Equities have just logged their worst quarter in decades; the US logged its worst first quarter on record and worst quarter since 1987 in respect to the DOW, the ASX its worst quarter in over 30 years, Europe the worst quarter since 2002 I could list dozens more.
Currencies too have seen huge flows and some of the steepest declines in beta currencies since the global financial crisis. While the likes of EUR, CHF and JPY have moved in atypical fashions considering the financial climate.
The first quarter has seen a stereotypical bear eventuate, the rapid up and down swings of several percentage points intraday a perfect example of this.
What is also core to a bear market has been the flow of trade from Emerging Market to USD assets. Outflows have been solid and explain why the USD hasn’t really fallen despite the Federal Reverse doing effectively QE ‘unlimited’.
The key question I hear from traders currently is: have seen the low and will risk rebound? I see this question as a by-product question to the interim environment.
In my eyes, the key question to evaluate possible future market movements is: what the post-COVID-19 global economy looks like? Understand this and we can evaluate currency direction.
There are probably two possible outcomes to this question:
1. The collapse of the petrodollar and global trade leading to a deep and prolonged crash of the global economy that neither fiscal nor monetary levers will stabilize.
Worst-case scenario but has to be considered. It would be a confirmation that the standard of living and asset prices of the globe pre-COVID-19 were artificially inflated. It would likely see a complete reset of the global economy and markets. It would be like unpegging all currencies at once. Currency pair value would be hard recognised, but the USD would, most likely, emerge as the global standard as all others revalue around it.
2. COVID-19 is contained, a vaccine produced the health crisis slows. Couple this with an immense monetary and fiscal stimulus that limits the crash, this leads to containment in market volatilities.
This outcome is the one global leaders and health experts are trying to ‘reach’. Programs being rolled out by G20 leaders are designed to see this outcome, and the immense stimulus being pushed out is only the beginning in my view.
However, what this outcome means is the post-COVID-19 globe although similar to the pre-COVID is going to have a huge increase in State presence. We are realistically seeing levers being introduced that has been theorised by Modern Monetary Theory. Therefore, in the post-COVID-19 world does this also mean a ‘revaluation’ of currencies as States moves to embrace new world economic policy settings? The USD not falling after all the stimulus the US has put in suggest it is. Risk-free rates and EM shelling will lead to one thing – USD appreciation.