There is a degree of concern among central banks and governments that their efforts to calm financial markets are proving less successful than they had hoped. Equity prices continued lower on Wednesday, together with oil, gold and bonds. Sterling’s 5% decline against the US dollar looks dramatic until it is compared with the Aussie’s 6.6% drop and the Norwegian krone’s 11.6% plunge.
It is of course of no consolation to supporters of the pound that the AUD, NZD, NOK and SEK took an even bigger thumping. Cable is at its lowest level since 1985, when it touched $1.0520, and five cents below its post-referendum trough. There is no concrete reason for its miserable performance: Some blame it on the perceived inadequacy of the government’s response to the tragic pandemic, some on Brexit and others on the growing government deficit. Behind all that is the wisdom of the ages that selling sterling is usually less risky than the alternative.
The NOK was hurt by an 18-year low for oil prices though its biggest hit came in the early hours as oil was staging a rebound. It looked very much as though somebody had deliberately taken it for a walk in a thin market which, even at the best of times, is illiquid.
Yet more stimulus
As if to prove that they really will do whatever it takes to repair the economic damage wrought by Covid-19, central banks have been out and about again, distributing further fiscal stimulus. The Reserve Bank of Australia delivered its second rate cut of the month and the European Central Bank announced another €750 billion of asset purchases.
The RBA’s rate cut from 0.5% to 0.25%, was generally expected. It was accompanied by a 0.25% target for three-year government bond yields and a funding facility for SMEs. The ECB’s “Pandemic Emergency Purchase Programme” came out of the blue at midnight. It was seen as an attempt to mend the damage done by president Christine Lagarde’s comments a week ago.
In Ottawa the government came out with a $27 billion stimulus package aimed at individuals and small businesses. Further measures are said to be in the pipeline. In Washington, the Senate passed its second major bill in response to the pandemic and a third, worth £1.4 trillion, is on its way through the system.
Statisticians are still producing national economic data but nobody has been paying much attention to them because, until now, they have all referred to the heady days before Covid-19 made its presence felt. A couple of today’s ecostats will begin to change that situation.
US weekly jobless claims and the Philadelphia Fed’s manufacturing survey this afternoon both refer to March. The Philly Fed reading is expected to fall from 36.7 to 10. This afternoon there is every chance that the South African Reserve Bank will lower its 6.25% repo rate by more than 25 basis points. On Friday morning the People’s Bank of China will make its own rate decision.
Whilst there is no mention of it on the official agendas, the possibility of central bank intervention to depress the dollar cannot be ignored. Ten days ago the IMF pondered the need for “a coordinated international response” and on Tuesday it encouraged “exchange rate flexibility”. A quick burst of dollar-selling would not be a surprise.