Hasty attack

Today’s news headlines:

  • ‘Flybe collapses after last-ditch talks with government fail’. Europe’s largest regional carrier went bankrupt early this morning as the coronavirus outbreak dampened demand and months of talks with the UK government failed to secure a £100 million loan. The event puts over 2,000 jobs at risk and raises uncertainty over regional air routes within the UK. (Financial Times)
  • ‘Next BOE Governor signals co-ordinated UK response to virus’. Incoming Bank of England Governor, Andrew Bailey, has had discussions with Chancellor Rishi Sunak about the ‘most effective coordination’ to ensure the UK economy can withstand an economic fallout from the coronavirus. Bailey is due to succeed Mark Carney on March 16th and has indicated he’s not in favour of cutting interest rates before gathering more evidence. (Bloomberg)

The other shoe

Now that the Federal Reserve has taken action by cutting interest rates by 50 bps, other banks are feeling the pressure to act, but a focus on practical measures to support SMEs is flying under the radar. Tuesday’s hasty meeting which announced unilateral policy action was a change from the norm. During the financial crisis, the Fed was careful to coordinate with other major central banks in order to muster the largest confidence uplift possible. The key take-away here is that the psychological component is at least half of the value of a central bank’s policy power and, in this case, it’s closer to all of it. 

We were of the opinion that the Fed should cut a token 25 bps in its March meeting and even that should be well signposted to the market and done in conjunction with other central banks. Instead, the Fed’s approach is stripped of its full weight by virtue of its independence and lack of context, leaving pressure firmly on the world’s other central bankers to step in once again. Fortunately, where national governments have remained a sad disappointment in the midst of crisis, at least some independent policy making bodies are thinking clearly. The International Monetary Fund is making $50bn in funding available, $10 billion of this at zero interest to the poorest countries.

Bottom line: The EUR versus USD dynamic remains firmly in place, following a repatriation of investment flows back into the EU. This leaves the Dollar somewhat weaker than its apex during prior periods of market turmoil. The key to a reversion of this dynamic is directly proportional to the virus paralysis inflicted upon business. As the hysteria grows, smaller or less capitalised firms will come under increasing pressure to find bridge financing and increasing rates of bankruptcy; that’s when the virus-paranoia becomes the self-fulfilling prophecy we all fear.

GBP/USD

Sterling rallied in yesterday’s session, pushing the pair closer to the 1.29 level after rumours of a Bank of England emergency rate cut turned to dust. On a trade-weighted basis, Sterling consolidated its position above the 200-daily moving average, while the US Dollar Index trades just shy of pre-stock market crash levels having recovered over 16% in recent sessions. With the Bank of England signalling its patience with emergency interest rate cuts, continued Sterling strength could push the pair towards the 1.30 level once again.

GBP/EUR

The pair affirmed its place above the 200-daily moving average, closing a cent above the level in yesterday’s session after testing the level in the morning. A light day ahead for UK and Eurozone data could create calmer conditions ahead of Bank of England Governor, Mark Carney, speaking at 5pm. As the Euro’s recent rally appears to be running out of steam and the Bank of England has quashed speculation of an emergency interest rate cut, the pair could tick higher in upcoming sessions.

EUR/USD

Yesterday, the Euro remained buoyed by the 1.11 level for the second day in a row but failed to rebound to the 1.12 level as in previous sessions. As the US Dollar Index extends gains and the Euro Index opens below the 200-daily moving average, the pair risks erasing the 4% gain made in recent weeks. With the Eurozone economic backdrop unchanged from before its recent rally, the pair could quickly dip back into single figures against the US Dollar, as stimulus from the European Central Bank may prove to be ineffective in shielding the Eurozone economy from a global economic fallout.