News & analysis


Sterling continued strengthening against both USD and EUR yesterday, with its progress stalling only slightly overnight. News flow has focussed on Boris Johnson’s condition, tweaks to Government support for the economy by Rishi Sunak, and the emerging picture of the UK economy. The Government announced last night that it would increase the size of the “Ways and Means Facility”, its account with the Bank of England. This will allow the Government to freely spend money in the short term without accessing the gilt market, in effect functioning as an enlarged overdraft facility for the nation. This morning’s main data release has been the Royal Institute of Chartered Surveyors residential market survey for March. The net balance of surveyors reporting rising house prices over the last three months fell to a net +11%, compared to +29% in February. However, the details of the report showed that the housing market had essentially frozen, consistent with the national lockdown implemented in March. The balance of surveyors reporting new buyer enquiries increasing had fallen to a record low of -74. The survey suggested that the housing market would in effect grind to a complete halt, with the balance for sales expectations dropping to -92. Lagged gross domestic product data from February was also released this morning and showed the economy grew an average of 0.1% in the three months ended February, compared to the previous three. Due to the fact that the data precede the coronavirus shock, they are of limited relevance to markets.


The euro managed to resist further depreciation against Sterling this morning after sustaining a day of losses in yesterday’s session, and was trading relatively flat against the dollar before trade data from Germany showed an upwards surprise in exports and the current account balance in February. After failing to reach an agreement on a joint economic response to the virus crisis on a marathon conference call going through Tuesday night, the Eurogroup of finance ministers will resume negotiations at 15:00 BST today. France’s Finance Minister Bruno Le Maire commented on the disagreements and said “it’s a disgrace for the Eurogroup and for Europe. While we are counting thousands of deaths, the finance ministers play with words and adjectives. We’re going to be judged severely by the markets and by our own populations”. Italy’s premier stated that the purpose of the European Union will be defeated if the EU fails to make an adequate agreement, which puts today’s meeting at high stakes. The coronavirus outbreak continues to test the unity of the EU, but Germany hopes they can agree on a coronavirus rescue package today. German Economy Minister Peter Altmaier states that he expects the EU ministers to make progress towards agreeing a €500 bln euro economic aid package, and is confident that “German Finance Minister) Olaf Scholz, together with his colleague (French Finance Minister) Bruno Le Maire, can push this forward today”. Eurozone interbank lending rates will be in focus today after EURIBOR data released yesterday showed the lending benchmark rate rising sharply to -0.29% for a 3-month tenor, considerably higher than the European Central Bank’s main overnight deposit rate at -0.5%, as well as overnight index swaps, a less risky form of interbank financing. This highlighted increasing credit strains in the European interbank lending market, similar to that seen in US and UK markets. EURIBOR fixings for yesterday will be released today at 10:00 BST. Minutes from last month’s European Central Bank meetings will be released at 12:30 BST.


The broad dollar DXY index traded in the green yesterday due to its weighting skewed in favour of developments in EURUSD. Even though the slump in the euro pushed DXY into the green, the narrative isn’t that clean cut. The dollar actually traded mixed against the G10, with GBP, NZD and AUD along with JPY making ground against the greenback. A similarly mixed session looks in store for today’s trading too, with the dollar making ground against JPY, CAD and AUD but sitting in the red against the red of the G10. The main news for the greenback yesterday was the release of the first set of Fed minutes since its dramatic decision to drop rates to its effective lower bound. The meeting minutes were released for both the March 3rd and unscheduled March 15th meeting, with the latter being the meeting where rates were dropped by a full percentage point and swap lines were announced to ease cash strains propping up dollar strength. At that meeting, FOMC officials noted that further work was needed to ensure the flow of credit to households and businesses. This was soon to be the case as the Fed evoked section 13(3) of the Federal Reserve Act shortly afterwards to announce crisis-era lending programs such as the commercial paper facility and opening up the eligibility criteria of collateral to repo auctions in order to clean up primary market institutions balance sheets and improve the transmission of credit to the real economy. Nearly all members of the FOMC voted to drop rates by a full percentage point and the longevity of the Fed’s current schemes was brought into question due to the temporary nature of the shock. This will be the key for Fed watchers going forward as some members of the FOMC noted the deflationary nature of the shock at a time when the Fed was already struggling to reach its 2% target, suggesting the Fed may be biased toward overshooting its inflation target and being slow to scale back its latest measures. Today, Fed chair Powell will likely give more clarity to markets with an economic update scheduled via webcast at 15:00BST.


While the loonie is trading on the backfoot again today, losses over the last 25 hours have been minute as currency traders focus heavily on the outcome of today’s OPEC+ meeting. Volatility is set to rise today, as WTI already sits 4% higher, however, petro currencies are failing to react in such a sharp manner. The move in oil comes after the Russian energy minister said Moscow is ready to reduce output by around 1.6m barrels per day, which is around 15% of current production, should the US also participate in scaling back output. Algeria confirmed overnight that today’s meeting will discuss a “massive” supply reduction of 10m bpd, which was previously touted as being too little to match the corresponding fall in demand due to the impending recessions in key developed markets. The WTI rally this morning is tentative in its nature as talks have a high probability of breaking down, which may be a potential reason why currencies such as the Canadian dollar and Norwegian krone are yet to make substantial rallies along with oil prices. The OPEC+ videoconference is set to begin today at 15:00 BST. In economic news, yesterday Finance Minister Bill Morneau provided more details on the government’s relaxing of its pay subsidy program that saw its cost rise from C$2bn to C$73bn. Under the new rules, the government will cover 75% of worker’s wages, capped at C$847 a week, for companies that show a 15% reduction in gross revenues for March as opposed to the previous 30% loss. The threshold will continue to be 30% for April and May, however. Further, new firms will also be eligible for the wage subsidy program compared to previously where the firm had to be operational for over a year. Major companies such as Air Canada announced it would use the program, with the airline set to use it for 36,000 employees of which nearly half were furloughed last week. Additionally, small businesses will be able to apply for C$40,000 in interest free loans which will be operational by mid-April. While the loonie is resisting the surge in oil prices this morning, it is likely to remain under pressure from the incoming Labour Force Survey released at 13:30BST. Prime Minister Justin Trudeau said the release of the March employment figures will be a “hard day for the country”. The forecasts for the unemployment rate are all over the place. RBC sees 1m jobs lost last month, along the same lines as Citi who predicts a 1.1m loss in jobs, while JPMorgan Chase puts the net job losses at just 175,000. In the second half of March, the government received more than 2m applications for employment insurance, but not all of this will be captured in Statistics Canada’s labour force survey, which was conducted between 15-21 March.



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