and the government’s seemingly relaxed approach (compared to other European nations) alongside global risk aversion saw Sterling tank in the following two sessions. GBP/USD is currently trading around 1.235 and GBP/EUR, which until three weeks ago was trading above 1.19, is currently trading below 1.11.
The New Zealand Dollar weakened “only” 2% last week but has lost a little more ground today after the RBNZ announced overnight an inter-meeting 75bp rate cut to 0.25% which will remain in place for at least 12 months. The RBNZ has cancelled its regular meeting scheduled for 25th March and said that QE would be preferable to further rate cuts.
The Australian Dollar was one of the weakest major currencies last week, tumbling about 5.5%. It has weakened a further 0.7% in the past 24 hours following a statement by the Reserve Bank of Australia that it was ready to buy government bonds (i.e. launch QE).