Daily FX Market Roundup 03_12_20By Kathy Lien, Managing Director Of FX Strategy For BK Asset Management
It was another day of nauseating moves in the financial markets as incoming headlines caused wild swings in currencies and equities. In the face of +2,000 point losses in the Dow Jones Industrial Average and major declines in Treasury yields, the Federal Reserve and European Central Bank increased liquidity to the financial markets. In an effort to contain the virus, President Trump banned all foreigners from Europe (ex UK) for the next 30 days. Investor sentiment can be summed up in one word – unimpressed.
The continued sell-off in equities reflects the market’s lack of confidence in their leaders to contain the coronavirus. Even as new cases slow in China and South Korea, in the U.S., where we have the largest economy and financial market in the world, the number of cases is expected to soar. Large-scale events are being banned, businesses are just beginning to test work-from-home scenarios and schools are closing on a limited basis. The CME will close its trading floor on Friday and it may only be a matter of time being the NYSE shutters its doors. When that announcement is made, there will be more panic selling. We haven’t seen the worst from the virus or the financial markets, which is why investors shrugged off the central bank’s efforts because volatility and risk aversion are here to stay.
At first, equities soared on the back of the Fed’s $1.5 trillion liquidity announcement but sellers returned quickly to drive equities sharply lower because these liquidity measures are aimed at normalizing market operations and not stimulating the economy. For example, the Fed will widen the range of its Treasury purchases across different maturities and will offer $500B liquidity through 3- and 1-month operations. All of this helps to relieve the bond market but none of it helps the bottom line of businesses and consumers. At the same time, individual states and countries are taking more drastic measures to contain the virus. Large-scale events are banned and schools closed. So far, the U.S. government has offered very little to soothe the market as President Trump’s payroll tax cut and travel ban have been met with fierce criticism.
The European Central Bank also announced drastic liquidity measures to support the economy but investors were disappointed that interest rates were left unchanged. The ECB boosted its asset-purchase program by EUR120B and introduced a new program of cheap loans that would basically pay banks up to 0.75% to lend to small businesses. It would also drop capital requirements for banks during this extraordinary period. EUR/USD dropped as low 1.1055 following the ECB rate decision but rebounded toward 1.12 by the end of the NY session.
The U.S. dollar soared in response as Treasury yields stabilized. Currencies of smaller economies such as Australia and New Zealand were hit the hardest but we are surprised that the loonie is not trading lower considering the persistent decline in oil prices. Given the drastic measures taken by governments across Asia and Europe to lock down their cities at the expense of their economies, Q1 will be a dark one for most countries. A global recession is all but certain, which makes it difficult to justify buying any risk currencies.