Morning Commentary: Records Are Made To Be Broken...Unfortunately

Foreign Exchange - Morning Commentary
Records Are Made To Be Broken...Unfortunately
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
On almost a daily basis, the markets are faced with some sort of never-before-seen event whether it be a market move or actions by government officials.  These moves have become so extreme that it takes historical context just to begin to understand their significance. 

On a historical basis, many are looking back at the Great Financial Crisis (GFC) for guidance.  While this is understandable, it is important to remember that the Great Financial Crisis was one that was sector specific and thus, much more contained than the current crisis. 

Given this, the GFC does provide some interesting benchmarks.  Looking specifically at the USD, we find that since the peak in the equity markets, the USD has rallied roughly in line with what it does during “typical” equity bear markets; but, this performance gain is still only half of what the USD gained during the GFC. 

This means that FX moves, while large, are not yet stretched, leaving room for the USD to continue to strengthen, despite fiscal and monetary support for the financial markets. 

With regards to policy, the clear sense of urgency from government officials is welcomed.  Although there were some headlines indicating disagreements over the weekend, the Senate sits again today and is expected to pass a stimulus bill.  The urgency of this action, as well as past actions, illustrates the seriousness with which the COVID-19 outbreak is being taken.  However, it is critical to remember that despite wave after wave of fiscal and monetary measures, the beginning of the end, let alone the end of the crisis, is not a real possibility until there is visibility that the end of the public health crisis is coming. 
  • Overall, the virus narrative remains the same with China showing improvement and Europe continuing to be hit hard.  The global count of confirmed cases has now exceeded 340K.
  • Equity markets continue to be volatile with futures swinging from limit down to positive and is currently up lower in the US.  This move was driven by the Fed’s most recent announcement that tries to bypass the intermediaries and go straight to the affected businesses and issuers.  This is likely as close to “helicopter money” as the Fed will get.  While markets are up, sentiment has shifted quickly in the past so it will be important to see how long the positive sentiment lasts. 
  • In Europe, reports are emerging that Germany could borrow up to 350 billion euro for its next wave of stimulus.  Additionally, the Swiss National Bank has stepped up its intervention efforts.  As a last point, post COVID-19 data will pick up this week with PMI prints coming out tomorrow.  There is likely an asymmetric reaction function to these numbers as positive prints will be ignored in anticipation of a worsening future number.    
  • The Reserve Bank of New Zealand initiated its QE program with the central bank buying ~$17 billion in government securities over the next 12 months.
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