Monex: EURUSD licht hoger na verrassende renteverlaging Fed

March 16, 2020

Hieronder volgt een commentaar in het Engels van Ranko Berich, Head of Research bij Monex Europe op de koersbewegingen van de Amerikaanse dollar, euro en het Britse pond.

USD

USD has weakened only slightly against some currencies overnight after the Federal Reserve took markets by surprise yesterday, enacting a historically broad and aggressive package of measures soon after markets began trading. The measures included the Federal Funds rate being cut to its historical lower bound, $700bn of asset purchases, and a host of liquidity and credit measures including coordinated USD swap provision to other central banks. Speaking on a conference call Fed Chair Jerome Powell said that the virus shock had created so much uncertainty the central bank had suspended its regular economic projections, and warned that US economic activity would decline. The last time these measures of this scope were implemented was in 2008 after the financial crisis, but back then they were introduced over the course of months, not all in one night prior to US markets even opening. The announcement of the measures looks to have done little to support confidence in equity markets, with S&P 500 futures reaching their daily loss limit and ceasing trading. Treasury yields plummeted after the announcement, in anticipation of increased Fed purchases - although the Fed’s announced 700bn purchase programme also included 200bn of mortgage backed securities. Despite the sheer scale of the measures, the US dollar was only mildly weakened, highlighting the fact that FX markets globally are truly in a crisis dynamic, where demand for dollars is driven by liquidity issues and safe haven demand, as opposed to marginal changes in monetary policy. With global central banks including the Fed approaching the absolute limit of their currently available playbooks, the focus for markets will remain on the spread of the virus, as well as the fiscal policy response. Although the House of Representatives passed an emergency relief package on Saturday, and additional cash was unlocked last week when Donald Trump announced a state of national emergency, the US has yet to enact a broad stimulus package of the sort taken by the UK.

EUR

The euro continued to weaken against the dollar on Friday, but has had some relief this morning after last night’s large monetary easing package from the Federal Reserve. European Central Bank policy makers spent most of Friday in damage mitigation mode, after Christine Lagarde’s communications error during Thursday’s Press Conference. Lagarde sent Italian sovereign yields higher by saying it was not the ECB’s job to close bond spreads - an area where her predecessor Mario Draghi maintained considerable ambiguity. Lagarde herself apologised for the miscommunication in a call on Friday. As with the US, fiscal policy will be a matter of intense interest for markets. Eurozone finance ministers will have a video-meeting today,and may endorse a package of measures floated by the European Commission on Friday, including relaxing of the bloc’s controversial budget balance rules.

GBP

Sterling currently sits at levels not seen since the announcement of a general election back in October but has started this morning’s session on the front foot along with the euro as the dollar weakens in selective areas. With the Bank of England and the UK government already releasing their swathe of stimulus, the virulence of COVID-19 will dominate market pricing. The response by the UK government to contain the outbreak has been mild compared to its European and soon to be North American counterparts. This gamble could pay off should the spread of the virus subside as the economic impact will be lesser from not employing containment measures, but this is a gamble that the markets aren’t willing to take. Risk reversals are plummeting for sterling, dropping to levels not seen since the December election, highlighting the increased cost of insuring further sterling downside, while the FTSE 100 drops over 4% upon writing. Today, the UK government will partake in another COBRA meeting.