Markets making its own judgement
17th March: Highlights
- UK on lockdown. New BoE Governor will act as necessary
- Fed actions fail to calm markets
- Eurozone closing national borders.
Sterling at five- and six-month lows
Sterling remains under severe pressure having fallen to a five-month low versus the dollar and a six-month low versus the euro.
In the current environment it is difficult enough to continue to run a business with further uncertainty over levels of staffing, the ability to move around and disruption to supply chains becoming impossible to manage.
Recession is an almost certain outcome from the current activity taking place in the economy. In keeping with the constantly revised shape of the Coronavirus bell curve it is the Bank of England’s intention to make any recession as shallow as possible.,
However, most now expect a significant global recession with some countries being worse hit than others, due more to the longevity of the isolation period, than the absolute numbers of infections and deaths.
The UK seems to loathe to put legislation in place to back its suggested actions. Yesterday’s first daily press conference from the Prime Minister was an exercise in stating the obvious in suggesting that the public adopt social distancing and avoid pubs clubs and theatres.
Economic data releases whether leading indicators or backwards looking have become almost irrelevant in the current environment since they cannot possibly keep up with either what is now happening to affect things like employment, inflation and growth, nor accurately provide activity expectations in cases like confidence indexes or PMI’s
The pound, as already mentioned, had a poor day yesterday as the dollar appears to be the bellwether for the global reaction to the Coronavirus pandemic, it fell to a low of 1.2202, closing at 1.2271, virtually unchanged on the day. Against the single currency, it breached the 1.10 level falling to 1.0929, closing at 1.0974
Liquidity deemed vital to domestic and global economy
However, yesterday, Powell had his Draghi moment in which he affirmed his promise to do whatever it takes to ensure that liquidity continues to flow through the system both in the U.S. and overseas. An agreement reached with other G7 Central banks will ensure that dollar funding is available across the globe as more and more countries go into lockdown to avoid the spread of Coronavirus.
It is impossible to judge anyone’s performance while the crisis develops and only history will determine whether actions taken where correct in the all-seeing, infallible telescope of hindsight. But in avoiding absolute numbers, which fascinate his boss so much, Powell is ensuring that the defences are in place to ensure that any unavoidable recession is short no matter how violent.
The attraction to holding dollars became a little less obvious as yield considerations were blown away. However, the attraction from a tactical or defensive perspective is as strong, possibly stronger, than it has been at any time in the present crisis.
Being cash rich appears to be the mantra of investors as almost every asset is caught in the maelstrom and taking that to its natural extreme being cash rich in dollars makes most sense.
The dollar index is recovering from last week’s omnidirectional price action and has developed a trend that mirrors Central Bank activity as the Fed takes the lead globally.
The new man at the Bank of England is still finding his feet (it is more than a little ironic that Mark Carney extended his tenure over Brexit which looks a mild condition in the current environment, only to leave as the going really gets tough), while the ECB continues to be seen as being in disarray.
The dollar index continued to rally yesterday. It rose to a high of 98.47 but closed just eight pips higher at 97.98.
The EU’s chickens coming home to roost!
Reality has been somewhat different and when the dust settles, Ursula von der Leyen, another newbie, will face some tough questions not just over Brussels’ performance but equally importantly on the group’s entire future.
With Italy virtually abandoned, Spain feeling similarly alone and France and Germany effectively sealing their borders, the entire premise of the EU appears to be splintering.
While it would seem obvious that travel is to be avoided, the French and Germans have felt a need to back that sense of caution with legislation.
European Finance Ministers have, so far, gone their own way. Governments have introduced wage subsidies, tax payment delays and several other individual measures.
Yet again, the lack of fiscal union is held up, by those outside the Union, as a significant stumbling block to concerted action.
Spending rules are about to be relaxed by certain countries (mostly Italy) there will be concern that once the dust settles, the Growth and Stability Pact may become even more draconian. Certain countries may exit recession sooner than others and want inflation -fighting policies to return.
The single currency continues to fluctuate, dancing to the dollar’s tune. Yesterday, it traded between 1.1237 and 1.1072, closing at 1.1182.
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.”