Morning Commentary: To intervene or not intervene, that is the question

Foreign Exchange - Morning Commentary
To intervene or not intervene, that is the question
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Since the middle of January, when China reported the first human to human transmission, non-safe haven G10 currencies have made some massive moves.  The Canadian dollar is down ~10% and the Aussie dollar is down ~15% but both of these pale in comparison to the Norwegian krone which is down ~23%. 

Central banks around the world have taken extraordinary actions to support and stabilize other parts of the markets so could FX intervention be in the cards?  Certainly in today’s “whatever it takes” market, anything is possible, however there are some reasons to think FX intervention is still a ways off. 

While FX moves have been rapid, only a handful of currencies (SEK, NOK, MXN) are sitting near extreme values.  As a result, there isn’t convincing evidence that FX levels are grossly misaligned from fundamentals.  This reduces the need for immediate readjustment of FX levels, let alone action along the lines of the Plaza/Lourve accord. 

Moreover, the strong demand for USD appears to be the result of deleveraging and not speculation.  During periods of market stress, USD deleveraging is to be expected.  Further, market data shows that FX speculative positioning has been reduced to the lowest levels since the Great Financial Crisis. 

All of this suggests that intervention would have limited effectiveness as there isn’t much of a speculative position to flush out on a tactical basis.  Even on a fundamental basis, the belief still remains that individual country intervention is ineffective and, often, self-defeating. 
  • Risk sentiment in the market has improved, but it is important to remember that sentiment has the ability to change on a dime.  This positive swing in sentiment can be attributed to the Fed’s action yesterday as well as reports that the Senate is close to a compromise.  Additionally, reports out of Italy show a decline in both the number of confirmed cases and deaths over the past couple of days. 
  • The UK issued a strict lockdown of the country with all non-essential shops and commerce closed for at least 3 weeks and people unable to leave their homes for any non-essential reason.
  • European flash PMIs fell to 31.4 from 51.5 last month.  The manufacturing number fell to 39.5 from 48.7 last month and services felt to 28.4 from 52.6 the prior month.  These numbers are the first PMI numbers to reflect the impact of COVID-19 related disruption. 
  • Japanese PMI readings for March came in very weak.  Manufacturing PMI fell to 44.8 from 47.8 last month and services fell to 32.7 from 46.8 the prior month.  In Korea, the government announced a stimulus package that doubled previous measures.  
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