Currencies: A Quick Read on the Current Environment | Lord Abbett

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Fixed-Income Insights

Here’s a brief look at key developments in global currency markets since the advent of the recent volatility.

Amid the ongoing market volatility, we have received numerous questions about the trajectory of the U.S. dollar and movements in other currencies. Here are a few bullets to provide some context about recent developments.

  • The U.S. stock market reached its recent peak on February 19, and in the period between that date and March 9, the U.S. dollar index was actually falling a bit overall. Safe haven currencies--those used as funding currencies in many carry trades, such as the yen, Swiss franc, and euro--were appreciating versus the dollar while emerging market currencies and those dependent on oil or other commodities were falling. Pricing in the prospect of a global recession from the coronavirus impact was really the main factor driving relative spot moves during that period.  
  • Then the large dislocations in the Treasury and credit markets flared up. March 9 was really the first day when the spread between on-the-run and off-the-run U.S. Treasury securities blew out followed by dislocations in the commercial paper market and then the rest of credit. All of this caused a huge run into U.S. dollars. 
  • All developed-market central banks (and most emerging-market ones too) started cutting rates to almost zero (or below) and unleashing versions of quantitative easing. Carry does not matter when liquidity is the primary concern, and U.S. dollar cash is still the most liquid asset.
  • However with the better sentiment and high frequency data out of China and the Chinese Yuan being kept relatively stable, some of the currencies most tied to China have been relative outperformers: Chile, Peru, Taiwan and even South Korea.
  • What might be next? Hopefully as the U.S. Federal Reserve’s dollar swap lines with other central banks, announced as part of its March 23 policy package, combined with the newly announced liquidity facilities, get up and running, these market dislocations will ease and the massive demand for dollars will subside. Then, the foreign exchange markets can go back to “just” pricing in the deep global recession we believe will take place in the first half of this year.

Obviously, the global situation remains fluid. We will continue to monitor developments in the currency markets and provide updates as warranted.



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