The Federal Reserve is doing everything in its power to limit the slide in equities, keep Treasury yields low and provide ongoing liquidity. In a breaking announcement before the start of New York trading, it announced plans to buy $250 billion in mortgage-backed securities and $375 billion in Treasuries this week, relaunch its term asset-backed securities loan facility to support consumer and business debt and introduce two facilities to support corporate debt markets. It also indicated that there is no limit to its Quantitative Easing program, which means it will do whatever it takes and purchase whatever is needed to stabilize the market. Unfortunately, its efforts fell flat with stocks giving up early gains to end the day lower once again.
The Fed’s measures were suppose to be positive for stocks and negative for the dollar but stimulus does not solve a health crisis. Once negative coronavirus headlines hit the wires, stocks gave up their gains quickly.
The Senate also failed to pass a key procedural vote to advance President Donald Trump’s coronavirus stimulus package. With five Republican Senators in quarantine, they simply did not have the 60 votes they needed. While many argue that Trump’s plan favors businesses over average Americans, the reality of the matter is that governments around the world are taking more aggressive monetary and fiscal measures to stabilize stocks. Unfortunately, as the U.S. Surgeon General Dr. Jerome Adams warned today, this week, it's going to get bad and not long from now, Americans will realize that self-quarantine will extend beyond April.
Adams said: “Fifteen days is likely not going to be enough to get us all the way through, but we really need to lean into it now so that we can bend the curve in the next 15 days and, at that point, we’ll reassess.”
Mayors and governors across the nation are saying that schools could remain closed for the rest of the school year. With such a grim outlook, the worst is not over for stocks or currencies.
The greenback, which sold off quickly after the Fed’s announcement, ended the day higher against all of the major currencies with the exception of the euro. It can be argued that today’s moves was Fed Chair Jerome Powell’s way of driving the U.S. dollar lower because intervention is a decision made by Treasury and not the Fed. The U.S. dollar has been on a tear for the past couple of weeks, and many governments have talked openly about intervention. It is not clear whether there’s buy in from the Treasury, but without U.S. support, any FX intervention efforts will be futile.
The euro in particular should be trading much lower. There are now more coronavirus deaths in Italy than China, and the number is growing by double digits. Spain is in the same boat, with France and Germany worried that they will be the next to follow. After Chancellor Angela Merkel self-quarantined, she banned any gatherings of more than two people. The country’s central bank (Bundesbank) warned that a recession is unavoidable even with the government’s EUR750-billion economic stimulus package. Data from Germany have already taken a turn for the worse, with steep declines in IFO and ZEW. Tomorrow’s Eurozone PMI numbers should be ugly and remind investors of how badly COVID-19 affects the economy.
EUR/USD should be trading below 1.05, and we believe its only a matter of time before that happens.
On a technical basis, four days of consolidation signals a potential bottom for GBP/USD. However, on a fundamental basis, data shows that the UK’s coronavirus outbreak is following a similar trajectory as Italy with a two-week delay so tougher distancing rules are inevitable. UK PMI numbers are due for release on Tuesday and, like the Eurozone, softer numbers are expected, but the slide may not be as steep. The commodity currencies remained under pressure despite new fiscal stimulus measures from Australia and a bond-buying program from New Zealand. The CAD/USD performed the worst, which is no surprise considering the economic pressure from lower oil prices and COVID-19.