London Open: Dollar demand soars, hammering global capital markets

London Open: Unbridled dollar demand

Echoes of  2008, when money-market mutual funds 'broke the buck', continue to resonate following the Fed's latest policy backstop.

It announced a Money Market Mutual Fund Liquidity Facility (MMLF). The Boston Fed will be able to make loans available to eligible financial institutions, secured by purchases from money market mutual funds. The US Treasury will provide $10bn of credit protection from the Exchange Stabilization Fund.

Major government and central bank policies are attempting to support the flow of credit while providing liquidity in financial markets but appear defenseless against the super steamroller of extreme weakness across equity, bond and credit markets.

The ECB is praying that its "Whatever It Takes" sequel doesn't disappoint as an enormous global recession is underway.

Markets will be shocked by the extent of job losses to come in North America and Europe next week.

The ECB Policy Deluge

The ECB has announced a EUR750 bn pandemic asset program. This comes after BTP-Bund spreads widened to 320bp on Wednesday, heaping pressure on the ECB to act. In the meantime, the Eurogroup has suspended fiscal rules enabling national governments to work as they see fit.

The ECB has been criticized for its lukewarm response so far, especially in the context of President Lagarde's underwhelming post-meeting press conference last Thursday., so this announcement will go some way to addresseing those concerns. However, fixed-income price action globally this week suggests that while the decision will be welcome, it may not prevent further market sell-offs.

And in an anything you can do I can do better routine, US President Trump signed a coronavirus relief bill, with more stimulus planned.

It's amazing how desensitized we've become to CBs dropping huge numbers and massive amounts of cash in the market’s lap. Wartime economics is not going to help with everyone in lockdown, sitting at home watching Netflix – even more so with traders betting the over and under on next week's US initial claims + / - 1 million new applications.

Wartime economics suits politicians, but wartime maximizes production whereas lockdowns minimize production as “Grandes Vacances" in most of Europe will continue to accelerate, regardless of how much money the ECB throws at the left-hand side of the V as we move further and further into unchartered territory.

Currency markets

Asia has been less than enamored by the ECB’s efforts as Kospi trading halted after an 8% decline, which comes on the heels KRW selling today amid the non-stop equity outflows.

The strong US dollar is slamming global capital markets like a sledgehammer today. Unbridled US dollar demand is causing extreme AUD, NZD and KRW weakness in the Asia morning, echoing broad-based USD strength in the dash for dollars overnight.

EM central banks are in a world of pain, unable to justify selling their USD reserves in an environment where their local banks are seeing massive USD demand. That merely signals more USD strength to come.

RBA cut the cash rate target 25bp to 0.25%, saying it’s to conduct longer-term repo operations while keeping some powder dry. The RBA declined to announce QE which is a disappointment vs. consensus.

Oil markets 

Crude oil is having a bit of a tough day today. Much of the impetus for the fall came after the headline earlier that Saudi Arabia's oil minister told Aramco to keep supplying crude at a pace of 12.3mbpd over the coming months, and it’s been one-way traffic since then. 

The continued containment and lockdown response of the world's major economies in response to Covid-19 will advance to a sharp impact on oil demand, but the OPEC+ producer group's cranking up of supply into these unprecedented conditions will trigger even more selling.

Gold Markets

The gold narrative hasn't changed: provided there a cause for forced liquidation of other assets, gold prices will probably remain capped over the near term. 

But as the demand for cash becomes more pervasive as personal liquidity and capital preservation become a dominant consideration in investors' decision making, bullion owners in any form – physical, paper or scrap – will probably continue to liquidate in order to boost capital levels the more protracted the Covid-19 global lockdown extends.