News & analysis

GBP

Sterling has traded in line with the euro and most other G10 currencies so far this week, and is again up against the US dollar this morning. News from UK corporates and financials has been unrelentingly grim, with British Airways announcing plans for making almost 30% of its workforce redundant in response to a long-lasting slowdown in the sector. Barclays has announced a £2.1 billion increase in its provisions for bad loans, matching earlier moves among other banks. The move reflects the rapid deterioration in the outlook for the global economy as a result of COVID-19 lockdown measures, and highlights the fact that even with the aggressive Government and central bank action being seen in response to the crisis, insolvencies and a degree of credit tightening will be all but impossible to prevent. This point was further underlined by forecasts published by the National Institute for Economic and Social Research, which say UK GDP falling more than 7% in 2020, with unemployment rising to more than 10%, despite fiscal stimulus and monetary easing.

EUR

This morning, the euro is reversing losses sustained against USD late on in yesterday’s trading session amid broad US dollar weakness. Italian BTPs slumped after Fitch downgraded Italy’s sovereign credit rating to BBB- in a surprise move on Tuesday. As a result, the spread between Italian and German Government debt widened. The move caught many off-guard as the rating agency was supposed to hold its next review on July 10, but it seems the European Central Bank may have anticipated this move last week already, when the Bank expanded its collateral eligibility to accept junk bonds. While Fitch’s downgrade leaves Italian debt one notch above junk, there were reasons to believe it could slide to junk status. In a statement, Fitch said that “the downgrade reflects the significant impact of the global COVID-19 pandemic on Italy’s economy and the sovereign’s fiscal position”. For now, Fitch’s outlook for Italy has been revised from negative to stable, which reflects expectations that the ECB’s asset purchases will help to keep yields low for the near term. However, downward risks remain as investors continue to be concerned about a higher debt-to-GDP ratio that could push Italian sovereign debt into junk territory. The news did little to shake the euro this morning after the single currency slid on the news in yesterday’s session. Spanish retail sales released this morning showed a 14.1% slump in seasonally-adjusted year-on-year figures, well below the expected drop of 4.0%, but the euro still managed to keep its footing and continued to strengthen against the dollar.

USD

Yesterday’s session was a volatile one for the dollar as risk sentiment flipped early on in the European session, leading to the dollar taking on water throughout the day, but the greenback found the impetus to post one last surge late on in the session. However, the dollar unwound most of its late gains overnight as it slid the most within the G10 space following improved risk sentiment following the news that more countries outlined plans to reopen their economies. Riskier assets like US equity futures and European stocks got the upper hand while oil markets rebounded after dropping 25% in two days. Further volatility in USD may be ahead with the Federal Reserve rate decision announcement at 19:00 BST, just after the market receives the first reading of Q1 GDP at 13:30 BST. Expectations sit at -4.0% for US economic growth in Q1. The first quarter saw the number of jobless claims soar to the 20m mark at the end of March as lockdown measures were rolled out, leading to a collapse in social consumption and output. With today’s Fed announcement, no further reductions in rates are expected as the FOMC has already cut rates close to zero and Fed Chair Jerome Powell stated earlier last month that he does not see negative policy rates as “likely to be an appropriate policy response here in the United States”. The key things to look out for are comments from the Monetary Policy Committee on how long the stimulus packages will be in play, what additional steps the Fed could possibly take should things worsen, and what the economic outlook would look like – more notably when they expect the recovery to begin. The Fed could provide one detailed outlook with expected inflation and GDP rates, or rather different scenarios similar to what Riksbank released yesterday, to account for the current unpredictability in markets. Jerome Powell previously stated that forecasts beyond the immediate horizon were foolish in the current climate as uncertainty was too high to provide accurate forecasts. With conditions settling substantially since March, the Fed may begin to start modelling the US economy for public viewing once again.

CAD

The loonie pounced on a softening dollar yesterday to break another leg lower despite the slide in crude prices. Today, with risk sentiment well supported again, the Canadian dollar is rallying again, marking its third consecutive day in the green as it sits up over a percentage point against the dollar thus far this week. Little is scheduled for the loonie today but with a busy roster for the USD, the pair may continue to see heightened volatility. Oil bounced in Asia after a roller-coaster session in New York following S&P’s decision to exit near-term contracts, which spurred funds to follow suit. WTI now sits $1.75 higher this morning with Brent also rising $1 this morning. Yesterday’s API data suggesting US crude stockpiles rose by 9.98m barrels last week, which would mark the 14th weekly increase if confirmed by EIA data today at 15:30 BST.

 

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