The global response to the coronavirus outbreak has been, while without overt coordination nevertheless coordinated.
- G10 policy rates
- and the expectations ahead for those policy rates
have converged towards zero or below (and with QE thrown in)
Rates and rate expectations are two of the huge drivers of FX divergence.
We are going to have look at other drivers ahead for some months to come .
- Keep an eye out for when monetary policy divergence (on the outlook for rates and then rates themselves) by country, these divergences will be small but there will be heightened sensitively and that'll impact FX pricing.
Fiscal spending right now is supportive but as the crisis eases back focus will switch to imbalances that are being compounded, countries with bigger deficits will be at risk.
Pretty soon too we will begin to see renewed focus on other factors come back into play, such as Brexit. Another thing to watch for are idiosyncratic exits from (or at least towards) lock down restrictions. Australia, for example, have done a (relatively) great job at containing the spread (NZ also) and may move to earlier easing of restrictions (his has already begun in parts of the country - which should be supportive for the currency as business recovers - as China also recovers is it should be a positive for Australian exports (and thus currency) also.
