Interest Rates and the Dollar Going forward

On March 23rd, Bannockburn’s Chief Market Strategist, Marc Chandler, hosted an update call where he shared ways in which this crisis is different from what we have seen in the last generation.  Unlike the Great Financial Crisis, the tech bubble, and the S&L Crisis, the current crisis did not begin in the financial sector, but the real economy. Also, what follows from that is that this crisis is about liquidity, while the GFC was about counter-party risk. Here is the full audio of the call.

Five main topics were covered:
1. The economic hit like we have never experienced as significant parts of the economy are shutdown.  Flash March PMIs tomorrow will give an inkling and the weekly jobless claims, which surged by a third in last week’s, are forecast to jump five-fold (~1.45 mln) in this Thursday’s report and that is unlikely to be the peak.  See the chart below (09 peak was ~665k).
2. The US monetary policy response is three-fold:  a) rates and asset purchases, b) other facilities to support commercial paper, money markets, asset-backed securities, corporate bonds, and soon, small and medium-sized businesses, and c) adjust the regulatory and macroprudential rules to the current crisis.
3. Briefly sketched how other countries are responding, especially Germany and the UK.  Also, how countries are varying in their responses, which will generate different results.
4. Described the two general hypotheses about the dollar’s surge:  safe-haven vs. shortage and why I am more inclined to the latter.
5. Why a historical perspective may help in these dark days, that the resiliency of the human spirit and unstoppable force people pulling in the same direction.  The response may begin slowly, but the machinery of governments, central banks, industry, and hardworking people has now become engaged.  Things that are ruled out in normal times becomes possible, nay, necessary now. 

Don’t hesitate to reach out if you have questions or would like to talk through any currency related strategies.

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