Apart from equity markets, the corona turmoil is also causing major turmoil in the currency world. Currencies of oil countries are among the biggest victims. Oil prices have fallen by more than 60% since the turn of the year. This is putting pressure on the export earnings of countries such as Russia and Canada. However, sterling is falling as hard as some oil currencies. The currency went down by almost 10% after mid-February. That exchange rate decline has accelerated in recent days. Currency traders have been spooked by Johnson's corona plans.
Business saved, pound scrapped
The prime minister wants to set aside as much as £330 billion to provide loans to companies, which are in trouble due to the corona outbreak. On top of that, another 20 billion in tax cuts. This is good news for business in Britain. But less good news for the financial health for the country. The national debt is about as big as 85% of the size of the economy. If Johnson implements his plans, that figure will rise to more than 100%. As the country's financial position weakens, investors are less keen on UK government bonds. The interest rate on 10-year government bonds, shot up from below 0.2% to almost 0.9% within days.
Delay, delay, delay
While bond yields flew up, the pound plunged. Against the dollar, the currency fell to its lowest level in more than 30 years. And compared to the euro, the 1:1 level is now getting very close. On Wednesday night, you were still only getting 1.06 euros for a pound. In autumn 2015, it was more than 1.40. Fair is fair: apart from Johnson's massive corona support measures, his stance on brexit also plays a role in this. Negotiations on leaving the EU should have started in early March. Because of the corona outbreak, that meeting was turned into a video conference. But a line went through that too on Wednesday due to all the economic turmoil.
Queuing up for corona vaccine
Despite all the delays, Britain is simply leaving the EU on 31 December. Johnson has until the end of June to push that date back. However, he is taking every opportunity to stress that there will be no opting out or postponement - coronavirus or not. That stance means the chances of a 'No deal' Brexit are rapidly increasing again anyway. With all its consequences. An international think tank, for instance, already predicted that the country will soon be at the back of the queue if a corona vaccine becomes available in Europe. If it really comes to that, a pound will probably be worth as much as a euro. It is to be hoped that Johnson will soon come to his senses and realise that you are stronger together than when it is every man for himself.
Joost Derks is currency specialist at iBanFirst. He has over 20 years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.
