Last week turned into an historic one for currency markets, possibly one that forex traders will be able to tell their grandchildren about one day. Markets were taking every new day as it came as many of the usual rules went out the window.
As it turned out the sell-off termed ‘Black Monday’ was just the start of a turbulent week as the market has reacted to one major piece of news after another, and some central banks have looked like they were playing catch up. As the week began we saw US Treasury yields plumbing record lows with the USD dropping along with US bond yields. With the European Central Bank and Bank of Japan having little monetary ammunition to hand, this meant a rally in both the EUR and JPY. But it was going to be a week of two halves in forex markets.
Mid-week the Bank of England slashed rates unexpectedly and released almost GBP 300 million of extra funding into the banking system, right ahead of the UK spring budget. The Federal Reserve also cut rates.
“Rate cuts alone are not amounting to much these days but with the term funding scheme measures and counter-cyclical buffer being reduced to 0% it ought to help the transmission to business,” observed Neil Wilson, Chief Markets Analyst with Markets.com.
UK Chancellor Rishi Sunak found himself presenting his first budget in the teeth of a major financial crisis. But he unveiled a massive GBP 30 billion of extra stimulus measures, which is probably what was required. The extra spending that came with this, to the tune of GBP 175 billion over five years, spelled the end of the days of austerity in the UK in what looks like the largest sustained fiscal boost in 30 years.
However this all seems like just the prequel to the main event now, as Donald Trump’s announcement of a European travel ban led to an historic market sell off on Thursday that conjured the shades of 1987. GBP was sold heavily and indeed has been dropping like a stone for most of the week, having slipped from 1.31 vs the USD to close the week at 1.227. It was a sustained period of selling against sterling.
Traders disappointed by no rate cut from ECB
The EUR also had a busy week – while the ECB did announce new stimulus measures there was no interest rate cut in the offing this week, leading to a rush from the EUR into dollars. Traders were saying Friday that there had been a blow out in the cross-currency swap spreads, leading to a rush into USD liquidity, led by banks and large corporations.
Other assets you would expect to hold or even gain value last week have also been sold off. The gold price finished the week down at 1529 despite reported heavy demands for gold ETFs, while silver is now at 14.74. Bitcoin has also seen a substantial sell off this week and is now below USD 5500. Bear in mind, however, that this reflects gains in the USD against other assets.
So what next? Surely not a repeat of this week, although central bankers will be watching the news for further detail on the spread of the virus. There is every chance we will see more surprise monetary easing, especially from the Federal Reserve. But for those who have in recent months questioned whether the greenback should still be the world’s de facto currency of last resort, it is certainly proving them wrong at the moment.
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