15 April 2020: Economic fallout in focus

Economic fallout in focus

15th April: Highlights

  • Pound rises on Virus plateau hopes
  • Chinese data improves risk sentiment; dollar falls
  • IMF predicts major economic collapse then slow recovery

IMF data more positive than UK Budgetary Authority

No one doubts that the UK will suffer a severe recession with the current quarter likely to see a quarter on quarter contraction of anything up to 35%.

The Office for Budget Responsibility OBR) has predicted that the economic downturn could see unemployment rise to two million and their estimate for QoQ contraction is the most bearish of the recent calculations at 35%. In their estimation, that could lead to a 13% year on year contraction.

The IMF published its most recent findings yesterday,and believes that the UK recession will be disturbing with a 6.5% contraction. The data for the Eurozone is significantly worse (see below).

The assumption of the OBR is that although its data is far more concerning than the IMF, it also sees a far stronger rebound in both activity and growth. The UK’s debt to GDP ratio is set to balloon to a record 14%. This is 500% of the last estimate from the OBR and will be the highest in peacetime.

The Confederation of British Industry, colloquially labelled the bosses union commented that the OBR report highlights the need for Sunak and Johnson (when he returns) to ensure that the policies adopted post-lockdown are targeted on growth which will go hand-in-hand with job creation.

An increase of the unemployment rate from 3.9% to 6% will add to the drag on the economy. Not only will 600k more people not be paying tax but they will be (mostly) claiming unemployment benefits.

Despite the quite horrendous news on the economy, the pound managed to rally to one-month highs versus the dollar and single currency. Against the dollar it rose to a high of 1.2647, closing at 1.2629, while versus the euro, it rose to a high of 1.1518, closing at 1.1497.That is a rise of 9.5% since the low that was seen on 19th March.

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Risk on returns as virus data improves and China rebounds

The current soft patch for the dollar continued yesterday as the number of fatalities across the entire nation fell and data released by China showed that their exports fell by far less than expected.

This improved market sentiment and raised hopes that once the lockdown is removed the economy while experiencing a recession would recover more quickly than had previously been feared.

The dollar’s role as a safety net is starting to slowly be abandoned but more conservative traders are still concerned that since little is known about Covid-19 that a secondary wave of infections could spring up should the lockdowns be lifted too quickly.

The Fed’s aggressive policy to ensure that those not currently working are able to continue to spend, even if it is only on essentials, has seen market sentiment turn against the dollar although only mildly for now.

According to market data, hedge funds have been building short dollar positions over the last week or so. Friday’s futures positions showed that dollar shorts had risen from $9.9 billion to $10.5 billion.

President Trump continues to fight running battles with just about anyone who disagrees with his handling of the crisis. At yesterday’s press briefing he rounded on a journalist who described his handling of the crisis inept. He labelled her and her employer as purveyors of fake news. It is also rumoured that he is on the point of sacking the country’s leading expert on infectious diseases and viruses because he questioned the timing of any loosening of the lockdown.

The dollar index fell to a low of 98.83, yesterday, cloning almost at its low at 98.86

Already suffering economy to see 7.5% contraction YoY

2020 was always going to be a tough year for the eurozone and its economy long before Coronavirus took over everyone’s lives.

The effect of Covid-19 has merely served to bring divisions that had existed for some time, into the light.

The IMF report yesterday showed not only that the weaker, southern nations of the Union would suffer but the stronger ones like The Netherlands and Germany would be at the forefront of GDP collapses.

With an overall expectation of a 7.5% contraction this year and a slow recovery taking possibly three years, the Fund also reported its view that the German economy would fall by 7% since it was already suffering sluggish growth in the face of Chinese competition. France is also likely to see a significant recession, its GDP contracting by 7.2% this year, although French Finance Minister Bruno Le Maire predicted a contraction of greater than 8%

The year following a recession often sees the highest growth since it is coming from a low base. However, the IMF sees the entire region only growing by 4.7% in 2021, meaning it will stay in recession well into 2022.

This is the direct effect of the current pandemic but has the added difficulty of an already slowing economy and fears for the very fabric of the Union in the aftermath of the funding dispute that continues to rage.

The euro rallied on the back of the dollar’s continued correction, reaching a high of 1.0987, closing at 1.0981. There are rumoured to be very heavy sell orders just above the 1.10 level from several sectors of the market, so any visit above that level may be short-lived.

Have a great day!
About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”