Markets continued to experience extreme volatility last week as the spread of the coronavirus intensified. However Sterling managed to recover some of its recent losses as Monetary and fiscal stimulus provided some respite for equities and riskier holdings such as GBP.
After hitting 12 year lows against the Euro, last week saw the pound recover over 5.5% against the Euro touching as high as 1.1226 and over 7.3% against the USD to a high of 1.2485 on Friday as profit taking seemed to temporarily break the correlation between GBP and risk attitudes within the equity markets.
After the Bank of England cut interest rates to all-time lows of 0.1% to provide as much protection as possible to the UK economy, there seems little room for further Monetary stimulus so Sterling is likely to once more find its movements closely linked to risk appetite within the equity markets as the catastrophic impact of Covid-19 continues to hit world economies with forecasts now suggesting UK unemployment will rise to 2.75 million jobless by June with the UK economy forecast to shrink by a record 15% between April and June.
Last week, the Euro closed out its biggest one-week gain against the US Dollar since December 2008 as the huge stimulus package in the US promoted investors to move out of Dollars into Euros and Pounds. Despite the gain against the greenback the Euro closed its worst week against the Pound since September 2017, losing 2.5% in the process, suggesting the US stimulus package is benefiting the Pound more than the Euro thus far.
On Thursday, the European Central Bank announced its own stimulus programme saying that it could buy up to €750 billion in state and corporate bonds but fears are that this may not be enough and the Euro could lose further ground as European finance ministers meet to discuss the possible use of the Emergency Stability Mechanism (ESM). The ESM was set up after the 2008 financial crash and has a little over 400 billion euros at its disposal. While the argument can be made that using some tools of the ESM could help restore market confidence, others worry that it may have the opposite effect. In other words, investors would look at Brussels using ESM tools and worry that circumstances are so bad that the situation warrants such a drastic response. This could then undermine confidence in the Euro longer term.
Data is beginning to flow through for March and is showing the extent of the unprecedented shock that has hit the world economy. The most eye-catching figure was the surge in weekly initial jobless claims in the US, which rocketed from circa 300k to 3.3 million. Previous highs reached were below the 700k level, set during the recessions in 1982 and 2009.
Last week markets enjoyed a better week despite the poor data. Large scale central bank quantitative easing asset buying programmes have calmed bond markets, with yields falling. Forex markets have become more range bound, with an easing in the scramble for dollars as central banks moved to provide funding in the US currency.
Over the weekend Trump abandoned his optimistic two-week timescale to get through the worst of the Covid-19 pandemic, with an extension of social distancing until April 30th. Stay at home orders and business closures have been implemented in some states by governors as a divide in the White House stance is emerging.
Looking ahead, the release of the US employment report for March will be of considerable interest this week. However, it will likely understate the impact of the coronavirus on the labour market, as the survey period precedes the implementation of lockdowns in many states. Non-farm payrolls are still forecast to have dropped by 123k, which would represent the largest single monthly fall since 2009. This is turn may see the unemployment rate rise from 3.5% to 3.9%, while a moderation in wage inflation from 3% to 2.9% is envisaged. The final prints of the March PMIs will likely be revised lower. The Conference Board measure of consumer confidence is also set to nosedive.
As part of the Australian government relief packaged to combat the impact of Covid-19, Australians will receive AUD 750 economic support measures as part of huge stimulus measures. The payments are only available to welfare recipients and the hope is that it will boost spending and kick start the economy to prevent further downturn.
Businesses will also receive a fortnightly wage package of AUD 1500 per employee as part of the government bid to prevent mass job losses across a variety of sectors.
Previous measures implemented this month included fiscal and monetary stimulus worth AUD 189 Billion, equivalent to nearly 10% of national Gross Domestic Product. Interest rates have been slashed to 0.25% in the hope that people will still spend money during this challenging time.
The AUD has remained relatively weak over the last few sessions as investors leave the Australian dollar and seek safer haven currencies like the USD. We have seen a 4.25% swing on GBP/AUD from 1.9500 to 2.0300 over the last week or so and this volatility could be set to continue.