Market Overview

7 April 2020

Different Currencies Scattered Their Toys to the Respective Corners

The US Dollar has already slightly eased its former pressure on most currencies over the past twenty-four hours reflecting relatively more positive sentiment of the majority of equity market participants with a slightly higher position of global stock indexes. Technical and fundamental origins that might be applied to the investment community's behaviour in the stock markets can be found in the article published on Monday.

Such a moderate change of the market beat temporarily reduces the need for US Dollar cash and for Treasury bonds safe-haven buying, but each of the currencies has its own path and its special set of factors that are to be focused on in each of the Forex instruments. According to these considerations, market investors place their funds in the corresponding currencies more willingly or, on the contrary, quite reluctantly. Those aspects have more of an effect on particular movements in currencies than the general - still not too accented - market's attitude to the Greenback.

The Bank of England (BOE) announced on Monday that a Term Funding Scheme with additional incentives for Small and Medium-sized Enterprises (TFSME) will open to drawings on 15 April 2020, sooner than was previously anticipated. GBP/USD reacted with a rise from 1.2245 to 1.2325 but failed to climb higher and even fell below 1.2165 for a short time before Monday's closing when the government confirmed messages that the British Prime Minister Boris Johnson is fighting worsening coronavirus symptoms in an intensive care unit. UK foreign minister Dominic Raab took the lead over the government's response to the accelerating outbreak. Boris Johnson was admitted to St Thomas' Hospital which is across from the River Thames and the House of Commons after suffering persistent symptoms for more than 10 days, during which he guided the work of the government remotely.

"The PM remains conscious at this time," Downing Street said late on Monday adding that the move to intensive care was "a precaution should he require ventilation to aid his recovery". However, it's clear that the British markets are seriously alarmed since it was the personal efforts of Boris Johnson that ended a long period of political uncertainty and concluded an agreement on leaving the EU. For these reasons, and also because the quarantine economic pause is costing the country's economy more than 2.4 billion pounds daily, according to the Centre for Economics and Business Research (CEBR), it can be assumed that the British currency tends to move lower anytime it reaches 1.23 level against the Greenback.

At the same time, the Pound was supported by the words of Boris Johnson's spokesman who repeated on Monday that Britain has no intention of seeking an extension to the transition period beyond December 31, 2020, which is the date when the UK should finally leave the EU. He emphasised that both sides continue to analyse legal texts and talks continue remotely. This increased political certainty therefore fundamentally fuels the economy at difficult times. The UK Treasury announced the creation of the Covid Corporate Financing Facility (CCFF) in March, which will provide funding to businesses by purchasing commercial papers of up to a one-year maturity. The scheme will help preserve the capacity of the banking system to lend to other companies as an alternative source of finance for larger companies.

The official death toll in the United Kingdom currently exceeds 5,000. The UK health minister said last week that the deadliest peak was projected to be on Easter Sunday, April 12. As for continental Europe Spain's daily death toll fell on Monday for the fourth day running to 637. It is the lowest level for two weeks. Italy reported 525 deaths on Sunday, the fewest since March 19 (although deaths ticked up to 636 on Monday). The number of new infection cases has declined for a third day from 4805 to 3599, according to officials. At the same time in New York City, the epicentre of the outbreak in the United States, Governor Andrew Cuomo said on Monday that the state's death rate has been "effectively flat for the last two days". But the numbers of new registered cases in the US was, in total, more than 30,000 on Monday. The figures are still high, especially in the United Stated. The dynamics of the infection case in the US does not give a reason to say the peak is in sight yet.

The single European currency has significantly increased in price since yesterday, from 1.08 lows to 1.0877 highs on Tuesday afternoon. Also all major European stock indexes have moved firmly higher today, beginning right from the first opening hours as investors also anticipate more financial aid to help bolster the region's battered economies. The EU's finance ministers will be in focus as they try to agree today on a list of measures to mitigate the impact of the virus on the region's economies. Then the bloc's leaders could debate and then rubber stamp a deal later in the week. The subject would be the so-called joint 'coronabonds', but this desire of Spain and Italy may be rejected by Germany, the Netherlands and others bigger economies of the EU. Other options include credit lines from the Eurozone's bailout fund, more lending from the European Investment Bank and the use of the joint long-term budget directly for guarantees for leveraged borrowing.

Any possible success of these financial negotiations can become a support for the EUR/USD, but still any negative dynamics around the virus should also be taken into account. Any possible gains may be limited both in time and in size. For example, the French Ministry of health believes that the peak of the pandemic has not yet passed, Germany's economy minister Peter Altmaier says that the data is still insufficient to lift the quarantine restrictions in the country. Finland has extended border closures until May 14, and the Italian daily newspaper Corriere della Sera writes that the country's restrictions may gradually begin to ease from May 6 only.

All this contradictory information makes it difficult for other currencies to grow against the US Dollar even in the lack of investors' necessity in US dollars. The Australian Dollar has become the leader of such growth over the past two days among major currencies. The AUD/USD soared to one-week top near 0.62 as Australia has less than 6,000 decease cases with 46 deaths and more than 2,500 recovered. The Aussie got an additional boost from the latest Reserve Bank of Australia (RBA) monetary policy decision on Tuesday to leave its official cash rate at a record low of 0.25%.

Philip Lowe, the Governor of RBA, commented in a media release: "Many countries are expected to experience large economic contractions as a consequence of the public health response. Large increases in unemployment are also expected. Once the virus is contained, a recovery in the global economy is expected, with the recovery supported by both the large fiscal packages and the significant easing in monetary policy that has taken place...There are, however, some signs that markets are working more effectively than they were a few weeks ago. This improvement partly reflects the substantial measures undertaken by central banks". The first drawings under the Term Funding Facility were made yesterday. This facility will help to lower funding costs across the banking system and provide an incentive for lenders to support credit to businesses, especially small and medium-sized businesses. Authorised deposit-taking institutions have access to at least $90 billion in funding under this facility.

Philip Lowe also added that "The Australian financial system is resilient. It is well capitalised and in a strong liquidity position, with these financial buffers available to be drawn down if required to support the economy... And the yield on 3-year Australian Government bonds is now around the target level set by the Board and the functioning of the government bond markets has improved. The Bank will do what is necessary to achieve the 3-year yield target, with the target expected to remain in place until progress is being made towards the goals for full employment and inflation. Since this target was introduced, the Bank has bought around $36 billion of government bonds in secondary markets, including bonds issued by the states and territories. The Bank will continue to promote the smooth functioning of these important markets. If conditions continue to improve, though, it is likely that smaller and less frequent purchases of government bonds will be required."

The Australian government bonds has the highest AAA ratings by the main rating agencies and are attracting investors' money to Australian bonds. The country is successfully competing for cash flows with both the New World and the Old World. That could be an important support factor for the Australian currency. However, an important condition for the possibility for the Australian currency continues growth above the 0.62 mark is a relatively positive development of the further situation on global stock markets since this is now a barometer of global economic sentiment. Australia is highly dependent on the supply of commodities and other goods from other countries so the recovery of China and the rest of the world is essential for trade.

This week most currencies behaved like a group of children who temporarily scattered their own toys to the respective corners to play alone. This game may continue until the nanny or another adult comes to engage them in a common game. But to create such an accord "game" in the currency market, market-makers need more stable trends in stock indexes and in the US Dollar.


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