News & analysis

The USD has pared back some gains since Friday’s close against its G10 rivals, with the single exception of the safe haven that is JPY. The retracement of the dollar combines with a solid surge in global stock markets as signs of deceleration in coronavirus deaths toll start to filter in investor risk appetite.

While the number of fatalities and new confirmed cases continues to pile up, the daily change in both figures have shown consistent evidence that the pandemic curves could be somewhere near to peaking.

By extension, this suggests that containment measures have paid off to some extent.

A study in the UK shows that postponing social distancing measures by 1, 2 or 3 weeks would have increased infections by 3, 7 and 18 times respectively; whereas the number of cases would have been reduced by 66%, 86% and 95% if the measures had been implemented 1, 2 or 3 weeks in advance.

Markets center now on the question of whether this rebound in equities marks the end of the pain seen in stock markets since mid-February. All three major US indexes skyrocketed on Monday, with the S&P 500 gaining slightly more than 7% -its third best day in more than a decade and also its third best day in three weeks. Today, European markets led the charge, with the Stoxx Europe 600 Index closing 3.7% higher – the most in nearly two weeks. Moreover, these moves took place while the virus continues to impact European economies and news that the UK Prime Minister, Boris Johnson, was admitted to intensive care overnight.

Intuition guides us towards thinking investors might be right about reading these signs optimistically. Italy’s statistics trend towards a flattened curve on both the daily deaths and new cases. Spain seems to be heading in the same direction. The speed of increases has also slowed down slightly in the UK. And in New York, the epicenter of capital markets, there are signs that the worst-feared overload of the hospital system may have been averted. Even though we might not see the eradication of the pandemic in the coming months, markets are hoping that the worst has passed already. Sentiment improvement might help ease the USD worldwide as a result.

Looking beyond these facts, it might be too soon to assure we´ve already seen the bottom of equities, and by extension financial market´s stress and USD strength. While this dynamic might build further in the following days on the back of “less bad news”, the economic aftermath of the pandemic is yet to materialize largely. From V-shape recovery prospects initially, consensus has rapidly shifted to a much flatter and longer bounce curve in economic activity. The debacle in the labor market and other macro data will then substitute the virus statistics as a leading indicator for market’s optimism.


The Deceleration in coronavirus deaths and new cases has prompted a swift recovery in equities


ZAR leads EM gains as risk-on in full flight

Emerging market currencies extended gains today on the back of virus optimism and subsided global risk appetite, as virus signs are easing in the worst-hit epicenters globally. EM equities rose to a four-week high and risk premiums on EM government bonds narrowed for the second day. Being a risk-sensitive currency, the South African rand benefits from the continued risk-on mood in markets and extends its recovery from yesterday’s historical low as 10-year yields also experience the improved sentiment as they hit a three-week low.

Although the pandemic seems to slow down globally, the outbreak in South Africa is still at its early stages, with domestic concerns over surging cases increasing. Having been under pressure from the recent risk aversion in global markets, the current shift to a more risk-on environment has had a more significant effect on the South African rand than the worsening of domestic virus conditions. The improved risk appetite was evident in today’s bond sale. Primary dealers placed orders for R15.2bn of bonds, more than three times that on sale (R4.53bn). This is slightly lower than last week, which saw demand at R19.2bn – its highest level since the Treasury increased the weekly auction amount to R4.53bn back in August. Two weeks of strong demand has helped to sooth fears that the government wouldn’t be able to finance its government deficit – which is projected at around 11.5% according to Fitch in 2020.

Falling yields in South Africa are helping sooth investor fears as the risk climate abates globally, helping the rand make ground against the dollar. Additionally, the functionality of the bond market remains a high priority of the SARB. Governor Lesetja Kganyago stated yesterday that the central bank would continue to purchase bonds if there is more dysfunctionality in financial markets. The reason for the purchase would not be to drive the yield curve, but to promote liquidity. This goes against traditional the aims of traditional QE programs, hence why the SARB are reluctant to call the scheme as such. Last month, the SARB’s balance sheet saw an increase of R1.08bn due to the purchase of government bonds.

The release of the data this morning further aided the bond rally. Additional headlines from SARB on their willingness to meet earlier if needed has also triggered steepening in the front end of the yield curve as investors price more potential cuts.

The dynamics in bond markets come as foreign investors pivot away from holding SAGB’s (see yesterday’s note) and CDS pricing rises showing a heightened risk of default.

Other risk-sensitive EM currencies that significantly benefitted from the tentative risk-on reaction in global markets are the Czech koruna and the Mexican peso.

  • The better-than-expected annual growth in Czech retail sales that speeded up to 7.4% in February certainly added to the koruna’s rally, but the improved global sentiment remains key in the currency’s performance.
  • The peso registered the best performance against the dollar in the expanded major currencies basket in the early trading session, but lower than expected inflation figures for March released in the afternoon brought the rally to a tentative halt.


BRL bounces back after Health Minister Mandetta keeps post

The real bucked the broad risk-on rally yesterday as local reports suggested that President Jair Bolsonaro was going to fire Mandetta over the Health Minister’s stance on containment policies. The President and Mandetta had disagreed on social distancing measures, with the President asking state governors to lift lockdown – a position that could increase the virulence of the virus in Brazil and cause greater economic damage.  The precarious position of the Brazilian economy was acknowledged today by S&P downgrading its outlook from positive to stable, while Brazil maintained its BB- rating. Earlier, Fitch had lowered Brazil’s GDP projection to -2% for 2020. Goldman Sachs also holds a bearish view on the LATAM space, forecasting a 3.8% contraction in growth in 2020 which would be slightly deeper than that seen during the financial crisis (-2.1% in 2009).

For now, the real has joined the risk rally, but risks remain prominent below the surface. The lack of room for fiscal stimulus in Brazil is concerning, and even though the government has already released R250bn (3.4% of estimated 2020 GDP) in direct cash-transfers, tax deferrals, healthcare spending and credit lines to SMEs the overall fiscal splurge is expected to rise to around R300bn-$400bn (4.1%-5.5% of estimated 2020 GDP). This would translate to a deterioration of the consolidated primary budget deficit from -0.85% of GDP in 219 to between -7.0% and -9.0% of GDP in 2020. This would cause a dramatic increase in the public debt load, pushing it from 76.5% in 2019 to around 90% in 2020. This elevated level of debt is concerning given the breakdown of reforms within Brazil and would likely see a more concerted fiscal consolidation program implemented in 2021. This increase in public debt also leaves Brazil susceptible to future macro shocks, tightening the space for fiscal response further.

For now, investors are enjoying the higher yields in Brazil, but signs in financial markets are there. Five-year CDS pricing, which insures holders of 5-year Brazilian government debt against default, charges its highest premium since 2016 when Congress voted to impeach its first female President, Dilma Rouseff. Levels were also this high back in 2015 when Brazil was stripped of its investment grade by global rating agencies.


C5Y CDS pricing is elevated as the risks to default rise with the government’s debt-to-GDP ratio


USD is on the back foot against its major and EM rivals on revived risk-on sentiment



Simon Harvey, FX Market Analyst
Olivia Alvarez Mendez, FX Market Analyst
Ima Sammani, Junior FX Market Analyst


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