RedFX: Currency volatility - what can drive the next moves
Overnight news:
Australian stocks climbed by a record amount as new stimulus measures were announced (China cut its Repo rate, Singapore added stimulus & New Zealand will by corporate debt as collateral)
Looking ahead at currency markets:
1. Data: Will the slew of financial data be even worse than expected? Analysts are predicting a 10.5% fall in global GDP for H1 2020.
The UK CEBR predicts a 15% fall in 2nd Quarter economic growth. This is alongside a doubling of unemployment – last week 447,000 people applied for Universal Credit, forcing re-deployment of UK DWP resources.
2. Economic stimulus: Will individual nation’s economic stimulus packages start taking effect quickly enough?
GBP/USD was a multi-year lows last week, but has witnessed a huge rebound (7%) as markets welcomed confinement measures, alongside support for SME’s. A spectacular rebound, suggesting that the market has ‘cleansed’ any speculative long positions.
3. USA: All eyes on the USA’s rate of infection and effectiveness / speed of responses.
The USD has pulled back from multi-year highs seen 2 weeks ago. The market was buying USD as a safe-haven asset in response to Covid-19, taking EUR/USD to 1.0650. But the USD has lost momentum, and EUR/USD is now 4.25% higher.
US jobs data last Thursday showed the largest ever number of people filing as unemployed, and the markets await data relating to the speed of the spread of the virus. This Friday (3rd April), the USA will release statistics relating to unemployment – if this number is as large as some think – the USD could continue its fall.
As Roger Kerr (Barrington Financial Services) notes regarding the US:
“As stated previously, 67% of the US economy is classified as services (media, entertainment, hospitality, technology, financial and transportation), a far higher proportion than other countries. These people-based industries will suffer the most under the health emergency”
He then moves onto a larger, structural issue which could have a more fundamental effect:
“The US economic downturn comes at a time when the Trump administration was running a much larger internal budget deficit and increasing Government debt levels. Foreign investors into US Treasury Bonds to provide the funding the US Government needs will be demanding a much lower USD currency entry point before they invest i.e. a substantially weaker US dollar.”
Volatility of course persists, and data will be closely watched.
France has noted a huge increase in home ‘accidents’ importantly .. incidents of fires due to electricity / power cables connections being overloaded and unable to cope with increased use. Probably worth checking.
Unsurprisingly, many incidents and accidents revolve around DIY and gardening. Some simple lessons there, for all of us un-skilled idiots (I am referring to my shower-door, the half-mowed grass, the plastic bucket under the kitchen sink and the enormous pile of wood stuck at the bottom of the garden) – the lesson being that THIS TIME, you can’t simply call the bloke that knows how to fix it! This could be said for COVID-19 as well .. stay safe