Governments around the world continued to take steps to shield their economies from further weakness but the continued market sell-off is a sign that investors have little faith that these efforts will prevent a recession. In the last 24 hours:
- TRUMP signed a coronavirus relief package that would expand paid leave for workers
- FED establishes lending facility to backstop money market mutual funds
- ECB announced a “Pandemic Emergency Purchase Program” to settle the markets
- BOE cut interest rates to 0.1% (lowest level ever)
- RBA cut interest rates 25bp to 0.25%
- BOJ offers JPY2 trillion lending in an unscheduled auction
Despite a surging number of COVID-19 cases, rising jobless claims and a sharp plunge in the Philadelphia Fed index, the greenback has been a major beneficiary of safe haven flows. USD/JPY soared above 110, while USD/CHF breached 98 cents. EUR/USD dropped below 1.07 to fall to its lowest level since April 2017. AUD/USD hit its lowest level since January 2003, NZD/USD fell its weakest since 2009 while USD/CAD broke 1.46.
By passing the Families First Coronavirus Response Act, Senate leaders can now move onto President Trump’s $1-trillion stimulus plan that includes $1,000 cash payouts. With the White House looking to send two separate cheques on April 6 and May 18, it's not clear whether it will be two cheques of $500 each or two cheques of $1,000. With Canada offering up to C$900 every other week for the next 15 weeks, regardless of the breakdown, this package falls far short of what Americans need to survive this crisis. The Federal Reserve is doing its part by cutting interest rates to zero and offering lending facilities, but its capabilities are limited. What’s worse is that yields are well off their lows so mortgage rates, student loans and credit cards payments have not seen further improvements. Yet, the prospect of what appears to be a major stimulus package and a recovery yields has been enough to renew demand for U.S. dollars. The greenback is also rising because other currencies are falling. Their outlook is just as grim as the U.S. but they are smaller economies whose pain will be exacerbated by contraction in U.S. and China.
The European Central Bank’s EUR 750-billion Pandemic Emergency Purchase Program sent the euro tumbling lower. EUR/USD dropped more than 1.5% and was single handedly the worst performing major currency pair on Thursday. Of course, it didn’t help that the German IFO index fell to its lowest level since August 2009 by the largest amount since 1991. Businesses are nervous, investors are nervous because consumers across the globe are stuck at home with decreased incomes. Today, the ECB launched a commercial paper facility that would be a backstop for the credit markets. The call is now for Eurozone governments to deliver coordinated fiscal stimulus.
The Bank of England also surprised the market with an emergency 15bp interest rate cut that took rates to an all-time low of 0.1%. This was accompanied by GBP 200 billion increase to their asset purchase program. According to the central bank, “Over recent days, and in common with a number of other advanced economy bond markets, conditions in the U.K. gilt market have deteriorated as investors have sought shorter-dated instruments that are closer substitutes for highly liquid central bank reserves. As a consequence, U.K. and global financial conditions have tightened.” They still plan to meet next week with minutes to follow.
The Swiss National Bank did not cut interest rates today and instead reaffirmed their preference and commitment to currency intervention. With central banks lowering interest rates to zero and running out of options quickly, there’s no doubt that FX intervention is being actively discussed in recent G7 calls with the selling of U.S. dollars to stabilize other currencies being the next major coordinated action.
The Reserve Bank of Australia surprised the market with an emergency 25bp rate cut that brought interest rates down to 0.25%. They also announced a quantitative easing program for the very first time that would provide a three-year funding facility to banks. They signalled that rates were at their lower bound and talked about the possibility of currency intervention. This announcement completely overshadowed better-than-expected labor market data because investors know that job losses are coming.
The Canadian dollar continued to fall despite the recovery in oil prices. Retail sales are due for release tomorrow and, while the risk is to the upside with prior labor market gains, investors will shrug off stronger data.
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