he initial reaction was to send the Euro higher, as the US yield curve evaporated and markets priced in Federal Reserve cuts all the way to zero. However, the worsening epidemic news from Euro soon led to a reversal. In the end, the dollar reasserted itself as a safe haven and rose against every other major currency in the world. In the end, the Euro, swiss Franc and the Yen held up relatively well, though the relatively modest weekly changes in these currencies against the dollar are not reflective of the week’s enormous volatility.

This week, the focus will be on extraordinary measures taken by governments and central banks to mitigate the blow to the world economy. As this is written, the Federal Reserve cut rates to zero in an emergency meeting, a move that should be followed by all G10 central banks that still have positive rates. We also should see aggressive measures to support demand, employment and SME and household finances, particularly in the Eurozone which is wearing the brunt of the crisis right now. Economic data out this week will be hopelessly out of date and markets will likely ignore it.

GBP
The Bank of England cut rates to 0.25% and launched a series of initiatives to ease the credit flow, particularly to SMEs. Sterling took little notice, and it had a rough week against both the dollar and the Euro amid the stampede away from risk assets. However, we think that the significant fiscal easing announced in the Budget is a significant medium term positive, and that the Pound is currently severely undervalued after last week’s sharp falls.

EUR
With Spain and Italy under lockdown, and France not far behind, a pall of uncertainty has descended over the Eurozone economy. The good news is that monetary and fiscal authorities are reacting quickly. The ECB corrected Largade’s miscommunication at Thursday’s meeting and has made it clear that it will ensure Eurozone sovereign bonds remain stable. European governments are preparing fiscal stimulus and various forms of support for households and businesses to ride out the lockdowns and consequent fall in demand. Germany’s €500 billion pledge is particularly welcome here. A combination of bank forbearance, extremely low rates, and fiscal stimulus is a powerful antidote to the economic and financial consequences of the pandemic, and we are optimistic that the Eurozone economy can rebound quickly after the lockdowns end.

USD
The dollar turned around mid week and become the preferred currency for investors fleeing risk. The perception that the US is not as affected as Europe by the pandemic likely played a role. However, the numbers there are also worsening rapidly, in spite of very limited testing. With the Fed taking aggressive measures, including emergency cuts in rates and additional QE, it will be critical to see if the dollar rally continues as and when the US takes stronger measures of the kind we are seeing in Europe.