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Assessing the EM policy reaction-function in the context of a COVID-19 induced recession
Weekly investor research
23 March 2020
The liquidity collapse resulting from the cumulative effects of the expected recession, the decline in oil prices and extreme market volatility was the main problem facing global markets last week. Liquidity dried up everywhere. Companies tapped any available credit lines in the banking system, thereby forcing the banks to sell liquid securities and reducing trading limits just as asset management companies attempted to sell assets to cover redemptions. At the same time, currency traders sold G7 currencies to raise US dollar liquidity on concerns that London – the world’s largest FX market – would shut down in case regulators forbade trading from home as requirements for social distancing in order to combat the spread of the COVID-19 coronavirus were ramped up. The surge in the demand for US dollars to cover collateral positions precipitated a crash in G7 currencies versus the Dollar.