Global Market Watch - 30th March 2020
The markets are ever changing and fluid. Economic data is usually reviewed as an aid to gauge where currencies are likely to move, and interest rates are a proven motivator. However, the markets also take into account human sentiment. Last week, despite Services PMI plunging to 35.7, sterling rallied over 7% against the US dollar. The reason being that despite being hit by coronavirus, the UK is not suffering as much as Italy or Spain, and, economically, the US jobs data was a disaster.
Yet, despite last week's strength, the technical picture is warning that this is only a temporary phenomenon. Late last week ratings agency Fitch cut its rating for the UK, citing “material downside risk.” Market volatility is high, and so the moves in FX have been large. Hedging FX exposures is highly recommended.
These are chastening times for Italy and Spain. However, with many EU economies locked down EUR/USD still managed to strengthen last week, as the market priced in the aforementioned US jobs number, and the hope that the EU will deploy either outright monetary transactions or issue coronavirus bonds. Either of these "big bazookas" would be seen as probably doing enough to support the eurozone economically. Until then it will be down to watching the headlines for direction.
The dollar index has gyrated wildly since February 20th. It was around 100 when the market realised that the coronavirus would have a huge effect on global trade. From there, it quickly fell 6% to 94.48 before hitting 103.94 on March 22nd. However, this expected strength, as the market rushed for security, has been dented and the index now sits at 98.40. This is despite a huge US dollar 2 trillion support package from Congress and the Fed, saying they would embark upon unlimited QE.
The Fed now has US dollars 5 trillion worth of securities on its balance sheet. So, if analysts can see that the fiscal and monetary support is being implemented, why is the dollar being sold? One explanation could be that European, Antipodean and UK leaders have been clear and open in their plans to deal with the coronavirus and its spread amongst their populations, whereas the US is undecided and uncertain. The Democrat Mayor of New York, Cuomo, is being seen as a strong and competent leader, as his city is the hardest-hit, and he has strongly chastised those that break the current lockdown rules.
Joe Biden has faded into the background, and President Trump wants to open the US by April 12th. A musing that has caused the World Health Organisation to say " the US risks to become the epicentre" of the pandemic. Early press reports now suggest that the President has thankfully changed his mind. Last weeks, jobless claims were stunningly bad, and the market will wait for the important Non-Farm payrolls to be released this Friday.
The AUD had a good week last week on US dollar weakness. China is now tentatively starting to get industry back on line and this will help. There was news late last week that the Australian Prime Minister, Morrison, was preparing a third economic stimulus package, which also supported the currency. Press reports today say that Morrison will recall parliament to approve a US dollar 130 billion package.
Moody’s finally downgraded South African debt to junk over the weekend and has retained its negative outlook, saying "The key driver behind the downgrade is the continuing deterioration in fiscal strength and structurally very weak growth." "An inexorable rise in government debt" is now seen with debt levels rising "under any plausible economic and fiscal scenario." This move will lead to capital withdrawal from South Africa. Leader Ramaphosa, is now seen as a dithering President who is not able to fix South Africa's problems. The current recession could now turn into a depression if the country cannot get strong and correct leadership.