FX Week - 12 April 2020

With risk appetite recovering last week currencies rose at the USD’s expense, led by the AUD (+5.3%) which is highly correlated to the global growth cycle, and by the NOK (+4%) which benefited from optimism that OPEC+ would agree to cut oil production. Other commodity currencies like the NZD and the CAD were also among the strongest. The Fed’s injection of another USD2.3 trillion into the US economy, along with an assortment of other packages from around the world helped assuage fears about the knock-on effects from the shutdowns. More evidence that rises in coronavirus cases are beginning to slow also offered  support to asset markets, although the US has now become the epicenter of the global pandemic, with over 20,000 deaths, and the news over the weekend showed that death rates elsewhere remain elevated and improvements patchy.

With lockdowns appearing likely to be extended into May, there may now be a limit to how much more markets can benefit from the announcement of stimulus measures alone, although policymakers continue to pledge that they still have more in their tool kits. With interest turning to the ability of economies to rebound after lockdowns come to an end, debates about exit strategies are increasing which means that upcoming economic data may become more relevant to see what is actually at stake. UK GDP data last week showed the UK economy already contracting 0.1% m/m in February before the crisis struck, which augurs badly for Q1 data as a whole once the March data is added, to say nothing of Q2. The decline in US activity shows no signs of abating either, with weekly initial jobless claims surging by another 6.6 million and the University of Michigan measure of consumer confidence falling by 18.1 in April. March industrial production and retail sales data in the coming week will provide harder evidence of the extent to which activity has been affected.  The start of the corporate earnings season may also provide a reality check on improving sentiment, although the week will begin slowly with many markets remaining on holiday on Monday including the UK and the Eurozone.

The EUR rose by 1.26% against the USD, helped in part by EU finance ministers finally agreeing a EUR500mn support package for EU economies. There will be a new unemployment re-insurance scheme, liquidity support from the EIB (European Investment Bank) for small and medium sized companies, and access to EUR240bn of credit lines to sovereigns provided by the European Stability Mechanism (ESM). Unlike the original bailout funds, for which the ESM was set up, these will come with very few conditions attached. Although the collective amount was substantial, the reliance on the ESM and the failure to agree to jointly issue debt (or so called ‘Coronabonds’) was controversial and may result in political tensions rising between Italy and the Eurozone in coming months. UK markets will no doubt be relieved by the improving health of UK Prime Minister Johnston which could lend some support to GBP, but like elsewhere attention will remain focused on the length of the UK’s lockdown and how and when an exit strategy is introduced.

Weekly currency movement vs USD (%)

Source: Bloomberg, Emirates NBD Research

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