With over 700,000 cases worldwide, the coronavirus continues to spread globally causing widespread social and economic disruption. The health and economic concerns of this situation are extensive and with the death toll having risen to near 34,000, this is clearly a matter to be taken very seriously.
This unprecedented time and impact on our modern way of life has seen some equally unique government and central bank actions to respond to the health and economic crisis caused, with extensive knock-on effects for the currency markets.
For the pound, which is much weaker since the onset of the crisis and following the Bank of England’s cutting of interest rates to historic lows of 0.1%, there may be further challenges ahead. The national lockdown and social distancing rules in place to stop the flow of the virus at present may go on for up to 6 months with the government reviewing the situation in three weeks.
This has warranted the ratings agency Fitch to cut the UK’s credit rating to AA-, in light of the challenging economic times ahead, and the ‘lingering uncertainty regarding the post-Brexit UK-EU trade relationship’.
The UK Prime Minister Boris Johnson and Health Secretary Matt Hancock have also both been diagnosed with the virus, but have so far been able to carry in their government roles.
The pound has actually rebounded off the record interbank exchange rate lows it touched against both the Euro and the US dollar, of 1.0533 and 1.1435 respectively on the 19th March, as investors back the measures being taken by both the US and UK governments last week. Sterling is currently trading at 1.1175 against the Euro and 1.2378, as the improved confidence in financial markets globally slightly favours the pound, against the previous ‘worst case’ scenarios.
Economic news is plentiful this week, notably from Wednesday and the 1st April when we get a new series of data releases for the UK economy. ‘Flash’ PMI (Purchasing Managers Index) surveys released last week provided a snapshot of March indicating a collapse in the dominant Services sector to 35.7, a worse reading than during the financial crisis in 2008 at the onset of the global recession.
By this measure, a scale of 1 – 100 is used with anything above 50 representing expansion. The fall here was the biggest on record and raises some big questions about where the UK economy is heading in the weeks and months ahead.
The Services sector data is due Friday this week and since it represents around 80% of the economy, could be of great interest in providing some firmer news on the true economic effects of the crisis for the UK . This week may therefore prove vital to determine whether last week’s rebound is part of a new trend higher, or just a short-term relief rally that might ultimately see the pound sold off once again.
For the Euro, we have also have important news this week, including the Eurozone’s own PMI data. The flash survey released last week for the Eurozone also showed a major decline, with the Manufacturing and Services sector recording a drop to 31.4 for March, its biggest since the survey started in 1998.
Many Eurozone nations have been swift in their response to the pandemic, with Spain, France and Italy on national lockdowns. The data coming through has shown this is having tough implications for the economy as economic activity is severely limited.
The Euro has retained strength against sterling because of the weakness of the pound and because it is a ‘funding currency’ for investors, made attractive by the low negative interest rates on offer.
This has seen the Euro used by investors to borrow and invest in other riskier assets. The deepening crisis globally has however seen the riskier higher yielding investments sold off, and the Euro loans repaid which has strengthened the currency.
The Euro is not immune to uncertainty of course, and considering that Italy for example was already said to be in recession in 2018 and struggled financially and economically in 2019, the single currency could have further economic considerations ahead as the true effects of the Coronavirus are seen in the future.
The US dollar has been true to form in its performance as a safe haven currency, strengthening in the early stages of the crisis. Investors will buy the US dollar in times of uncertainty, to guard against risk elsewhere.
The reverse is also true, in that in times of global confidence, the US dollar can lose value as investors have confidence to park funds in other higher yielding and riskier assets. The greenback is now losing value as investors back the extensive measures taken by the US authorities to weather the storm.
A 1.8 trillion-dollar stimulus package announced with unlimited QE (Quantitative Easing) has encouraged some confidence back into markets with stock markets posting record gains last week. QE is the purchase of assets by a central bank to encourage liquidity and confidence in a financial system.
With the US now reporting more cases than China, much attention is focused on Trump and his approach to the developments, Trump has extended the social distancing rules until April 30th. New York has been particularly badly hit, and experts are predicting the death toll for the country might rise to 200,000 with 2,000 deaths having been reported so far.
The price of US Crude Oil has now dipped below $20 / barrel, its lowest level in 18 years, a further mark of the lack of demand globally. Last week, a record 3.3 million workers filed for Jobless Claims, indicating the big economic harm being done to the US economy and citizens.
This Friday is one of the most important data sets of the month for the US, the latest Non-Farm Payroll data, and should be very closely monitored given recent events. By providing further news on the US economy, this closely watched survey provides insight into the changes in employment in non-agricultural sectors, and may influence US dollar rates and global attitudes to risk.
The US dollar is currently softer following a slight unwinding of some of the safe haven positions taken up at the peak of market uncertainty following the announcement of the pandemic. However, the major efforts so far have to a degree encouraged some confidence back into markets.
With this crisis still at very early stages however, there are big questions about what the true effects of the pandemic will be, and whether the measures taken will be sufficient.
The last few weeks have been a good reminder of the inherent unpredictability of the world and the currency markets. It seems this crisis will impact almost all of us one way or another, and our thoughts to all those severely affected by the virus.
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