Monex: Dollarsterkte neemt af…voor nu

Monex: Dollarsterkte neemt af…voor nu

Currency
Geld dollar.jpg

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

USD

Last week’s desperate liquidity measures by the Federal Reserve and other central banks seem to have only partly mitigated the global demand for US dollars, as hopes of an immediate fiscal stimulus from the US have faded. Some of the rampant US dollar strength recently observed has begun to ease this morning as the greenback is trading either flat or slightly lower against many currencies such as the euro, sterling and Japanese yen.

US fiscal policy will be a topic of intense interest for markets this week as Democratic and Republican lawmakers in the Senate seek to send a fiscal stimulus bill to the House of Representatives. Partisan discord is a serious threat to hopes of rapid passage of a bill into law, as Republican lawmakers seek to freely distribute cash to corporations with few strings attached. Democrats have sought to add oversight and conditions to bailout money. Negotiations for a Senate bill reportedly hit an impasse on Sunday, after Senate Democrats blocked a procedural motion to advance the legislation. The core of the legislation will aim to send a cash payment to households, and loans to small businesses. The current legislation also contains a rescue package of $500 billion for large corporates such as airlines. Democrats were unhappy at this cash being distributed as with little oversight or conditions. Negotiations will continue today, amid increasingly dire forecasts from major investment banks about the impacts of the virus on the US economy: Goldman Sachs and Morgan Stanley are forecasting a 25-30% fall in US GDP this quarter, and a sharp increase in unemployment.

Elsewhere, the Federal Reserve’s top priority seems to be preventing a tightening of financial conditions and improving access to dollar liquidity. Last week the Fed opened currency swap lines to a number of global central banks and stepped up the frequency of the swap operations at the end of the week, as well as announcing domestic liquidity measures such as a lending facility to money market mutual funds. The latter facility will be able to accept municipal bonds - a key component of US financial conditions - as collateral. Despite the Fed’s best efforts, most elements of US financial conditions indices continue to show worsening stress in the financial system. Spreads have reached their widest levels since 2009 between US treasuries and riskier fixed income such as municipal bonds, investment grade corporate debt, and high yield corporate debt. Spreads between safe interbank lending such as index swaps and risky direct interbank lending also remain wide, while equity futures are negative this morning. All in all, although last week’s dollar strength has slowed slightly, there remains little sign of stabilisation, let alone improvement, in last week’s dire market conditions. G20 leaders will have a conference call today at 11:00 GMT to discuss the coronavirus outbreak, although no statement will be released.

EUR

The euro seems to have found some modicult of stability against the US dollar this morning, after a tumultuous week that saw the EUR/USD exchange rate reach its lowest level since 2017, and the European Central Bank announce a large asset purchase program aimed at stabilising eurozone sovereign bond markets. As with the UK and US, fiscal policy is moving to the fore as a means of mitigating the economic impact of coronavirus in the EU. Germany announced a spending package of emergency spending totalling more than €150 billion, amounting to a departure from previous commitments to a balanced budget, famously known as the “schwarze null”. Spending plans will be presented to the German cabinet today, including about €150 bn of direct spending, and hundreds of billions of euros in additional stabilisation funds and state guarantees for corporate debt. A new stabilisation fund, known as the WSF, will be funded with a total of €500 billion euros and will be able to take equity stakes in companies as well as underwrite business loans. Germany’s development bank, the KfW, will receive a loan of €100 billion. Taken together the budget and funding for the WSF and KFW will total 10 percent of German gross domestic product. Elsewhere, Italy extended plans announced over the weekend to halt Industrial Production to a full-blown lockdown, preventing any movement within the country. It comes as the amount of cases in Europe outstrips that seen in China. In Spain, Prime Minister Pedro Sanchez sought parliamentary approval to extend a state of emergency to April 11th, as the nation has the second-worst outbreak after Italy.

GBP

Sterling is trading roughly flat against the euro this morning compared to Friday’s open, suggesting that Friday’s seismic fiscal measures from Rishi Sunak have not had a significant impact on sterling, which remains driven by global risk appetite. The Chancellor of the Exchequer unveiled some of the most activist state measures in a developed economy in history on Friday by promising that the Government would pay 80% of the salary of workers who are inactive but have not been laid off. This support comes on top of hundreds of billions of dollars of state loan guarantees, and quantitative easing from the Bank of England. Simple arithmetic suggests that the scheme will cost around £3.5 billion per 1 million workers affected over the initial three month window. On Friday, the BoE, in line with the core members of the Fed’s swap lines, announced they will step up the timeliness of their USD repo auctions with a daily 7-day offering as opposed to weekly. The operations will be in effect as of today and could take some of the edge off of the pressure built on GBPUSD. This week’s calendar will begin to show some of the impact of the coronavirus outbreak, with flash Purchasing Managers Indices released tomorrow. On Thursday, Andrew Bailey will lead his first Monetary Policy Committee meeting as Governor of the Bank of England and will give further explanation for the Bank’s unscheduled restart of quantitative easing last week.