US dollar rallies as stock market rebound falters
The Federal Reserve’s efforts to ﬁll the world’s need for dollars by ﬂooding markets with liquidity has so far been only partially successful.
While measures of stress in the interbank lending markets have come down to less worrisome levels, the US dollar rallied hard last week as the greenback remains for now the preeminent safe haven. The currency rose against every other major currency in the world, with the sole exception of the Russian ruble. The latter was buoyed by the sharp rebound in oil prices from multi-decade lows, prompted by news that oil producers were moving closer to cuts in production levels.
Economic data worldwide varied from bad to dreadful, depending on the exact time that it was collected in the past month. The most timely numbers, US jobless claims and Eurozone PMIs of business activity, all posted the worst levels on record by some distance, although this was largely expected.
Most economic data out this week will be fairly out-of-date. The exception will be the weekly jobless claims out of the US, where another record is expected, and combined with the previous two will enable us to paint a complete picture of the damage wreaked on the US jobs market. The Eurogroup meeting on Tuesday will be another point of focus for traders, as public responses to the crisis have become the main driver of market moves.
Last week’s PMIs of business activity in the UK were terrible, though not quite as dismal as elsewhere in Europe. The March composite PMI was revised down to a fresh all-time low 36.0, which is roughly in line with quarter-on-quarter GDP contraction of between 1.5-2.0%. This relative outperformance is, however, cold comfort, as it likely reﬂects the fact that the UK lagged much of the rest of Europe in imposing shutdown measures. We expect the April numbers, the preliminary estimate of which is set for release on 23rd March, to be signiﬁcantly worse.
Economic news out this week will be of limited use. More important will be news regarding the roll out of the SME and income support programmes by both the UK government and the Bank of England.
The PMI numbers out of the Eurozone were as dismal as could be expected, given the early adoption of lockdown measures in most countries. The Italian number, at 17, was probably the lowest number ever recorded in this series in any country.
Amid the awful numbers, we see reason for cautious optimism. The size of the state response from the individual countries and the Eurozone as a whole is enormous, matching the size of the 08/09 crisis. Contagion numbers in both Spain and Italy also seem to suggest that the worst of the crisis has now passed. Both the number of conﬁrmed cases and deaths caused by the virus have shown encouraging signs of slowing in these countries, a contrast to both the UK and the US that remain very much within the ‘high growth phase’ of the virus.
The carnage in the US jobs market was highlighted by the new record setting weekly jobless claims, 6.6 million to be exact. The payrolls report for March, while not as bad, is less meaningful as the survey was taking in mid-march, before most US states decreed various degrees of lockdown.
The massive job destruction points to a weakness of the US economy during a temporary shutdown: the absence of job protections and mechanisms to regulate and slow the dismissal of workers means the hit to US employment will likely be larger. At some point in the next few weeks, we expect that markets will realise this and it will result in a rebound of the euro vs. the US dollar.
The Swiss franc solf-off heavily against a broadly stronger US dollar last week, a sell-off that would have been more pronounced if not for SNB intervention. We saw another signiﬁcant increase in total sight deposits, suggesting that the central bank is ramping up its efforts to mitigate franc strength. Sight deposits surged by 6.7 bn CHF, its second-largest increase since early-2015.
Last week’s macroeconomic data painted a rather bleak picture. Inﬂation dropped further into negative territory, largely due to a sharp drop in oil prices, coming in at -0.5% in March, its lowest level since early-2016. While this resembled similar declines witnessed in other economies, it is still not an encouraging sign. More negative news came in the form of the March manufacturing PMI, which dropped deeper into contraction and its lowest level since 2009. This is likely to deteriorate further in April given the overall situation in Europe is unlikely to be managed within the coming weeks.
This week we’ll receive the data on the country’s FX reserves (Tuesday), which will be a nice addition to the weekly sight deposits data and should paint a clearer picture of the SNB’s March intervention. We’ll also receive unemployment data for the same month (Wednesday), which is expected to show an uptick from the previous month’s reading.
In line with the broadly stronger US dollar, AUD eased back last week, although the currency is still currently trading around 10% higher than March’s multi-decade lows. In our view, the sell-off witnessed in AUD last month was slightly excessive and driven more by market panic than anything else. While there remains a long way to go, the number of cases of the virus in Australia has not, as of yet, followed the same exponential growth trend witnessed in other countries around the world, which may be behind some of the currency’s rebound. Should this comparatively less aggressive spread continue than we may see some support for AUD in the short-term, although this remains a big if.
Attention this week will be back on the Reserve Bank of Australia, which is set to meet on Tuesday. With rates already at the bank’s effective lower bound, there will be no rate cut, with focus to instead be on policymakers’ comments on the impact of the COVID-19 virus on the Australian economy. The question for investors will not be ‘if’ the economy will enter into a recession, but how long it will last and to what magnitude.
The Canadian dollar outperformed almost all of its major peers last week, holding its own against the broadly stronger USD. The rationale for this is the sharp move higher witnessed in oil prices last week that were buoyed by hopes that Russia and Saudi Arabia may be close to ending their oil price feud.
This week’s main focal point will be Thursday’s March labour report, expected to show a sharp number of net jobs lost and jump higher in unemployment. While the survey will not cover the entirety of the month, the fact that shutdowns were implemented in Canada prior to much of the US suggests that the report is likely to be comparatively worse than last week’s US data. A 250k contraction in net jobs is expected, which would take the jobless rate to around 6.6% and its highest level since early-2017. Similarly to the US, we think that this would be just the tip of the iceberg, with the worst yet to come.