Market commotion as Covid-19 crisis continues

  • Daily update on Covid-19
  • King Dollar tears higher
  • Weak pound dogged by Covid-19 and Brexit
  • Eurozone recession fears rally

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Daily update on Covid-19

• UK advises against non-essential travel anywhere in the world
• The EU plans to ban all non-essential travel in the Schengen free-travel zone
• French residents face a fine if they are outside without good reason
• Italy’s death total has passed 2,500, Spain is over 500, the US over 100 and in the UK over 70. The total number of cases globally is fast approaching 200,000.
• The European Commission says more than €120bn have been pledged to economies within the bloc
• US to send cheques to Americans totalling nearly $1trn
• The UK unveiled a £330bn package of emergency loan guarantees and £20bn of extra spending on grants

King Dollar tears higher

Demand for the US Dollar continues to swell because it is the world’s reserve currency and is very liquid. The same thing happened during the financial crisis of 2008 as it gained just shy of 17% on a trade-weighted basis. The US Dollar index rose 26.7% back then too, heavily weighted by its price versus the Euro. The dollar is expected to continue strengthening amid this global pandemic and we have already seen GBP/USD test below $1.20 and EUR/USD fall back under $1.10 yesterday.

The US economy entered this crisis in a stronger position than most, particularly the Eurozone, which was on the brink of recession, and the UK which had suffered from amplified political uncertainty. The US Federal Reserve (Fed) has taken the lead in making critical monetary policy decisions, slashing interest rates and injecting trillions into the economy and yesterday confirmed it would start buying commercial paper through a facility first used during the 2008 financial crisis. This is basically a method of critical short-term funding that businesses use to operate. In addition, the Trump administration called for an 850bn stimulus package.

  • The move triggered a boost in sentiment prompting demand for stocks and gold, but the currency market was unfazed, and the dollar continued to elicit huge demand. Risk aversion took control though, and the market rebound has been short-lived. No Fed meeting tonight given the Fed’s emergency meeting on Sunday.

Weak pound dogged by Covid-19 and Brexit

The British Pound has suffered heavily in the wake of the coronavirus crisis. The pound has fallen aggressively over the past couple of weeks except against some commodity-linked currencies and riskier currencies closely linked to China like the Australian Dollar. GBP/USD and GBP/EUR have both suffered their worst weeks since the financial crisis with GBP/USD falling an incredible 12 cents in six trading days.

The Bank of England (BOE) has slashed interest rates by 0.5% with rumours of another 0.15% cut looming to take rates to 0.1%, which would be an historical low for the UK. The government has also changed its rhetoric and advised against all non-essential travel anywhere in the world and to avoid large gatherings. The impact on UK businesses is expected to be intense as demand recedes and supply chains unravel. Coupled with the fears of an economic downturn, Brexit remains an overshadowed but still relevant risk to the pound. The next round of Brexit talks has been postponed due to coronavirus. There was growing speculation that the UK would have to request an extension to the Brexit transition period, but the UK government confirmed yesterday that this is not the case and that the deadline of Dec 31 is enshrined into law.

  • Parts of Europe are in lockdown and the peak of the disease in the UK expected to coincide with critical negotiation deadlines – June is the final month for Britain to ask for an extension. This uncertainty is also weighing on sterling, which remains a risky currency amidst these unprecedented times of volatility.

Eurozone recession fears rally

The Euro fell below a key psychological level against the US Dollar yesterday as data aggravated fears about Germany and the Eurozone overall descending into recession. Germany’s ZEW index of investor confidence plunged nearly 50 points below zero – nearly twice as weak than the forecast figure and to its lowest level since December 2011.

Concerns about the spread Covid-19 across Europe and the impact on economies are behind the heavy fall of the confidence index. As mentioned above, the last time this index dropped to such a low level was in late 2011 and late 2008, two periods in which the German economy experienced a recession. This dismal ZEW reading gives a clear early indication for what is yet to come.

  • EUR/USD accelerated its decline and fell below the $1.10 handle. GBP/EUR continued to flirt with €1.10 but worries about the Eurozone should allow GBP to stabilise against the Euro after the aggressive slide its experienced.

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