The pound had a troubled start to the week on the news that Boris Johnson had been taken into intensive care, following his contraction of the Coronavirus. With more positive news towards the end of the week that Boris was sitting up and in good spirits, sterling had staged a recovery, shaking off some of its earlier losses.
The pound was trading last week at three-week highs against the euro, with the interbank rate at GBPEUR rising to 1.1439 last Friday. Against the US dollar, the more recent interbank high of 1.2470 on the 27th March was very close to be tested, in another sign the pound is at much improved levels against both currencies. Considering on the 19th March GBPEUR was down at 1.0533 and GBPUSD 1.1435 by the same interbank measure, we are up 8.7 cents on GBPEUR rates and 9.6 cents on GBPUSD rates, some good news for clients buying these currencies with with the pound.
Sentiment for sterling continues to be dictated by the response to the COVID-19 pandemic with plenty of cause for health and economic concerns ahead. Nevertheless, the significant government response to pay wages and provide loans has helped support the pound.
As we approach the Easter Bank Holiday weekend, today’s UK Gross Domestic Product (GDP) data will shine a light on recent economic performance. Whilst there looks set to remain plenty of challenges ahead for the British economy, the sun is shining on the country and its currency, and sterling is entering the long weekend in a more upbeat mood.
The euro has been weaker in some of the recent sessions, following losses suffered at the hands of the lack of unity on debt problems being displayed. Eurozone countries all currently issue debt individually, meaning some countries pay more than others because they are seen as riskier, eg Italy pays more to borrow than Germany.
Concerns that the economic effects of the pandemic will exacerbate the economic woes of Italy and Spain, two of the Eurozone’s larger economies, has seen the euro sold off. A key meeting this week by Eurozone finance ministers did not provide the progress hoped for.
The meeting will continue today and there could be more positive news before the weekend, history tells us that often these important meetings between countries do not always end in immediate agreement and a further delay in talks may continue.
Any positive news from the meetings might help to neutralise some of the weakness the euro has been displaying, any continued delays may weigh on the single currency, in keeping with the recent behaviour it has displayed.
News earlier in the week that the number of reported cases in Spain and Italy had peaked, and that the rate of deaths was decreasing, has contributed to a more positive outlook from the health point of view.
However, reports on the possible easing of restrictions do not appear to have made much headway, with the lockdowns a key factor triggering the economic slowdowns. The Financial Times reports today that UniCredit bank in Spain is predicting 15.5% decline in GDP for Spain this year, the article also reports that this would send their Debt to GDP ratio 100% to 120%.
To put this in context, Italy has 135% debt to GDP, whilst Greece has 181%. Such concerns are the reason that the Euro was much weaker in 2012 – 2015 during the ‘debt crisis’ as financial markets became fearful over their ability to repay these debts.
Such reports underline why the meetings between the Eurozone finance ministers to deal with the debt obligations looks likely to be a key factor ahead for the euro.
The US dollar has had a mixed performance owing to its status as a safe-haven currency, whereby it will rise in times of uncertainty. The onset of the COVID-19 pandemic has definitely ticked that box and seen the dollar rise, but just lately it has also been softer following signs that globally the number of cases is peaking and markets begin to see a path ahead.
Where the greenback had been rising to a 35-year high against the pound on the 19th March, it is now weaker as investors have had the confidence to look elsewhere for returns. Economic data last week showed that over 700,000 Americans had come out of unemployment, and previous data showing 3 million had signed on for Jobless Claims has confirmed many fears over what lies ahead.
However, the significant government response in the form of a 1.8 trillion dollar stimulus package to pay workers $1200 cheques, and to provide billions in loans to business, has helped to shore up confidence.
This week’s US Federal Reserve (Fed) meeting minutes, from the US central banks last interest rate decision, indicated how the Fed cut rates to their record lows of 0-0.25% last month to provide as sharp a response as possible.
They also highlighted how they would use all tools at their disposal to provide support in the months and weeks ahead. The use of unlimited Quantitative Easing (QE) where the Fed buy bonds to help encourage liquidity in the financial system has also helped to underline the efforts being taken.
The path ahead for the US dollar is not clear but we can see the immediate fear and panic that caused the sharp rise in value last month has been eroded following the strong policy actions by government and the US central bank. Consequently, the currency is now weaker than then as the conditions, attitudes and sentiments have changed for now.
The Canadian dollar has had a very volatile time due to Coronavirus, having fluctuated 14 cents on the interbank rate, from 1.6613 to 1.7997 since the outbreak. This wild movement is in part due to the status of the Loonie dollar as a commodity currency, whereby it can trade higher and lower on variations in global trade sentiments and that of particular commodities.
In this case, the commodity is oil, with the price of oil also experiencing wild swings as the market tries to understand the effects on the global economy from the Coronavirus. Since oil is a major export for the Canadian economy, it relies on a strong price to support the health of the economy and the currency.
March saw West Texan Intermediate (WTI) oil drop 54.2%, heaping pressure on oil exporting countries like Canada. More recently news of a recovery in the price of oil, as countries seek to limit production, has helped the price to stabilise.
The Canadian dollar is also sensitive to the news of its largest trading partner and neighbour, the United States, where we have seen gyrations on the GBPUSD dollar track those on GBPCAD. For example, the recent lows on GBPUSD and GBPCAD both saw lows on the 19th March.
Pound to Canadian dollar rates are trading at 1.7422 on the interbank rate, having been boosted by a more optimistic and supported pound, and a slightly weaker Loonie dollar as markets still remain fearful over the economic impact of COVID-19 on Canada, and the global economy which supports the Canadian currency.
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