Currency-market volatility exploded higher on Wednesday with evidence of position capitulation as the demand for cash remained extremely strong.

Currency-market volatility exploded higher on Wednesday with evidence of position capitulation as the demand for cash remained extremely strong.

There was very strong dollar demand as the currency pushed to 3-year highs amid the strong demand for liquidity with EUR/USD dipping to lows near 1.0800.

The Euro recovered slightly after the ECB announced a new bond-buying programme. Sterling came under very heavy pressure with GBP/USD sliding to 35-year lows below 1.1500 with EUR/GBP at 11-year highs.

Commodity currencies weakened very sharply with AUD/USD at 17-year lows before a corrective recovery as the Reserve Bank cut interest rates and introduced bond purchases. Governments continued to announce fresh fiscal support measures.

During the European session there were reports of difficulties in trading in the Italian bond market due to a lack of liquidity. There were also reports that the ECB could be given increased scope for asset purchases, but market tensions remained very high.

US housing starts declined to an annualised rate of 1.60mn from 1.62mn the previous month, although this was above consensus forecasts while building permits declined to 1.46mn from 1.55mn. Data releases had no impact, but jobless claims data on Thursday will be monitored closely.

Although global central banks have continued to inject liquidity into money markets, overall demands have continued to support the US dollar as funds looked to raise cash. The dollar remains by far the most liquid global currency which continued to drive strong demand.

Volatility surged again late in Europe with the US dollar continuing to gain very strong support with a push to 3-year highs and the Euro declined sharply. Commodity-related currencies also remained under very heavy pressure with the Australian dollar at fresh 17-year lows. As pressure intensified, the EUR/USD dipped to lows at 1.0800 before a recovery to 1.0900.

After an emergency meeting, the ECB announced additional asset purchases of EUR750bn until the end of 2020. EUR/USD rallied to near 1.0980 in an immediate reaction before retreating to near 1.0900 as the US dollar maintained an extremely strong tone. Commodity currencies slid to fresh record lows before a tentative correction with volatility inevitably remaining extremely high in the short term.

Global equity markets remained under pressure ahead of the New York open, but wider dollar demand continued to dominate. US Treasury Secretary Mnuchin stated that parts of the economy are being closed down to destroy the coronavirus. The US will provide whatever economic aid is needed to support the economy and an injection is being planned into the exchange stabilisation fund. President Trump signed a second relief package, while negotiations within Congress to provide a wider stimulus package continued amid a lack of consensus.

Democrat Presidential candidate Sanders stated that he would assess his campaign with expectations that he would withdraw. Given the surge in volatility, there will be speculation that G7 will intervene in currency markets to provide an element of stability. US bond yields continued to move higher which helped underpin the US currency. USD/JPY pushed to highs just above 108.50 before a limited correction as underlying US demand continued. Global equity markets moved lower in Asia, but the dollar continued to gain underlying strength with USD/JPY highs around 109.50 before a correction to below 109.00.

Sterling remained under heavy pressure on Wednesday amid fears over the domestic and global growth outlook. Wider dollar strength was also a key element undermining the UK currency. New Bank of England Governor Bailey stated that the bank was watching Sterling developments closely and that the moves would be taken account of at next week’s policy meeting. He reiterated that negative interest rates in the UK would likely hurt lending. Bailey also stated that large companies had found it more difficult to operate over the last week and he also implored companies not to lay-off workers before consulting with the government and central bank.

Ahead of the New York open, there were reports that restrictions would be imposed on traffic in and out of London with tight restrictions on the opening of retail outlets.

Overall confidence in the UK outlook remained extremely fragile amid fears over a deep recession while a sharp global downturn was also a key element undermining the UK currency, especially with oil prices continuing to slide. The UK currency collapsed further late in Europe with 25-year GBP/USD lows below 1.1500.

Economic Calendar

08:30SNB Monetary Policy Assessment (Q/Q)--
08:30CHF SNB Interest Rate Decision--0.75%
12:30USD Current Account Balance--124.1B
12:30USD Philadelphia Fed. Manufacturing Index(MAR)2836.7
12:30CAD New Housing Price Index (M/M)(FEB)-0
12:30USD Initial Jobless Claims220K211K
12:30USD Continuing Jobless Claims1.725K1.722K
15:17JPY BoJ Rate Decision-0.10%-0.10%

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.