Dollar Broadly Weaker as Market Sentiment Improves

  • Risk sentiment has gotten a big boost this week; the dollar has come under some pressure
  • President Trump continues to target the WHO; there will be several Fed speakers today
  • Germany and France came up with a compromise for a virus package; UK job figures were surprisingly resilient, but worse is still to come
  • Bank of Japan will hold an emergency meeting this Friday to finalize details of its funding program;  RBA minutes were released
  • Reports suggest China is targeting more Australian exports as the diplomatic spat widens; Indonesia once again went against consensus by standing pat

The dollar is mostly weaker against the majors as market sentiment improves.  Kiwi and Stockie are outperforming, while yen and Swissie are underperforming.  EM currencies are mostly firmer.  HUF and CZK are outperforming, while CNY and SGD are underperforming.  MSCI Asia Pacific was up 1.7% on the day, with the Nikkei rising 1.5%.  MSCI EM is up 1.3% so far today, with the Shanghai Composite rising 0.8%.  Euro Stoxx 600 is down 1.1% near midday, while US futures are pointing to a lower open.  10-year UST yield is down 2 bp at 0.71%, while the 3-month to 10-year spread is down 1 bp +61 bp.  Commodity prices are mostly higher, with Brent oil down 0.4%, WTI oil up 1.7%, copper up 0.3%, and gold up 0.2%.

Risk sentiment has gotten a big boost this week.  Besides positive headlines on a clinical trial for a Covid-19 vaccine, it appears that France and Germany were able to come up with a workable compromise on an EU virus package.  Add to that continued signs of reopening around the world and you have a good recipe for a risk-on backdrop. Of course, there are many risks to this rosy outlook but for now, equity markets are rallying.

The dollar has come under some pressure.  DXY traded last week near 100.556, the highest since April 24.  It has been unable to build on those gains and is trading back below 100 at its lowest level since May 8.  After flirting with the $1.08 area, the euro has reversed higher to trade at its highest level since May 4 near $1.0955.  Sterling also reversed but has underperformed and so EUR/GBP is trading at the highest level since March 31.  USD/JPY is edging higher as risk-on sentiment takes hold, though 108 will be tough to crack.



President Trump continues to target the WHO. He criticized the institution’s links with China and threatening to permanently cut off its funding and leave if changes aren’t made within 30 days. This is a continuation of the stepped-up rhetoric against China, blaming the country (and the WHO) for the pandemic. We think these should be seen as trial balloons, testing what sticks with the electorate as we approach the US elections in November. Several polls have shown him struggling in key battleground states such as Pennsylvania, Florida, and Wisconsin, so we should expect a more combative posture against China in the coming months.  For now, China is keeping mum as we believe its leaders do not want to rock the boat ahead of the National People’s Conference this weekend.  Once that is out of the way, we see risks of rising rhetoric.

There will be several Fed speakers today.  Powell testifies before the Senate Banking Committee.  His prepared remarks were released yesterday and basically mirrored his “60 Minutes” interview.  That is, the Fed is prepared to use its “full range of tools” and leave policy rates near zero until the economy is back on track.

Kashkari and Rosengren speak also speak today.  The Fed pushback against negative rates hasn’t done much.  A burst of risk-on sentiment Monday did have an impact and Fed Funds futures are no longer pricing in negative rates by Q2 2021.  However, the timing has simply gotten pushed out as futures are now pricing in small odds of negative rates by Q3.  We expect more pushback this week and continue to believe that the Fed will never go negative.  April building permits and housing starts will be reported today.



Germany and France came up with a compromise for a virus package.  The two largest eurozone economies will support a EUR500 bln aid package that would come from the EU budget.  It will be financed by additional borrowing and will make grants to member states that have been hardest hit by the pandemic.  Those bonds will be repaid by the EU budget, much of which is covered by Germany.  While not exactly the so-called corona bonds that Italy and Spain have called for, this would be step towards true joint debt issuance as the EUR500 bln proposed is much greater than the EU’s existing debt issuance.

The plan must be unanimously approved by all 27 EU member states.  As we know, this is a process akin to herding cats and Austria has already expressed its opposition to direct handouts.  We would add that even Merkel is on shaky ground domestically and may struggle to win over supporters in her home country.  ECB President Lagarde praised the proposal as “ambitious, targeted and, of course, welcome.”  Needless to say, Italy will be the big winner. Italy’s 10-year spread to German bunds were already on the way down before this event, and we expect it to continue to sub-200 bp in the near term.

UK job figures were surprisingly resilient, but worse is still to come. The headline unemployment rate ticked lower to 3.9% in the three months to March, contrary to forecasts of 4.3%, with an increase of 210K in the number of people employed. Of course, the figures hide the coming storm. Unemployment claims spiked by about 850K, multiple times greater than any print seen during the financial crisis. April CPI data will be reported tomorrow, preliminary May PMI readings will be reported Thursday, and April retail sales and public sector net borrowing will be reported Friday.  This data should start to reflect the impact from the pandemic.


Bank of Japan will hold an emergency meeting this Friday to finalize details of its funding program.  The bank sketched out broad details of the plan at its April 27 meeting, with banks earning 0.1% and not paying any interest to the BOJ on any lending to small businesses that’s carried out.  Reports suggest that the range and scale of the program have yet to be determined.  Other policy settings are not expected to be changed, however.  Next regularly scheduled policy meeting is June 16.

RBA minutes were released.  It kept policy on hold that meeting, and minutes show that the bank saw its policy measures working broadly as expected.  It did discuss financial stability risks and was concerned that housing loan arrears were likely to increase.  The RBA reiterated its forecast of a -10% contraction in H1, noting that reports suggest strong March consumption  was followed by weakness in April.  Preliminary April retail sales will be reported Wednesday, while preliminary May PMI readings will be reported Thursday.  Governor Lowe takes part in a panel Thursday.  For now, clues suggest the RBA is in wait and see mode.  Next policy meeting is June 2 and no change is expected then.

Reports suggest China is targeting more Australian exports as the diplomatic spat widens.  China is retaliating after the Australian government called for an investigation into the origins of the pandemic.  It initially barred meat imports and later slapped tariffs on barley.  Reports suggest China is now looking into restrictions on wine and dairy imports.  So far, iron ore, coal, and natural gas have avoided restrictions and are the big ticket items that would really harm Australia.  Stay tuned.

Bank Indonesia once again went against consensus by standing pat. BI kept rates steady at 4.50%, contrary to calls for a 25 bp cut, which is exactly what happened in April. The arguments in favor of more easing are obvious – the huge economic slowdown – and the case has become stronger with the recovery in the rupiah since early April. The currency has appreciated nearly 10% since then and is down “only” 6% on the year against the dollar. Moreover, inflation is running at 2.7% y/y as of April and so not a big concern given the target range of 2.5-4.5%. We think it’s just a matter of time for the BI to deliver more easing, probably in the next meeting June 18.