Last Week’s FX and Economy Summary Mar 16, 2020

Coronavirus fear continues to intensify

Fears over the economic impact of the coronavirus outbreak increased sharply during the week. 

The number of cases in Italy continued to increase very rapidly during the week and there was a further sharp increase in cases across much of mainland Europe.

Very tight limits on travel and public gatherings were imposed in Italy and Spain as well as Germany

The US Administration move to ban travel to the US from European countries was an important factor in increasing market fears.

Defensive assets in demand

As confidence in the global economy continued to decline, there were renewed gains for the yen and Swiss franc, although the yen retreated as global equities rallied. 

Equity markets declined very sharply…. 

Global equity markets came under very selling pressure during the week. The US S&P 500 index and UK FTSE 100 index indices registered the sharpest decline since 1987 while the German DAX index registered the sharpest daily decline on record.

… before a sharp reversal on Friday

The US Federal Reserve to add liquidity stemmed equity-market selling and there was a very sharp recovery in US stocks on Friday with the S&P 500 index gaining close to 10% on the day.

Dollar rebounds strongly

The dollar had declined sharply the previous week amid a sharp decline in long, non-commercial positions, a fact confirmed by the latest market data as speculators moved out of long dollar positions.

Over the past week, however, the US currency rebounded very strongly.

As fear increased demand for liquidity increased and this was a key element boosted the dollar. In effect, there was a big shortage of dollars in global markets which inevitably pushed the priced higher. 

Why was there a dollar shortage?

As fears over the global economic outlook has increased sharply, companies and institutions look to increase cash reserves and draw on credit lines with commercial banks. A large proportion of global commerce is transacted in dollars and tensions have, therefore, increased overall dollar demand sharply.

The Federal Reserve injected $1.5trn dollars to ease stresses, but the dollar still gained very sharply on Friday.

Federal Reserve takes drastic action

Ahead of Monday’s market open, the Federal Reserve announced a further cut in interest rates of 100 basis points to equal a record low of 0.00-0.25%. The bank also announced a fresh $700bn package of bond purchases.


There was a decline in consumer confidence for March, but data releases had no real impact with the CPI inflation data virtually ignored. 

President Trump declared a state of emergency which allowed the release of Federal funds. Trump also launched another round of criticism against the Federal Reserve and threatened to dismiss Chair Powell before the latest Fed rate cut.


The Bank of England sanctioned an emergency rate cut interest rates with a reduction to 0.25% from 0.75% which equalled the record low.  It also announced further measures to support bank lending to small businesses.

In its Budget fiscal statement, the government announced a substantial fiscal boost of £30bn for this year. There will be a strong increase in healthcare spending and further support measures for small businesses including tax relief.

Although the measures were generally received well, Sterling declined sharply over the week. Increased concerns over the global economic outlook undermined the currency given the exposure to global trade.


The ECB made no changes to interest rates following the latest policy meeting, contrary to expectations of a small cut in the deposit rate from -0.50%. 

The ECB did announce an increase in bond purchases through the quantitative easing programme and will also provide further very cheap funding to the commercial banks.

The measures failed to support the Euro, especially with national governments een as too slow to sanction additional fiscal spending.


In an emergency measure, the Bank of Canada cut interest rates to 0.75% from 1.25%, the second cut this month. The government also announced a fiscal support package. 

The Reserve Bank of New Zealand also announced an emergency cut in interest rates to 0.25% from 1.00%.

Commodity currencies rallied after the Federal Reserve rate cut as volatility remained high.

Tim Clayton

Tim Clayton is a market analyst with more than 20 years of experience in the financial markets, with particular focus on currencies. Holds an economics degree from University of New York. Writes for multiple publications including and SeekingAlpha so he is on top of all the happening in the world of currencies and macro-economics.

Leave a Reply

Notify of