News & analysis

GBP

Sterling continued to hover just above last week’s lows against the US dollar and euro, as the UK announced stringent nationwide lockdown members and the US Federal Reserve dramatically escalated easing measures. Speaking at a late press conference, Boris Johnson ordered an Italian-style lockdown which will be enforced by police, and the closure of non-essential businesses. News flow was once again dominated by variations on the coronavirus theme, including news that the number of available ventilators in the UK was rising rapidly, and that public authorities such as councils, schools, and government departments would keep paying suppliers even if their services had been reduced or discontinued. Flash purchasing managers indices will be released for the UK at 09:30 GMT, alongside other major European Economies. The median forecast currently submitted to Bloomberg for the UK composite PMI is a fall to 45 from 53.0 in February. Anecdotal reports of hiring and firing decisions will be especially relevant for the UK, where the Government has already implemented job guarantees and support measures for business lending. These anecdotal reports will also be a first look at the effectiveness of these measures.

EUR

The euro continues to bounce back from its 3 year low against the dollar yesterday and this morning as the Federal Reserve announced an unlimited QE program, taking some of the wind out of the greenback’s sails for now. Additionally, the number of reported coronavirus-related deaths in Italy had been falling for the second day in a row, suggesting that strict containment measures may finally be working. German officials signalled readiness to help Italy get through the pandemic and are willing to use the euro area’s bailout fund to grant an emergency loan. The euro came under pressure in the buildup to the purchasing managers’ indices releases for Germany, France and the eurozone as a whole today as market expectations did not augur well for the eurozone. French composite PMIs were dragged down by the disappointing performance in the service sector, which printed 29.0 compared to the 40.0 consensus. Manufacturing PMI surprised slightly to the upside with a 42.9 vs 40.6 consensus. For Germany, the services PMI fell to 34.5 vs a 43.0 consensus making it the largest underperforming sector, whereas manufacturing data for Germany also surprised to the upside, printing 45.7 compared to the 39.9 estimated value. Though the euro slightly sank in the buildup to the release, the actual releases left no impression with the single currency. It is safe to say that in the present climate of pandemic turmoil where aggressive surprise interest rate cuts and unlimited QE are no longer the exception, markets had braced for disappointing data.

USD

The dollar weakened against most developed and emerging market economies overnight and is also lower compared to Friday’s close when measures using broad indices such as the Bloomberg dollar index after the Federal Reserve embarked on a historic expansion of its monetary accommodation. The Fed’’s measures announced yesterday had two main thrusts: a commitment to massive, open ended asset purchases on one hand, and the opening of new facilities to support lending to consumers and businesses. The initial pace of the asset purchases is unprecedented: the New York Fed will be purchasing $75 billion of treasuries and $50 billion of mortgage backed securities every day this week, with a commitment to continue purchases “in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy”. Three new facilities were announced, two of which were created to purchase corporate debt on both primary and secondary markets. The third was the re-establishment of the Term Asset-Backed Securities Loan Facility, which will purchase asset-backed securities consisting of bundles of student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration. The three facilities will provide up to $300 billion in new financing and will be capitalized by $30 billion in equity from the US Treasury. Although the measures were clearly aimed at halting or reversing the decline in US financial conditions, many measures of financial system stress worsened or were flat after the announcement. US equities declined after the release, as did high yielding debt indices – a concerning lack of improvement considering the Fed’s steps were more aggressive than those taken during the 2008 financial crisis. Elsewhere, progress towards a fiscal stimulus bill seemed to stall as Senate Democrats twice blocked votes to progress the $2 trillion Republican stimulus bill, and Nancy Pelosi unveiled a rival Democratic stimulus bill in the House. Donald Trump gave a press conference and continued to voice support for ending containment measures in the near future, following a series of tweets suggesting this idea throughout the day and on Sunday evening. Such a move would be inconsistent with prevailing medical advice, including the President’s own advisers. Legislative negotiations will continue today, and Markit flash purchasing managers indices will be released at 13:45 GMT, followed at 14:00 by the Richmond Manufacturing Index and New Home Sales.

CAD

The loonie sat on the back foot yesterday, falling some 0.9% against the dollar but failed to break Friday’s range. Today, USDCAD looks set to continue trading in this range with the loonie 0.7% stronger this morning amid a weakening greenback. However, markets were here yesterday after the Fed’s extreme liquidity measures with the US dollar finally showing signs of weakness, but it didn’t last long, highlighting how nothing can be taken for granted in this climate. WTI is up $1.3 this morning in a brightening risk climate, with brent also up $0.86, but oil markets have a long way to go before North American production becomes profitable again, meaning a lack of investment and output will drag on the Canadian economy to a larger extent than that seen in Q1 2019. The Bank of Canada has yet to extend USD swap lines to regional banks despite the Federal Reserve stepping up its 7-day issuance access from weekly to daily. The BoC will launch the USD term repo facility “should the need arise”, instead focusing on domestic measures first. At first glance, given the wide rolling out of the USD liquidity measures by eligible central banks, this suggests the BoC are happy with USD demand pressures in the current system and the level of CAD weakness. Yesterday, the central bank increased the frequency of its treasury bill auctions to weekly. Additionally, the BoC conducted its first Bankers’ Acceptance Purchase Facility (BAPF). Under this programme, the BoC will purchase promissory notes issued by borrowers from local banks. The BoC was willing to purchase as much as CA$15bn of these IOUs at a floor rate of 0.63%, but the results of the operation signal there are still stresses in Canada’s banking system. The full $15bn was used but at a much higher yield of 1.57% – the spread in yields highlights money market stresses are yet to have abated.  Banker’s acceptance is a typically used short-term funding market for SME’s. The central bank will continue these operations at a pace of CA$10bn a week but may step up the pace given the results of its first operation yesterday.

 

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