Down, down, down
They might not be coordinated in the strictest sense of the word, but the world’s central banks are scurrying to relax monetary policy in response to the threat – even the promise – of recession. The Bank of Canada and Norges Bank cut their benchmark interest rates on Friday while the Fed moved again yesterday together with the RBNZ. The Bank of England announced a concerted effort to provide liquidity.
Different countries are approaching the tragic Covid-19 pandemic in different ways. Although none can match the draconian lock-down imposed by China, most are inclined to lean in that direction. Across the board, the containment measures are dramatically reducing economic activity. Goldman Sachs estimates first quarter US growth at zero but many are less optimistic. It is not necessary to stray beyond the mainstream media to find predictions of global recession or even the assertion that it is already here.
With that in mind, and in view of the patchy response of political leaders, central banks are taking it upon themselves to do what they can. On Friday, Norges Bank lowered its benchmark by 50 basis points to 1% and the Bank of Canada cut by the same amount to 0.75%. On Sunday, the US Federal Reserve made its second cut in as many weeks, taking the Funds Rate down to 0-0.25%, and announced $700 billion of quantitative easing. The Reserve Bank of New Zealand joined the party with a 0.75% reduction in its Official Cash Rate to 0.25%.
The unorthodox actions of central banks are having a similarly atypical impact on currency values, not least because everybody is at it. As interest rates everywhere head towards zero the differentials become ever smaller and less significant. It is sentiment, not carry, that matters now.
On Friday, and in the wake of Sunday’s rate cuts, that sentiment favoured the Canadian dollar and worked against the Aussie. Sterling did almost as badly as the Australian dollar, perhaps because criticism of the government’s relatively relaxed Covid-19 strategy makes investors worry that Britain might take a bigger hit than its peers. The pound lost an average of 1%. It is 2.2% lower on the week and down by 3.1% from a month ago.
The North American dollars were neck-and-neck for the lead, the Loonie sneaking the win by a nose with a gain of 1.8%. There was little to choose between the euro, the yen and the Swiss franc, all of which added around 1%.
A nod to the data
For the most part, the economic data are supremely irrelevant to the prognosis for exchange rates. They are inevitably backward-looking - some more than others – and at the moment investors are paying more attention to the news flow.
For the record, however, it is worth pointing out that the Michigan index of US consumer confidence fell five points this month to a provisional 95.9. Although “the initial response to the pandemic has not generated the type of economic panic among consumers that was present in the run-up to the Great Recession… the data suggest that additional declines in confidence are still likely to occur”.
It came as no real surprise that Chinese industrial production fell by an annual 13.5% and retail sales were down by 20.5% in February. The numbers suggest that “the shock to China’s economic activity from the coronavirus epidemic is greater than the global financial crisis”.