The pound was duly thrown off a cliff yesterday, posting its worst day in as long as anyone can remember and being the standout failure amongst all of the major currencies.

Sterling’s move down was more pronounced than others for a number of reasons; it’s less liquid than the Euro and therefore less able to soak up bigger selling pressures. We’ve got a differing strategy for handling the virus; and though it seems to be getting closer to Europe’s by the hour, that differential is being seen as a gamble that, for the time being, not everyone is comfortable with. We’ve also still got the lingering reality that Covid is immediately followed by Brexit, which means that any economic recovery we get between then and the end of the year becomes null and void – Boris was toeing his own line yesterday when he was asked about extending Brexit, responding that “there is legislation in place that I have no intention of changing”, which is frustrating as even the vaguest of answers to the contrary would have been a welcome relief to the market.

We were actually hoping yesterday was going to play out quite differently for major currencies, as the swap lines between the Fed and other central banks got a lot of extra dollars into the system… These lines are where central banks can exchange US dollars from the Fed and then in turn get them to banks who then become more liquid. Ironically this move might have made the situation worse before it got better, as banks that would normally be participating in the market didn’t need to and all of a sudden there’s a bit of a liquidity crunch. 

We are hopeful that the squeeze doesn’t stay around for long though and as much as a weak pound is good for our exporters and also helpful for the government to sell bonds to foreign investors on the cheap, it isn’t great for our imports which are going to become significantly more expensive.

 

The ECB got off the fence yesterday and announced a 750bn euro bond buying programme. The central bank will use the same guidelines of what it can buy that it did for its QE programme, which is to say pretty much anything with a credit rating. This is all well and good, but as former Greek finance minister Yanis Varoufakis pointed out on Twitter “So, the ECB is doing more QE – the same QE that failed to undo the EZ’s stagnation BEFORE the virus hit. Meanwhile the EU is doing none of what would have worked: A fiscal stimulus and, even better, direct payments into citizens’ accounts. Yet another EUROPEAN HISTORIC DEFEAT” 

Whether you agree with the idea of direct payments or not, the point is that this isn’t going to be solved by doing what they’ve always done. This is going to need unprecedented levels of government assistance and it can’t just be handled by more money to banks that may or may not make it to the people. 

Yesterday we saw the British Chambers of Commerce put out an embarrassing GDP forecast for 2020. They have revised their growth forecast down from 1% growth in 2020 to 0.8% growth… By contrast, JP Morgan have said that US output in the second quarter is going to fall by 14%. You would have hoped the BCC had a better grasp of the realities faced by their members.

Going into today we’d expect more chaos, to the point that central banks must be thinking about direct intervention in the market if these liquidity operations don’t start to have an effect – which they might (stress; might) as cash has been bought yesterday and payments should settle today/tomorrow. We shall see.

If you want any more reading, this Vice article on why US airlines shouldn’t get a bailout, unless it comes with some serious strings attached, is light-hearted enough to warrant a look.

Be well.

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