Dollar Soft as Risk-On Sentiment Intensifies

  • High-frequency data on coronavirus infections and death rates continue to stabilize; the rebound in equity markets continues
  • Democrats are reportedly planning another round of stimulus; the Fed introduced a new program to help keep credit flowing to small businesses
  • Reports suggest the IMF is preparing a new program to help ease the global dollar shortage
  • Eurozone finance minister will hold a conference call today; UK Prime Minister Johnson remains in intensive care
  • State of emergency declared in seven Japan prefectures; Abe’s stimulus package proposal came in at JPY108.2 trln
  • RBA kept policy unchanged but hinted it may taper its QE and OMOs; MAS eased capital requirements in an effort to boost lending

The dollar is broadly weaker against the majors as risk-on sentiment intensifies.  Nokkie and Aussie are outperforming, while Swissie and yen are underperforming.  EM currencies are broadly firmer.  ZAR and CZK are outperforming, while PHP and TWD are underperforming.  MSCI Asia Pacific was up 2.4% on the day, with the Nikkei rising 2.0%.  MSCI EM is up 2.8% so far today, with the Shanghai Composite rising 2.1% after China returned from holiday.  Euro Stoxx 600 is up 2.9% near midday, while US futures are pointing to a higher open.  10-year UST yields are up 7 bp at 0.74%, while the 3-month to 10-year spread is up 13 bp to stand at +67 bp.  Commodity prices are mostly higher, with Brent oil up 2.7%, copper up 3.9%, and gold down 0.3%.

High-frequency data on coronavirus infections and death rates continue to stabilize. Fatalities have stabilized in Spain and Italy and are likely to start trending lower soon. The number of deaths and hospitalization rates in the US, especially in New York, has been well below the central case forecasted by the most closely watched models. Despite the sad news about the UK PM Johnson (see below) fatalities in the UK remain relatively low and slowed for the second day, although the apex is still thought to be about 10 days away.

The rebound in equity markets continues. The S&P500 is up nearly 20% from March lows to yesterday’s close. On a year-to-date bases, the index is down 17.6%, compared to declines of 22.9% for EurStoxx600 and 17.3% for the Topix. The UK FTSE 100 is underperforming, down 26.0% this year.



Democrats are reportedly planning another round of stimulus.  House Speaker Pelosi reportedly told lawmakers in a private conference call that it will be at least another $1 trln and will be aimed at replenishing programs that were established in the last $2.2 trln package.  Pelosi reportedly said that there would be additional direct payments to individuals, extended unemployment insurance, increased funding for food stamps, and more funds for the Payroll Protection Plan that provides loans to small businesses.

US credit markets have been, in aggregate, stable for the last few sessions, though energy credit has outperformed. After a substantial bounce at the end of March, the Bloomberg-Barclays investment grade credit index has stabilized but still down 3.8% on the year. In the high yield sector, the year-to-date return on the energy sub-index recovered from -43% in early March to around -37% now thanks to the bounce in energy prices and the prospect of an OPEC+ deal.

The Fed introduced a new program to help keep credit flowing to small businesses.  The facility will provide term financing for banks that use loans issued under the Payment Protection Program as collateral.  Note that banks had access to funds using PPP loans at the Fed’s discount window, but preferred not to use that given the stigma attached to using that window.  This is just the latest in a series of ad hoc steps taken by the Fed to ensure that its financial  measures are transmitted to the real economy.  In related news, Indonesian officials said that the Fed agreed to provide it with a $60 bln repo facility.  It’s worth noting that Bank Indonesia’s foreign reserves fell $9.4 bln in March, ostensibly due to FX intervention.

Reports suggest the IMF is preparing a new program to help ease the global dollar shortage.  The agency is prepared to offer short-term dollar loans to countries that lack enough US Treasuries to participate in the Fed’s new repo program.  The program will have the blessing of the US Treasury.  It remains to be seen if there is any sort of conditionality attached.  For instance, it’s Flexible Credit Line (FCL) program requires a country to qualify for it by meeting certain criteria that come with having sound economic fundamentals.

It’s a quiet day for US data.  February JOLTS job openings (6500 expected) and consumer credit ($14 bln expected) will be reported.  The main event this week remains weekly jobless claims Thursday, where another 5 mln of initial claims are expected.



Eurozone finance minister will hold a conference call today.  At stake will be how (if?) the bloc responds to the current crisis.  We know from press reports that the crisis has reopened old divisions, with the debtor nations pushing for mutualized debt and the creditors naturally resisting.  Those countries pushing for so-called corona bonds are quite right to say that existing debt and spending protocols must be jettisoned in this current crisis, but resistance remains strong.  Germany trotted out the European Stability Mechanism as an existing resource, but this simply reflects an inability to give up past norms.  We expect no breakthroughs today but the tone that emerges will be very important to gauge which path policymakers are likely to take.

UK Prime Minister Boris Johnson remains in intensive care.  Though his coronavirus symptom worsened, he remains conscious and has reportedly not been intubated.  Foreign Secretary Dominic Raab has taken charge. The pound had another leg lower on the news late yesterday but rebounded this morning to $1.2330 before running out of steam.  It’s worth noting that sterling implied volatility has been comparatively elevated over the last few weeks, trading some 2 ppts above the G7 index (VXY). Similarly, sterling’s 3-month risk-reversals remain at deep negative levels, suggesting greater demand for protection against downside risk versus the dollar even as the equivalent measure for the euro recovered. This might reflect the view that the UK government’s handling of the crisis has not been as good or as efficient as the other.

Germany reported firm February IP.  It was expected to fall -0.8% m/m but instead rose 0.3%, while January was revised up a couple of ticks to 3.2%.  Yesterday, February factory orders came in at -1.4% vs. -2.5% expected.  The German economy has held up relatively well compared to Italy and Spain, but more pain lies ahead.



As expected, Abe declared a state of emergency in seven prefectures that together generate about half of Japan’s GDP.  Infections have jumped to around 4000 from less than 400 a month ago.  Japan reported solid February cash earnings and household spending.  Real cash earnings rose 0.5% y/y vs. -0.7% expected, while spending contracted only -0.3% y/y vs. -3.4% expected.  Yet it’s clear that under the lockdown, the economy will take a big hit in April and beyond.

Abe’s stimulus package proposal came in at JPY108.2 trln, or $994 bln.  However, government documents suggest that once private sector contributions and government loan programs are stripped out, actual fiscal spending only totals about JPY27 trln.  Funding will come from an extraordinary budget of JPY16.8 trln, which will be financed by issuance of JPY14.5 trln of standard bonds and JPY2.3 trln of construction bonds.

Reserve Bank of Australia kept policy unchanged, as expected.  The bank noted that the 3-year yield is now around its 0.25% target and added that it’s likely that smaller and less frequent purchases will be needed to keep it there.  It also noted that its efforts to inject liquidity has led to a substantial boost, and that daily open market operations are likely to be smaller in the near-term.  AUD rallied after the decision but ran into resistance around the .62 area.  We would downplay taper talk.  As we saw with the BOJ, a Yield Curve Control regime targets the rate, not the amount of QE.  Those amounts can be adjusted with no real policy implications.  February trade will be reported.

The Monetary Authority of Singapore eased capital requirements in an effort to boost lending.  It saw no need to restrict dividends but strongly discouraged any sort of share buybacks with the freed-up funds.  The MAS thus follows many other central banks that have taken such measures and is a relatively low-cost method of stimulus.  Yesterday, the government added a third round of stimulus worth around $3.6 bln and takes the total up to nearly $60 bln.  It will be funded by a drawdown of past reserves but will still push the budget deficit up to -8.9% of GDP, according to Deputy Finance Minister Heng Swee Keat.