Find out Mitrade’s exclusive market forecast and analysis on the global economy and Forex trends. Learn to understand central banks policies and how to trade Forex in times of a pandemic (COVID-19).
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In a trading environment where direction and momentum are being dictated by volatility, it is still imperative to evaluate other Forex inputs through central banks’ policies. Especially when the economic world is changing at such rapid and frenetic pace due to the COVID-19 pandemic, understanding currency flows using fundamentals is still a valid basis for trading.
So here are the Monetary policy changes by central banks that have occurred due to the COVID-19 crisis across the developed currency world:
The Fed: Federal funds rate range cut to 0% — 0.25%, new QE programs have seen the Fed’s balance sheet expand by US$1.9 trillion since February 26. Over the weekend, a newly announced program of US$2.3 trillion in loans via various facilities will also hit the market in the coming days and months. The biggest news here is that the Fed will start buying junk bonds, a support that was never expected by the market and it may explain why equities are rallying so solidly.
The ECB: Further easing of collateral requirements for participants. The duration of these programs will be tied to the Pandemic Emergency Purchase Programme, which is currently open-ended. Rates at the ECB remain below 0% in several instances. However, stimulus in Europe has really come from individual states rather than from the central bank itself as it had basically exhausted itself over the past decade with other financial crises.
The BOE: Will provide “temporary and short term” direct monetary financing to the UK government (these are the same measure it provided during the GFC) while also expanding and extending the “Ways and Means Facility” from £400 million to an ‘open-end’ amount. The goal is to allow the government to spend in the immediate future without having to tap into new gilts.
The RBA: Cash rate to ‘terminal rate’ of 0.25%, target ‘rating’ the 3-year bond to a yield of 0.25%, injecting $90 billion in liquidity loans as well as other cost-effective monetary levers. Rumours it is mulling over corporate debt purchases.
Since mid-January, 25 central banks have eased monetary policy. This has seen the global weighted average policy rate now being below the post-GFC low, and this accommodation is likely to remain in place for at least 18 months. What’s also interesting is the speed of this decline: -66 basis points since December and a whooping -177 basis points since December 2018.
Conclusions for Forex Trading from Central Banks’ Policies in this COVID-19 world
The catch is, with all central banks in highly accommodative modes, using central bank differentials for Forex trading is a little opaque. However, there are themes emerging in this COVID-19 world:
First, the USD continues to perform solidly against all comers even with the unprecedented monetary programs enacted to fight COVID-19. It has started to ease but the risks from COVID-19 remain great and the certainty that comes with the US risk-free rate is too appealing to Forex traders.
Second, the EUR remains ‘lost’ against traditional peers as the IMF and others see it being the most affected region by COVID-19.
Finally, risk Forex that is being backed by policy is outperforming peers that aren’t. If this is of interest, look at crosses rather than pairs to trade.
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https://medium.com/@Mitrade/market-review-taking-stock-of-forex-levers-in-the-covid-19-world-mitrade-28d908c4e511
2020-04-16 03:16:46Z
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