Weekly Brief

Stimulus barrage


It is scant consolation that the Norwegian krone had a worse week than sterling, falling by 2.3% against the pound. Sterling itself lost an average of that much to the other majors, touching a 35-year low against the US dollar along the way. It gave up nine US cents 7.1% and more than three and a half euro cents. The pound avoided taking last place on any individual day but the downward pressure was relentless. There was no single reason for sterling’s walloping. Some blamed it on the perceived inadequacy of the government’s response to the tragic pandemic, some on Brexit (the two main negotiators have come down with Coronavirus) and others on the growing government deficit. Behind all that is the age-old wisdom that selling sterling is the best thing to do when in doubt.

Efforts by the government and the Bank of England to steady investors’ nerves were not of much use to the currency. Having told people to stay away from pubs and restaurants the prime minister announced a £330 billion package of loans and grants to support, among others, pubs and restaurants. The Old Lady said on Thursday that it had cut its Bank Rate to 0.1%, an all-time low, and will increase quantitative easing by £200 billion.



A week after European Central Bank president Christine Lagarde upset investors with her comment about Italian government bonds she put the situation to rights with a “Pandemic Emergency Purchase Programme” that will pump out another €750 billion of quantitative easing. Unlike in previous iterations, the ECB will this time be prepared to buy Italian bonds, making the bank more credible as a lender of last resort. Monetary and fiscal stimulus was coming so thick and fast from around the world that investors took the ECB’s move in their stride, and the euro was unaffected. Overall it took more than three and a half cents off sterling and lost four and a half US cents.

As with most countries, data from Euroland predominantly related to the pre-Covid-19 era, so were dismissed as irrelevant. Thursday brought a first taste of the new era, with Ifo’s business confidence measures. They were even worse than expected, with the Business Climate Index collapsing from February’s 96.0 to 87.7 in March. It was the biggest drop since 1991.



The dollar was by far the week’s strongest performer, rising an average of 4.8% against the other major currencies. To a great extent the rush for the dollar is a reflection of the huge uncertainty posed by the pandemic. Despite efforts by the world’s central banks to reassure markets with cheap and plentiful money, investors crave the safety and liquidity that only the US Treasury bond market can provide.  Although the Federal Reserve has made swap arrangements to provide dollars to the central banks of Australia, Brazil, South Korea, Mexico, Singapore, Sweden, Denmark, Norway and New Zealand, allowing them to tap up to $450 billion, more is expected to be needed as the scramble for cash continues. Beyond extending the swap facilities there is no evidence yet of direct central bank intervention to sell the dollar but the possibility cannot be ruled out.

Meanwhile, the Fed has lowered its Funds rate – for the second time in March - to 0-0.25% and the Senate has approved a second stimulus bill. An even bigger stimulus package is coming down the line, said to be worth $1.3 trillion. Under normal circumstances such measures would hurt the currency. These are not normal circumstances.



The Bank of Canada made its move last Friday, one of a handful of central banks to lower rates, and stimulus or both. In the case of the BoC it was a 509-basis-point reduction to the target for the overnight rate, taking it down to 0.75%. The bank said it would “do what is required” and is “ready to adjust policy further and deploy other market tools” if necessary.  On Wednesday it was the turn of the government to get involved, with a $27 billion stimulus package aimed at individuals and small businesses. Further measures are said to be in the pipeline.

Oil prices were unhelpful to the Loonie for most of the week. Only eventually did they find a base, rebounding 40% from $20 on Wednesday evening to$28 this Friday morning. The Loonie followed similar course, losing ground to the US dollar until late Wednesday and recovering partially at the end of the week. It lost a net two and a half US cents and took six and two thirds of a cent off sterling. On average it was 1.5% higher against the other majors.



The Australian dollar had a better week than the pound but only just. It strengthened by an insignificant fifth of a cent – 0.1% - against sterling and fell an average of 2.2% against the other major currencies. The Aussie fell 7%, nearly four and a half cents, against the US dollar to a 17-year low. As with sterling, it is arguable that the selling of the Australian dollar was overdone, but it is out of favour with investors and nobody was keen to get in the way of the runaway truck.

In line with most of its peers the Reserve Bank of Australia cut its benchmark Cash Rate from 0.5% to 0.25%. At the same time it set a 0.25% target for the yield on thee-year government bonds and announced a $90 billion pot to encourage banks to carry on lending. The government “chipped in” up to $15 billion with similar intent.



Not to be left out, the Reserve Bank of New Zealand and the NZ government came out with their own measures to stay with the global trend. On Sunday the RBNZ made its move with a 0.75% reduction in its Official Cash Rate from 1% to 0.25%. At the beginning of this week the NZ government “splashed the cash” in a bid to lessen the expected coronavirus-induced recession, unveiling a $12.1 billion support package”. The suspicion is that more will be required.

Backward-looking economic data from the NZ economy were vaguely reassuring but out of date. Gross domestic product expanded by 0.5% in the fourth quarter and Westpac’s index of consumer confidence faded by five and a half points to 104.2. The Kiwi lost an average of 1.2% over the week, giving up three and three quarter US cents and taking two and a quarter cents off the pound.

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