23 March 2020: Government announces new plans

Government announces new plans

23rd March: Highlights

  • Sterling rallies as whatever necessary hits home
  • Dollar rally slows and Central Banks act
  • Eurozone needs fiscal intervention

Short term gain, long term pain?

While it is absolutely necessary that the Government acts both swiftly and decisively to limit the economic fallout from the Coronavirus, the unprecedented measures that are being taken will need to be paid for at some point.

As Boris Johnson and his Chancellor, Rishi Sunak tear up the rule book on public sector financing and provide much needed relief to those who are self-isolating whether employed or self-employed the financial markets see dark clouds on the horizon once the pandemic starts to recede.

The bold statements being made that the effect on GDP and its recovery will be V-shaped are looking more and more optimistic. There is little doubt that there will be massive economic fallout which could take years to recover from.

Post-coronavirus, the Government’s finances will resemble the end of a socialist Government rather than those of a supposedly frugal Party leaning towards austerity.

When Boris Johnson promised an end to austerity with investment in the NHS, social care and several other areas that have been poorly funded for close to ten years, he had no idea the chaos that the virus would bring.

It may very well be that commentators and analysts are merely putting a headline to an existing story, but the reasoning behind the pound’s recent collapse being attributed to the economy going forward appears sound if not a little premature.

Without question it is the first responsibility of any Government to keep its population safe and the decisions being taken, despite being criticised by the opposition, are as sound as they are unprecedented.

We often remark that the pound has had a rollercoaster week, but last week was the biggest of big dippers. It traded between 1.2399 and 1.1411 while over March the range has been even more stark at 1.3200 to 1.1411. The global effort to slow the dollar buying frenzy has led the pound to recover a little as Asia opens for a new week. It has reached a high of 1.1687 so far (0530GMT), although it is too early to place any faith in the rally.

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Data to start to reflect the crisis

There is a little confusion in the U, S. Administration over the size of the rescue and recovery package being prepared to aid the economy during the coronavirus pandemic.

Chief Economic Advisor to the While House Larry Kudlow stated that $2 trillion of new measures were in the pipeline, while Treasury Secretary Steve Mnuchin commented that the 2 Trillion included $1.5 trillion of measures already announced.

Whatever the number it is obvious that it is a very big package but even such a bold effort may not be enough.

As President Trump continues to make bland and uninspired statements about how well the relief effort is going, those under him including Kudlow, Mnuchin and Fed President Jerome Powell are pulling the strings.

The dollar is being dragged in several directions at once by the frenzied global demands for dollars while the U.S. economy prepares for recession.

The time is beginning to arrive when economic data will be significantly weaker as leading indicators include the starting effect of the virus.

Jobless claims have already grown significantly while measures of output and confidence are likely to fall to recession levels.

Globally, post coronavirus, it seems likely that the global economy will hit the reset button with every nation starting from a new low point, which will be determined by how successful they have been in fighting and limiting the effect of the virus.

The dollar index remains very well supported as demand for dollars remains strong despite efforts to curb the market’s enthusiasm.

Last week the index reached a high of 103.00 having opened at 97.89. Overnight it has fallen to a low of 101.95 but it is unlikely that volatility will recede as the crisis continues to rage on.

What are the long-term prospects for the Eurozone?

As the doyens of responsible state financing, successive Bundesbank Presidents must be having sleepless nights as Germany prepares to launch its financial Bismarck to sail into the uncharted waters of the coronavirus crisis.

It must be hoped that its fate is more successful than that of its namesake as the country goes it alone in both destroying the growth and stability pact and putting the future of the region at risk.

Successive crises going back many years have put a strain on the glue that binds the Eurozone but once the dust settles, right facing politicians will question the Union, which while a nice thought, will need massive surgery to be able to compete, but more importantly survive, in a global context.

Fiscal Union is now becoming almost as hackneyed a phrase as it is a proposition, but at the risk of repeating recent comments, without it the Union faces an almost insurmountable task. Christening Lagarde, as experienced as she is in global financial matters, with her expansive rolodex, needs to bring a massive helping of her predecessors pragmatism to bear on her colleagues on the ECB Governing Council if the Central Bank is to come out of this crisis unscathed.

The overriding feeling since the EU economy started to head south has been one dithering uncertainty.

A 27-person committee trying to steer the ship is hopelessly top heavy particularly when decisions need to be made quickly and decisively.A model more akin the the FOMC where members, take it in turns, would be more suitable.

There is little mention of other nations outside Italy, Spain, France and Germany or the necessary leadership of the entire region by new EU Commission President Ursula von der Leyen which appears not just lacking but totally invisible.

We are closing on the time when it will need a miracle for the Union to survive but for now, with a splintering of actions and reactions to the crisis, individual nations are closing their own borders for protection.

The euro, in keeping with other G7 currencies, gyrated wildly last week, it traded between 1.1237 and 1.0696

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.”