News & Analysis

Little has changed from this morning’s session as markets still trade off of headlines that the Bank of Japan will increase their QE program, Australia will begin to relax lockdown measures, and the worst affected European nation’s eye exit plans.

In this renewed risk climate, the Australian dollar is leading gains within the G10 space, with the move similar to that seen in the Kiwi dollar last week on exiting plans, while the pound is also bid despite Prime Minister Johnson erring on the side of caution with the UK’s exit plan. In the EM space, the South African rand is leading gains despite limited onshore liquidity due to locals enjoying a bank holiday. Meanwhile, the Swiss franc is the only G10 currency taking sustaining losses against the greenback as sight deposit data shows the largest intervention by the SNB this year in the week ending April 24th as EURCHF approached the 1.05 level.


Sterling is up nearly half a percentage point today as Prime Minister Boris Johnson returns to cabinet. Major UK periodicals focused this morning on reports that the cabinet was split on how long containment policies should continue, with the Prime Minister’s aides telling journalists that this was sure to be the decision that defines Johnson’s time in office. However, despite the speculation, the Prime Minister took little time to head to the front of Downing Street to address the nation. Johnson said the UK is in no rush to draw up exit plans, which are being discussed by many mainland European governments as the data slows, with the UK government adopting a conservative approach dominated by the progression of the data. Johnson stated that no adaptation to the current policies will be forthcoming until phase one is over. Focus in options markets remains on the Brexit extension deadline coming up in June, with 3-month risk reversals still showing a deep bearish bias, similar to that seen ahead of the March 2019 deadline.


Graph: GBPUSD 25 delta risk reversals shows market is bracing for yet another Brexit deadline as talks continue without extension to December deadline in play


The Australian dollar is leading gains in the G10 today as Queensland and Western Australia, two of the states that enforced the strictest isolation measured in the first place, are now easing lockdown measures for certain residents. In Queensland, non-essential shopping will be permitted for shops where the two-square-metre rule is observed, and residents are allowed to partake in activities such as leisurely drives, outdoor picnics and relaxing at the beach. Although, social interactions are to be limited to households only. Whereas in Western Australia, the rollback sees non-work gatherings of up to 10 people permitted, with the same limit allowed for weddings, funerals and house viewings. The slight opening up of Australia’s economy has prompted the currency to rally on the hopes that the economic damage caused by social distancing measures may not be as serious as previously thought. Although the measures taken are only small thus far, the currency reaction is befitting with the idea that those economies first through the door will see the largest currency gains.


The Swiss franc is the only anomaly in the G10 space as it sits in the red against the euro and trades roughly flat against the dollar. Data released this morning from the Swiss National Bank (SNB) shows the largest rise in domestic sight deposits since 2015, back when the franc was de-pegged and the SNB intervened to prevent a serious bout of franc strength. Domestic sight deposits are the markets best proxy for central bank intervention in FX markets as it only publishes intervention data on an annual basis. Sight deposits increase when the SNB purchases EUR and USD from banks directly, in effect increasing the amount of CHF in the system which is then parked at the central bank in the form of reserves in the interim. Sight deposits rose by 13.4bn francs ($14bn) to a record of 651bn francs in the week ending April 24, marking the largest rise since January 2015.


Graph: Sight deposits rise by the most since Jan 2015, putting pressure on CHF as it struggles to join G10 risk rally


The Bank of Japan has stepped up monetary support by enhancing liquidity provisions to the financial system through a wide set of different assets:

  • The most symbolic measure comes in the form of an unlimited target for JGB purchases, previously set at an annual increase of Y80tr. This move could prove somewhat meaningless considering that public debt markets have been broadly balanced in line with the 0% target for the 10-year yields, which was maintained at this morning’s meeting. However, the move contains a rather strong signal of support aimed at reinforcing the stimulus package set by the government amid the coronavirus crisis, while also helping to consolidate BoJ´s 2% inflation commitment in the long run.
  • On the other hand, the more targeted boost to corporate finance liquidity has been the more crucial action this time around. In line with risk-taking moves by other major central banks as the Fed and the ECB, the BoJ widens its willingness to invest in riskier private markets such as corporate bond and commercial paper markets. The move is aimed at improving liquidity conditions in these markets and to increase the transmission of policy to the real economy. The bank increased the upper limit of its corporate bond and commercial paper purchases by almost 300% to Y20trn in total, while extending the maturity length to 5 years and loosening single issuer rules. The announcement saw swift relief in corporate yields across several tenors, which had jumped over 8-times their previous level in some sub-investment grade markets.
  • As per the Special Funds-Supplying Operations to Facilitate Corporate Financing regarding the Novel Coronavirus, looser regulatory conditions were conducted too. The fund was implemented last March, but is was strengthened today with expanded eligible collateral and counterparties, as well as with favorable interest rate conditions to financial institutions.

Despite the broadened monetary base implied by this set of tools, the Japanese yen has broadly strengthened on the news. Rationale is that the stimulus boost reinforces economic prospects and reduces uncertainty on the domestic recovery path. 



Simon Harvey, FX Market Analyst
Olivia Alvarez Mendez, FX Market Analyst



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