Morning Commentary: Freefall

Foreign Exchange - Morning Commentary
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
In today’s volatile markets, the title for today’s commentary could be referring to just about anything.  For now, let’s narrow the focus to the British pound that fell ~4% over the past two days and is down to its lowest level against the USD in over 30 years.  The only other time that the GBP was lower than it is today was in 1985 after which countries around the world had to sign the Plaza Accord to help weaken the USD and pull the US economy out of recession. 

Certainly, the incredible demand for the USD, as the ultimate safe haven asset, plays a role in the drop in GBPUSD this time around, as it did it 1985.  However, market participants have also dumped UK assets in fear that the UK government will be unable to take the actions needed to counter the impact of COVID-19.   

This fall in the pound came against after the UK government announced a coordinated effort between fiscal and monetary policy, clearly indicating that the markets do not think the steps taken are enough.  Likely adding to market jitters is a new BoE Governor who is only in his first week and whose view on monetary policy is still unknown.   

The GBP’s price action, as well as price action for nearly all asset classes, have shown little positive reaction to the wave of fiscal and monetary stimulus that government officials have thrown at the markets.  This has to do in some part with the magnitude of the response and the reduced effectiveness of some tools (i.e. monetary policy).  However, a large part of it has to do with the nature of the crisis.  This isn’t a financial crisis, but a public health one.

Fiscal and monetary steps may help ensure liquidity and soften the blow, but they can’t solve the problem.  Until the world is able to gain control on the spread of the virus and visibility is gained on how much longer the crisis will last, expect market volatility to continue despite the fiscal and monetary measures being deployed.  
  • Australia’s labor market report for February beat expectations by adding 26.7K jobs and lowering the unemployment rate to 5.1% from 5.3%.  While this would normally be something for which to cheer, we are not in normal times.  Backwards looking data does little to predict the future with due to the COVID-19 crisis.  That is why the RBA took emergency action to cut rates by 25 bps.  The bank also introduced enhanced forward guidance and joined the QE club through yield curve control measures that will fix 3-year yields at around 0.25%.
  • The ECB announced new “whatever it takes” measures during an emergency meeting as it plays catch up to actions by other central banks.  The central bank announced that it will purchase additional assets, including commercial paper, as well as ease collateral standards.  With this new package, it the ECB reaffirmed its view that liquidity is the key issue with markets.  This move by the ECB is likely to be follow up with coordinated fiscal action. 
  • The Fed relaunched the Money Market Mutual Fund last night, bringing back another crisis area program.  The facility will provide short term loans to mutual funds and is guaranteed by the Treasury.  Additionally, the Senate passed the virus bill by a 90-8 vote.  The bill provides paid sick leave, increased food assistance and virus testing assistance.  Congress is now scheduled to begin work on its next assistance bill that is expected to include helicopter money (direct payments to consumers.)  
  • The Fed has also adopted USD swap lines with additional central banks including Australia, Brazil, Denmark, South Korea, Mexico, Norway, New Zealand, Singapore and Sweden.  Clearly, central banks are focused on increasing liquidity in the markets.  
  • Crude fell to an 18-year low during yesterday’s session and is down ~59% over the past month. 
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