Morning Commentary: And Then There Were None

Foreign Exchange - Morning Commentary
And Then There Were None
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Last night, the Federal Reserve cut interest rates by 100 bps in its second emergency cut in two weeks.  With this cut, the Fed has basically taken its rate down to the zero lower bound (rate range of 0 – 0.25% which matches the record low in 2008).  The bank also announced that it will boost bond purchases by at least $700 billion.  Additionally, the bank announced that it will allow banks to borrow from the discount window for as long as 90 days and reduce the reserve requirement ratios to zero percent.

The Fed’s most recent action effectively removes the possibility of further monetary policy support from rate cuts out unless the Fed is willing to go into negative territory, something that Jerome Powell has stated isn’t appropriate for the US.  Looking forward, the Fed has put focus firmly on fiscal policy as fiscal policy is really the only tool that can reach out to affected industries and workers.

Elsewhere around the world, other central banks have also stepped up actions with South Korea and New Zealand also slashing rates and the Bank of Japan upping asset purchases.  Despite this, equity markets around the world are selling off sharply as markets remain concerned that policy responses could be insufficient to counter the rapidly escalating economic impact from the virus.  According to the WHO, Europe is now the center of the global virus outbreak and many people in most European countries have been asked to stay home.  Efforts in the US towards containment have also stepped up with the CDC recommending all gatherings of more than 50 people be cancelled for the next eight weeks.

For today, a G-7 head of state video conference meeting will be of particular note.  However with a pressure campaign led by Chancellor Angela Merkel needed for the call just to be scheduled, there is fear that world leaders lack the consensus needed for the level of coordinated action that can shift market sentiment leaving the market vulnerable to the extreme volatility that has roiled markets the past few weeks. 
  • The GBP losses have accelerated along with an acceleration in the number of COVID-19 cases.  Given the recent comments from the PM, it is no surprise at how negative public sentiment has become. 
  • The AUD briefly ticked up to ~.63 on the interbank market on headlines the RBA would stand ready to purchase Australian government bonds but quickly gave up these gains and more as the overall negative backdrop continues to overwhelm any positive news. 
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