When I first started our regular Monday morning review of global currency markets, I was not expecting to be covering some of the most dramatic weeks in forex trading. Last week again saw the strong trend in the US dollar which in turn meant some other currencies, for example the GBP, saw some heavy selling.
Sterling had a very volatile week but was largely heading downwards as chancellor Rishi Sunak announced further stimulus measures to help the UK cope with a partial shutdown caused by the coronavirus. While Sunak was seeking to reassure markets, the pound dropped from 1.24 dollars on Monday to break the 1.15 level on Wednesday 18 March, probing that level again on Thursday. This is the lowest the pound has been against the dollar since the 1980s.
Is sterling in ‘claw back’ mode?
GBP has staged a couple of short rallies since then, getting back as high as 1.19 dollars on Friday but saw some further heavy selling Friday afternoon. Wednesday represented one of the biggest one day drops on record for sterling. The Bank of England, which now has new governor Andrew Bailey in charge, cut rates to 0.1% in a dramatic move to help the UK economy get through this.
Much of the selling action was being caused by traders and investors moving into the USD which last week was still seen as the quality asset. With the virus now obviously spreading in the most populous US states we can expect to see further chaos in the US over the next week which might take the shine off the greenback a little.
The US Federal Reserve has learned from the Great Financial Crisis and has moved aggressively to curb markets, including slashing rates to zero on the 15th. Writing in the Financial Times this week, former Fed chair Janet Yellen pointed out that there are still some major differences here with the GFC of 2008 – back then the Fed was dealing with problems that had arisen within financial markets themselves, while now the threat, apart from the loss of human lives, is the potential damage to the US and wider economies.
Yellen noted that the Fed still has a range of tools at its disposal to support banks and markets. We have seen major efforts from governments to provide credit in the form of low interest loans and even grants to companies to help them to pay their employees to potentially stave off the worst effects of a global recession.
ECB launches bond buying program
The European Central Bank has been doing its bit, with an extra emergency bond buying program valued at EUR 750 billion. Traders are paying some hefty premiums to hedge against swings in the EUR over the next year, according to an options pricing model being run by Bloomberg.
What it all amounts to as we go into the trading week is a hefty slew of uncertainty: nobody knows for sure for how long and how widely the coronavirus will spread; nobody can provide an accurate assessment of the overall economic impact of the virus; and the actions of central banks are not predictable either. While the flight into the USD has been the big theme of the past two weeks, we don’t expect that to be the case next week as the news flow from the US could change for the worse.
Expect more interest to emerge in coming days in Asian currencies – JPY has seen buying interest, but I note that the Chinese yuan has hit a 10 month high against a basket of other traded currencies. It has still lost some ground against the surging dollar, but substantially less than other emerging markets currencies.