Easing funding strains are a sign of progress - Capital Economics
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Easing funding strains are a sign of progress

Capital Daily
Written by Jonas Goltermann
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The renewed weakening of the US dollar over recent days suggests that policymakers’ efforts to ease strains in short-term funding markets are having an effect.

  • ECB will not be bound by issuer limits in its Pandemic Emergency Purchase Programme
  • EU leaders to hold press conference on joint fiscal response to the crisis later on Thursday
  • US $2tn coronavirus relief bill likely to be passed by the House on Friday

Key Market Themes

The renewed weakening of the US dollar over recent days suggests that policymakers’ efforts to ease strains in short-term funding markets are having an effect.

Since the spread of the coronavirus sent equity markets into a tailspin about a month ago, the dollar has gone through two distinct phases. (See Chart 1.) At first, the dollar depreciated against the major currencies captured in the DXY index as expected interest rates fell more sharply in the US than elsewhere. But as the market turmoil intensified, the dollar rose, both because expected interest rates in the US approached zero and didn’t fall further, and because the panic led to a scramble for dollars as short-term funding markets dried up.

Chart 1: S&P 500 & DXY Index

Sources: Refinitiv

One clear sign of the distress was the sharp widening of cross-currency basis between the dollar and other major currencies. (See Chart 2.) (This is the additional cost of obtaining dollars when using a different currency as collateral.) As market participants who fund their dollar balance sheets in wholesale markets struggled to roll that funding, the basis widened, driving the greenback up (another option for a non-US borrower in need of dollars is to buy them in the spot market). That is similar to what happened during the Global Financial Crisis (GFC), when dollar funding became scarce. Then, the basis widened much further and the DXY index rose by almost 25%.

Chart 2: Selected Basis Swaps to USD In 2020 (Inv., bp,)

Sources: Bloomberg

This time around, central banks have acted quickly to alleviate the strain on dollar funding markets, with the Fed reactivating crisis-era swap lines to the other major central banks, enabling them to provide dollars to their banking systems. But while the cross-currency basis has eased, and the dollar softened, other indicators of stress remain elevated. In general, though, they have eased a little this week, and remain well below their GFC peaks. (See Chart 3). We have published a new Financial Market Stress Monitor that takes stock of different signs of stress across the global financial system, which we intend to update periodically. (Jonas Goltermann & Franziska Palmas)

Chart 3: Selected Stress Indicators (bp)

Sources: Bloomberg, Refinitiv

Selected Data & Events




CE Forecasts*

Fri 27th


Interest Rate Announcement




*m/m(y/y) unless otherwise stated; p = provisional

Key Data & Events


The unprecedented surge in initial jobless claims last week, from 282,000 to 3,283,000, starkly illustrates the extent of the economic devastation caused by the coronavirus outbreak. Claims have never exceeded 700,000 in a single week before. Furthermore, there are good reasons to believe that constraints on the capacity of state employment offices to process claims mean that the true picture is even worse.

Despite the terrible labour market data, market sentiment was buoyed on Thursday by the Senate’s unanimous approval of the $2tn coronavirus relief bill, which is likely to be passed by the House on Friday. Fed Chair Jerome Powell’s also insisted during a TV interview on Thursday morning that the Fed is far from out of ammunition, as it attempts to counter the economic and financial market impact of the pandemic. (Andrew Hunter)


The ECB published details on its new Pandemic Emergency Purchase Programme on Wednesday evening, confirming that it has temporarily abandoned its issuer limits. Bond markets responded favourably, with the 10-year Italian government bond yield down by over 20 basis points. Later on Thursday, EU leaders will be holding a press conference after a meeting in which they discussed the use of the ESM to help ease the economic impact of the coronavirus epidemic. They might also have talked about the issuance of “corona bonds” to mutualise the cost of tackling the crisis.

A raft of data were published on Thursday, including Germany’s Gfk consumer confidence for April, as well as France’s Insee business confidence and Sweden’s Economic Tendency Indicator for March. All plunged and are highly likely to sink further in the coming months. And Italy’s ISTAT business and consumer confidence indicators for March, due on Friday, are virtually certain to plummet too. Meanwhile, we suspect that Germany’s IAB Labour Market Barometer is underestimating the coming rise in unemployment there.

In the UK, after announcing unprecedented support in two emergency meetings over the past two weeks, the Bank of England took a break today, leaving Bank Rate at 0.10% and maintaining its pledge to purchase an additional £200bn of assets. But should the stresses in the markets escalate, the Bank said that it would do more. Meanwhile, the 0.3% m/m fall in UK retail sales volumes in February suggests that consumers were already starting to rein in spending before the disruption from the coronavirus. Finally, retail sales may be flat in March as exceptionally-strong food sales offsets weakness elsewhere, but they are likely to plummet in April, perhaps by as much as 30% m/m. (Melanie Debono & Ruth Gregory)

Other Developed Markets

In Canada, the federal government announced that it is doubling the size of its direct fiscal spending measures, to 2.2% of GDP, adding to the tax deferrals worth 2.4% of GDP already announced. The province of Ontario also unveiled measures amounting to $17bn split between tax deferrals and direct spending. This pushed the combined stimulus package up to 5.3% of GDP. Most of the spending measures are aimed at households, however, and support to businesses is still needed to ensure that the economy eventually recovers strongly.

In Japan, the sharp rise in new cases of Covid-19 in Tokyo on Wednesday and Thursday has raised the chances of a lockdown being imposed in the capital. The city’s Governor Koike Yuriko has urged Tokyoites against nonessential outings, and pressed the four surrounding prefectures to tell their residents do the same. (Stephen Brown & Tom Learmouth).

Emerging Markets

In Emerging Asia, Singapore’s advanced GDP estimate suggests that output fell by 10.6% in q/q annualised terms in Q1, although that will almost certainly be revised down, and will probably be dwarfed by an even larger fall in Q2. With the economic outlook worsening, the finance minister announced extra stimulus that brought the total measures close to a massive 11% of GDP. This should help the country’s economy bounce back strongly in the second half of this year.

In Emerging Europe, the Czech central bank followed up its emergency 50bp interest rate cut last week with another 75bp cut at its meeting on Thursday, taking the two-week repo rate to 1.00%. It also announced further measures to stabilise the economy. As the impact of the coronavirus crisis on economic activity becomes clearer, we expect the central bank to deliver another 50bp rate cut, and possibly to commence sovereign bond purchases.

Published at 16.35 GMT 26th March 2020.

Editor: John Higgins (+44 20 7811 3912)


Enquiries: William Ellis (+44 20 7808 4068)



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