News & analysis

The US dollar has stabilised somewhat in today’s session after its fall from grace against the G10 yesterday…

The greenback fell by over a percentage point against all G10 currencies yesterday as liquidity conditions improved in markets and the dollar’s synthetically produced strength due to credit and liquidity issues unwound. Data from the New York Fed posted yesterday shows the ECB was the largest user of the Fed’s swap line, tapping it for a cumulative $116.22bn across 7-day and 84-day facilities. While the Bank of Japan swapped $67.175bn, the BoE $19.015bn and the SNB $3.64bn, while the Bank of Canada has yet to tap the Fed for liquidity measures.

The premium charged in currency markets for USD cash flow, known as cross-currency basis swaps, have eased substantially against the yen to levels normally witnessed at quarter-end. The easing of USD access against the yen comes nearly a whole week after the pressures in GBP and EUR markets appeased. In volatility markets, implied volatility has dropped across most pairs from the beginning of the week. As implied volatility falls it contrasts with rising realised vol; the cross-over suggests calmer waters in FX markets may be ahead. Calmer waters than last week may be ahead but that doesn’t necessarily suggest low volatility. This is evident as  2 week implied volatility still sits at elevated levels compared to recent history, highlighting the heightened demand to hedge against FX volatility in option markets. Last week the DXY index, which measures the dollar’s performance against major G10 counterparts, marked its 9th largest percentage intraweek range since the 1980’s. The DXY’s 5.69% range last week was only 0.3% below that seen in the week of the 2008 financial crisis when Alan Greenspan made the comment “this is a once-in-a-century credit Tsunami” and Gordon Brown admitted the UK was already in recession mode.

The dollar today has traded mixed against the G10, however. EUR, CAD, NZD, AUD, SEK, NOK and CHF all trade lower against the greenback while GBP and JPY remain the standout performers. We wrote on Wednesday about the conditions still in play that will keep the dollar supported, especially given the month-end and fiscal-end flows at the beginning of next week.

Emerging markets have also had little luck against the greenback today, with only the Indian rupee making advances in today’s session.


Graph: Implied volatility falls for major currency pairs suggesting volatility may subside after the huge price swings over the last 2 weeks


The eurozone fails to agree on a fiscal response to the virus

EU leaders came up with no concrete joint response to the economic toll of coronavirus in the area after a 6-hour meeting yesterday. The two avenues the group had been discussing have faced notorious criticism by extreme positions among the state members. On one hand, fiscally conservative members such as Germany and the Netherlands have pushed for the option of releasing credit lines from the funds of the European Mechanism of Stabilization (EMS) to countries in need. This policy choice, however, was opposed by southern states like Italy, Spain and France, who appealed for much more supportive measures like an EU joint issuance of the so-called coronabond, backed by a European institution and not by separate EU members. The idea behind this initiative is to balance out the spread some riskier countries carry on their debt costs, which would ease financing pressures for the necessary expenses at present. However, the proposal of joint debt issuance fell on deaf ears as the proposal was strongly rejected by Germany and Angela Merkel. The single currency is feeling this dislocation also. The spread of the coronavirus continues at a rapid pace in mainland Europe, with Spain recording its worst day in mortalities to date today.


Bank of Canada cuts rates by a further 50bps in surprise move

Adding to today’s news flow, the Bank of Canada just dramatically cut rates by a further 50 basis points, leaving the overnight rate at 0.25% due to COVID-19 and lower oil prices. To add to the rate cut itself, the Bank of Canada has launched two new programs. First, the Commercial Paper Purchase Program (CPPP) similar in nature to that used by the Federal Reserve, in order to help alleviate strains in short-term funding markets and thereby preserve a key source of funding for businesses. Secondly, to address strains in the Canadian sovereign debt market and to enhance the effectiveness of all other actions taken so far, the Bank will begin purchasing Government of Canada securities in the secondary market. Purchases will be CAD$5bn a week minimum and will span across the yield curve. This has exacerbated the slump in the loonie, which now sits near a percentage point lower on the day. BoC Governor Poloz is due to speak in Ottawa at 09:30 local time.


Simon Harvey, FX Market Analyst
Olivia Alvarez Mendez, FX Market Analyst



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