Europe agrees on its recovery plan

It took four days of long and difficult negotiations for the 27 members of the European Union to reach an agreement on the economic recovery plan. At the end of a marathon summit, the joint Franco-German loan project was finally adopted by the European Union on the night of Monday to Tuesday. This €750 billion stimulus plan will be financed for the first time by common debt which can be borrowed by the Commission on the markets. It consists of €390 billion in non-repayable grants and €360 billion in loans. The so-called ‘frugal’ countries threatened throughout the negotiations to derail this massive plan to support the economy which would benefit primarily the southern countries like Italy and Spain according to them. A third of the funds will also be used to combat climate change with the new 2021-2027 budget. ‘We have an agreement. And a good deal! With a 2021-2027 budget of €1.074 trillion and a recovery plan of €750 billion, the European Union has never before decided to invest so ambitiously in the future’, declared the Belgian Prime Minister Sophie Wilmes. Italy should be the main beneficiary of this common agreement. The country is expected to receive €82 billion in grants and €127 billion in loans at a very favourable rate. But this summit is also a great victory and a spectacular revival of the Franco-German pair. The EUR/USD parity, which reflected the optimism of the markets in remaining above 1.1400 since the start of the summit, crossed the 1.1500 mark last night. The single currency is coming out stronger after these four days, especially since the US dollar is being penalised by the situation in the United States. President Trump has warned that the epidemic is likely to get worse before it gets any better. He finally encouraged the population to wear a mask and recognised the extent of the health crisis.

On Tuesday, the United Kingdom resumed in London its negotiations with the European Union to conclude a trade agreement in order to avoid the ‘no deal’ scenario at the end of the year. But the EU and the UK have recognised that serious differences undermine the odds of reaching such an agreement quickly. Among the main points of disagreement are fishing rights, compliance with EU rules and the role of the European Court of Justice. ‘Significant differences […] still remain between us on a number of important issues’, such as fisheries and British sovereignty, Johnson’s spokesman said on Monday. The UK Prime Minister had meanwhile set a deadline at the end of July to come to an arrangement and therefore believes less and less in a favourable outcome. This situation is keeping the British currency under pressure against both the euro, above 0.9000, and against the Swiss franc, below 1.1900. Especially since the latest statistics are hardly encouraging. British households recorded the largest drop in their income since the oil shock of 1975. Real wages have fallen by 4.5% since the start of the coronavirus crisis, despite the aid programmes deployed by the government.

The minutes of the last monetary policy meeting of the Central Bank of Australia show that the institution expects that the policy of low interest rates and aid to the economy would go on for many more months. It is ready to increase its asset buyback programme if necessary but does not foresee interventions in the foreign exchange market, considering that the effectiveness of these is limited. The Australian dollar traded at USD 0.7145 at its highest this year. The Australian currency plunged to USD 0.5510 on March 19 with the onset of the crisis.

Demand deposits with the SNB increased by CHF 2.9 billion last week, marking the fifth consecutive week the figure has increased. Even with a euro above CHF 1.0700, it therefore seems that the central bank is maintaining its activity unlike its Australian counterpart. This while the US Treasury Department should soon publish its next ‘FX Manipulators Report’, which lists the countries suspected by Washington of manipulating their currency. Thailand and Taiwan should be added to the list, while Vietnam and Switzerland will be added to the watch list according to Goldman Sachs.

Gold hit $1,865 an ounce yesterday, its highest level since September 2011. The price of the yellow metal has increased by 22% since the start of the year, favoured by the low interest rate environment and the uncertainties linked to the COVID-19 crisis. Silver also rose sharply and traded at  22.50 this morning, up more than 16% since Friday and its highest since 2013.