News & analysis


Sterling joined the rest of the G10, and most major currencies, in an overnight rally against the US dollar, as global markets took a breather after a week of severe risk aversion and a spree of aggressive policy actions by central banks. The Bank of England cut interest rates to a historic low of 0.1% yesterday in an extraordinary meeting while pledging to increase its portfolio of asset purchases by £200bn. More measures to support small and medium businesses were introduced, in the form of a term lending scheme that will provide liquidity to banks aimed at supporting SME lending. The brief statement accompanying the decision made it clear that it was driven by recent developments in UK gilt markets, which like other global sovereign debt markets have seen long-dated yields rise rapidly in recent days amid high volatility and poor liquidity. The resumption of QE, which will be predominantly targeted at government debt, seeks to address this. Next week’s BoE meeting is likely to feature some uncomfortable consideration of potential future moves. Given the BoE’s opposition to cutting rates into negative territory, we are now at the limit of conventional policy options. If further monetary easing is necessary, QE expansion and further liquidity operations are the likely options. In the worst case scenario where the crisis escalates and these options are also exhausted, the next frontier for policy experimentation would be direct financing of fiscal stimulus – an extreme option that would have been unthinkable even months ago. The Bank of England’s aggressive measures yesterday are expected to be followed today by further moves from the Treasury.


The euro also rallied yesterday, as eurozone government bond yields fell in response to the European Central Bank’s massive quantitative easing commitment, after spiking earlier in the week. The key development yesterday was the substantial fall in Italian sovereign bond yields, which had worryingly skyrocketed on Wednesday after a series of communications blunders caused markets to doubt if the ECB was willing to intervene. With these doubts addressed for now, European markets are trading with a more optimistic tone and the euro is benefitting from the global improvement in risk appetite despite the deterioration of the COVID-19 pandemic in the mainland. Italy’s contagion figures now surpass that seen in China, heightening the probability of a more prolonged shutdown and quelling optimism that the peak may have been found. Further fiscal measures are necessary to stabilise the eurozone economy, but for now the euro is enjoying the unwinding of USD demand for one day.


The US dollar pared back its gains overnight, after a week of historic strength driven by global funding stress, as financial institutions and ordinary businesses worldwide scrambled to cover dollar liabilities, creating a shortage in the greenback. The Fed has scrambled to alleviate this shortage, opening swap lines to a wide range of central banks, with the expanded counterparties now including countries such as Australia, Brazil, South Korea, and Mexico. Various measures of stress in the US financial system – and therefore the global system – continued to generally flash red yesterday, although improvement was seen in some areas. Credit spreads generally continued to widen, as did the spread between interbank lending and safer index swaps. In general, these stress measures have reached levels not seen since the 2008 financial crisis. However, cross currency basis swap pricing has eased for EUR and GBP. JPY cross currency basis pricing has been volatile, at times yesterday remaining very wide. The Fed announced further measures yesterday in the form of further funding facilities to the money market mutual fund industry. On the macro front, California announced lockdown measures for its 40m residents, ordering them to stay at home unless for essential trips – similar to measures implemented in other places such as Italy and Spain. California’s economy is larger than that of Italy, Spain, or France, a fact that highlights the likelihood of extremely severe consequences to global growth. Senate Republicans unveiled legislation that would inject more than $1 trillion of fiscal stimulus into the economy. The proposal includes direct transfers to businesses and taxpayers, but its timely passage through the legislature is far from assured, given the fact the House of Representatives is controlled by the Democratic party. Democratic House Speaker Nancy Pelosi was quick to lay out conditions for supporting the bill, including worker protections and bans on stock buybacks and layoffs.


The loonie is substantially higher today as risk appetite recovers somewhat in currency markets today. WTI crude jumped 24% in yesterday’s session, a one-day record, but the headline figure was flattered by base effects. In reality, crude oil jumped a less flattering amount of just $5 a barrel. The impetus for the spike in crude came from a Wall Street Journal article that suggests the US contemplates intervening in the Saudi-Russian oil price war, levying sanctions on Russia and using diplomatic routes to curtail oil production in Saudi Arabia. Reports also suggest that Texas regulators are weighing up enforcing production quotas for the first time in decades after crude prices hit 18-year lows. The loonie’s rally has taken it far away from the 2016 lows it was eyeing up over the last two days, with percentage point moves now becoming the norm in FX markets.

FX Elsewhere

Global currencies began to rally overnight as risk appetite improved and bond yields fell in the developed world, although some major currencies have yet to recoup their losses from yesterday. Central banks and governments around the world introduced further monetary and fiscal measures aimed at responding to the virus shock. Significant measures were taken yesterday in Japan, Australia, and many others. The Norweigan krone in particular has been on a wild ride and has almost 10% from all time lows it reached against the US dollar yesterday. The Norges Bank cut interest rates by 0.75% to a historic low of 0.25% this morning and comes after the Bank stressed its willingness to intervene in FX markets during this week’s krone rout.



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