Oil-dependent currencies hammered by market crash

Most major currencies moved in relatively tight price ranges last week, at least by the standards of the past few weeks.

The main exceptions were those exposed to oil prices, like the Norwegian krona and the Mexican and Colombian pesos, which dropped sharply in reaction to the mayhem in the oil market that ended with much lower oil prices across the board. Elsewhere, a generally negative tone in risk assets was supportive of the US dollar, which rose against most of its peers.

Central banks will be the key focus of currency traders this week. The Federal Reserve meets on Wednesday and the ECB does on Thursday. We expect relatively little news out of the former, given how active and aggressive it has already been in announcing various stimulus and support programmes. As for the ECB, we expect to see an expansion of existing measures, particularly the PEPP asset purchase programme announced right at the beginning of the crisis. We think that this will be increased in size to a point where it can absorb all the expected issuance from peripheral sovereigns through at least the end of 2020.

GBP

Data out of the UK last week was dreadful, as expected. Retail sales posted the largest drop on record last month, while the business activity PMIs also fell to all-time low levels. The exception was the March claimant count number, but this was roundly ignored by the market given that it only covers the period up to 12th March, and therefore does not yet reflect the surge in layoffs late in the month.

Figure 1: UK Retail Sales (2010 - 2020)

Source: Refinitiv Datastream Date: 27/04/2020

The reemergence of hard Brexit concerns was also not kind to sterling, which had the second worst performance among G10 currencies. This week, data out of the UK will be sparse and we expect the pound to trade mostly off of news elsewhere.

EUR

Markets appeared to have been somewhat disappointed by the EU's aid package to the countries more affected by the pandemic. We take a more positive view. Between the €540 billion agreed last week and the existing arsenal of tools, more critically the €750 billion PEPP ECB programme, there is sufficient firepower for member states to run the deficits they need to to finance the response to the crisis and the recovery from it.

As mentioned, we think that an increase in the PEPP is likely at Thursday’s ECB meeting, which should drive the point home to markets and be supportive of the euro over the next few weeks.

USD

The US dollar has withstood quite well the steady drumbeat of disastrous economic data. Last week jobless claims numbers reflected the loss of another 4.4 million jobs, supporting our view that casual labour relations in the US are likely to maximize the damage from the enforced shutdown of the economy. It is likely that the actual unemployment rate in the US is close to 20% by now, a much faster pace of job destruction than we have seen almost everywhere elsewhere.

The Federal Reserve has been appropriately aggressive in deploying programmes to support the economy, and therefore we expect relatively little news to come out of Wednesday’s FOMC meeting.