- Coronavirus is upending markets in different ways, including currencies.
- The ECB and the BOE announced new bond-buying schemes and sent the respective currencies higher.
- Concerns about inflation are left for the future.
Oversupply leads to price falls – that is how it usually works in economics. When central banks announced they are printing money from thin air – Quantitative Easing – currencies used to tumble. However, the rapid spread of Covid-19 and the swift economic paralysis that is triggered by keeping people at home is changing it.
The dollar tumbled when the Federal Reserve unleashed trillions of dollars to mitigate the effects of the financial crisis. It surged when then-Chairman Ben Bernanke sent shivers down investors' spines in the 2013 "Taper Tantrum". When then-European Central Bank President Mario Draghi announced a massive money-printing scheme, the euro tumbled down.
Those moves – and others from the UK, Japan, and elsewhere – all made sense. But this time is different.
The ECB held an emergency meeting on March 18, and announced an immense €750 billion bond-buying scheme. Instead of falling in response to the night-time decision, EUR/USD surged in response.
On March 19, Andrew Bailey – only on his fourth day in the job as BOE Governor – cut rates to 0.10%, the lowest since in the bank's 300+ year history. Moreover, he added £200 billion to the bank's QE program – an increase of 45%. Also here, the pound surged.
How is money printing positive for the currency?
The answer is simple. The massive lockdowns are inflicting severe economic damage and many jobs cannot be performed from home. Governments are moving forward to mitigate the extraordinary downfall by providing support to individuals and businesses, from waiving mortgage payments, providing loans and other types of economic stimulus.
Central bank support is needed to fund trillions worth of programs that are crafted on the move. Without monetary backing, the "bond vigilantes" would flee from bonds, choking countries with high borrowing costs. Therefore, money printing is good for stabilizing the economy – and therefore for the underlying currencies as well.
What about inflation?
Central bankers have been doing whatever they could to lift inflation and it refused to budge – even in the US, with near full employment. Models suggesting that a strong economy triggers inflation had been upended long before coronavirus came to town.
And now, coronavirus is already triggering layoffs or unpaid leave at airlines and amid automakers. More layoffs are likely coming, especially in tourism, restaurants and more. With people out of jobs, there is a low risk of runaway inflation. Are policymakers sowing the seeds for a future rise in prices? Perhaps, but that may take years.
Monetary finance seems the name of the game, as funding to counter coronavirus and its vast economic impact – and thus keeps the underlying currencies bid – contrary to logic in normal times.
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