Pound at lowest level in 35 years

The pound was routed yesterday as the market’s flight into dollars claimed a high-profile victim.

The praise heaped upon Chancellor Rishi Sunak for his innovative plans to help businesses on all sides backfired on him as we found out that, as usual, the devil is in the detail.

The so-called Commercial Financing Facility (CCFF) is not quite the handout that it was set out to be. The largest users of the facility will have to have a rating above investment grade, while customers asking banks to provide the promised mortgage holiday found out that it comes with a series of strings attached, not least of all, a higher interest rate after three months, which means that the holiday will then definitely be over!

The provision of a new law which provides a degree of security to private tenants will go some way to alleviate converse but the politicization of just about every decision is hampering the Government’s stance since every action has to be justified to a voracious press..

It is absurd to imagine that the pound, which reached a high of a little over 1.31 versus the dollar just a week ago, fell to a low of 1.1450 yesterday. It is equally impossible to consider where the fall will stop.

Possibly more surprising, given the rush into dollars, is the pound’s precipitous fall versus the euro. Yesterday it reached a low of 1.0593, closing at 1.0644.

The rout has continued overnight with lows of 1.1469 and 1.0516 recorded so far.

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Liquidity fears drive the dollar to unprecedented levels

Fears of a liquidity squeeze have caused the dollar to become the most sought-after commodity in the world. While every asset, whether physical or financial, is falling like a stone, the dollar index has rocketed through the 100 level and looks set to remain in demand until there is a degree of clarity (and perhaps honesty) about the true state of play.

The dollar’s rise reflects the dollar’s global role in financing rather than any confidence that the U.S. economy will fare any better than its G7 partners once the virus outbreak starts to abate.

It seems that as well as infections and deaths, the financial markets are considering longevity as a significant driver of when recessions will hit globally and their depth.

Pledges of assistance have become a little irrelevant since, to a certain extent, no Global Central Bank has any idea what it is dealing with. China declared yesterday that it had no new cases of Coronavirus, but given the sporadic methods being used in most developed countries, it is impossible to say what will (or won’t) be successful and therefore, when the economic crisis that will inevitably follow begins.

The plummeting stock markets globally bring a concern over pension investment and while President Trump (and his acolytes) expect a v-shaped recovery, analysts are not so sure as the mopping-up operation may take far longer than expected.

Yesterday, the dollar index rocketed through the 100 barrier that had been so tough to break in recent days/weeks. It made a high of 101.75, closing at 100.89. In keeping with other G7 currencies the trend has continued overnight.

Confidence; a major barrier to recovery

There has been a perception for several months that there is something of a laissez-faire attitude across the entire Eurozone towards any issues that arise, which is obviously false. The issues that face the region are not rooted in a lax attitude but, more in a sense of helplessness.

The EU Commissions appears to have no solution or even a plan for a pan-EU issue of the size of the Coronavirus epidemic, with every nation not only being forced to go it alone, but also forced into a national form of self-isolation.

Yesterday, the ECB made what looked a lot like its last stand as it announced an Eur 820 billion package of measures and Christine Lagarde finally had her Draghi moment as she claimed; there are no limits to the ECB’s commitment to the euro.

The catchily named Pandemic Emergency Purchase Programme will provide the platform for the Central Bank to buy Government and Company debt across the region. The plan will include debt from Greece and Italy which has previously been excluded from stimulus packages.

Ask any analyst or commentator where the recession will be seen first and, despite most expecting recessions to begin at the end of the third quarter when there will have been two quarters of contraction (negative growth), the answer will be almost certainly the Eurozone. Given the parlous state of the economy prior to the pandemic signs of a recession will start to appear by the end of the second quarter. A lot depends on how much the economy had already slowed when it was hoped that Coronavirus would be limited to China or possibly Asia.

The euro, despite falling as the dollar gains, has shown a certain degree of resilience. Yesterday it fell to a low of 1.0819 and closed at 1.0913. Overnight it has not (yet) made a lower low than yesterday which may be an early sign that the dollar’s advance is slowing.