Morning Commentary: Coordination is Key

Foreign Exchange - Morning Commentary
Coordination is Key
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
One of the unique features of the EU economy is that it is a single monetary union but has separate fiscal systems.  This uncoordinated coordination has always seemed to hold back progress.  Recently, this dynamic has played out through the EU’s slow and underwhelming fiscal response, especially when compared to the decisive and forceful actions taken elsewhere including in the US. 

Overall, there has been a wide dispersion of fiscal responses in the Euro area with discretionary measures barely adding up to 2% of GDP.  While automatic stabilizers also help, the magnitude of the virus shock makes fiscal steps taken so far simply the bare minimum needed to keep the economy going even when accounting for fiscal multipliers.

Within the suite of actions proposed by the Eurogroup, the vaguest but also the most important measure is the European Recovery Fund.  The hope is that the European Board meeting tomorrow will provide increased clarity around this fund as there are still many unknowns regarding the size, impact on individual country’s balance sheet and how it will be funded.  Moreover, there is a divide as northern countries fear debt mutualization will contaminate their financial decisions due to decisions made by southern countries. 

Ultimately, the ability for Europe to normalize will depend on coordination on both fiscal and lockdown policies as success depends on the weakest link.  So far, plans on the table are not coordinated responses but rather are based on unilateral decisions stemming from individual country situations. 

On the fiscal level, the risk is that once exceptional circumstances that allowed for a relaxation of rules has passed, rule flexibility will go away and possibly trigger a second recession.  A similar dynamic is at play regarding lockdown polices.  If a country ends its lockdown too early, say due to the lack of a proper European response, it then puts the normalization path for the rest of Europe at risk should a second wave of infections necessitate a second shutdown.    
  • Overnight virus news remains mixed with the US, Germany and Singapore seeing an acceleration in infections.  Conversely, the numbers in Italy and Spain have shown improvements.  
  • The US Senate agreed on another aid package worth around $500 billion last night.  The House is scheduled to vote on this package as soon as tomorrow.  The Paycheck Protection Program was allocated another $340 billion dollars with $100 and $25 billion allocated to hospital funding and virus research, respectively. 
  • Mexico’s central bank, in a unanimous decision, announced a surprise 50 bps rate cut last night.  This brings the policy rate down to 6.0%.  In taking action, the bank emphasized that the monetary transmission channel is not particularly strong in Mexico.  This makes the liquidity measures also taken more important than the cut itself.  The central bank is expected to cut rates further with May and June as possible windows for action, however the effectiveness of alternative measures will have a material impact on the overall pace of cuts.  
  • Australia reported better-than-expected retail sales numbers with sales rising 8.2% MoM which is the most on record.  However, this number does reflect stockpiling of food and essential items meaning it isn’t a meaningful data point in assessing the health of the Australian economy. 
  • Oil prices continue to be pressured as storage issues continue.  OPEC+ oil ministers held a call yesterday, but the meeting minutes did not show a change in policy.  Petrocurrencies have been put under pressure by the fall in oil prices but the contango (future prices higher than spot prices) shape of the crude curve has muted some of this softness. 
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