Dollar Mixed as Markets Consolidate

  • The situation in Italy and Spain continues to plateau in terms of deaths and new cases, but the focus remains on the US
  • Weekly jobless claims will be the data highlight today; Florida finally went on lockdown
  • Canadian government officials now put the total cost of its fiscal package to combat the virus impact at around CAD250 bln ($176 bln)
  • The EU has broken into two camps with regards to their visions for a virus rescue plan
  • Oil futures shot up today on a few different headlines
  • The Reserve Bank of New Zealand ordered banks to stop paying dividends to their parent companies

The dollar is mixed against the majors as markets consolidate after yesterday’s moves.  Nokkie and Kiwi are outperforming, while euro and yen are underperforming.  EM currencies are mixed too.  RUB and TRY are outperforming, while ZAR and CZK are underperforming.  MSCI Asia Pacific was down 0.3% on the day, with the Nikkei falling 1.4%.  MSCI EM is up 1.1% so far today, with the Shanghai Composite rising 1.7%.  Euro Stoxx 600 is up 0.4% near midday, while US futures are pointing to a higher open.  10-year UST yields are up 1 bp at 0.59%, while the 3-month to 10-year spread is up 2 bp to stand at +57 bp.  Commodity prices are mostly higher, with Brent oil up 10.5%, copper up 0.7%, and gold down 0.2%.

The situation in Italy and Spain continues to plateau in terms of deaths and new cases, but the focus remains on the US. One popular forecasting model (by the Institute for Health Metrics and Evaluation) projects another fourteen days until the apex of deaths in the US, after which the curve should hopefully begin to flatten. There have also been reports that China masked the true extent of the virus outbreak, even as that nation is now grappling with a second wave of infections.

The dollar is trading sideways as markets consolidate after yesterday’s moves.  The euro has retraced nearly half of its recent gains and a break below the $1.09 area would signal deeper losses.  Sterling has held up better, which has pushed the EUR/GBP down to new cycle lows.  Break of the .8745 area would set up a test of the February low near .8277.  USD/JPY remains stuck below 108 and we see risks of a break below 107 when risk-off sentiment picks up again.

 

AMERICAS

Weekly jobless claims will be the data highlight today.  The reading will be for the week ended March 28, with 3.7 mln expected vs. 3.283 mln last week.  Forecasts are again all over the place, ranging from a low of 800k to a high of 6.5 mln.  Since the previous weekly survey was completed, more than 15 states have gone into some form of lockdown.  Also, technical glitches prevented many from filing the previous week and so we see upside risks to this week’s reading.

Florida finally went on lockdown.  After weeks of rejecting such calls, Governor DeSantis yesterday ordered Florida residents to stay home.  Florida is the third largest state with a total population of over 21 mln.  Pennsylvania moved to full lockdown yesterday too.  Parts of the state were already on lockdown but now, all 13 mln residents (making it the 5th largest state) are required to comply.  Nevada also went on lockdown but is relatively small with a population of 3 mln.  As the lockdowns spread to more states, upward pressure will remain on jobless claims and eventually, the unemployment rate.

Some minor US data will be reported today ahead of tomorrow’s key jobs report.  These include March Challenger job cuts, February trade (-$40.0 bln expected), and factory orders (0.2% m/m expected).  It’s all old data, however, and will have no impact on the Q2 outlook.

The Fed’s latest dollar funding facility is clearly meant to prevent chaos in the world’s largest bond market.  By allowing foreign central banks to temporarily access dollars with US Treasury repos, the Fed is hoping to prevent forced sales of USTs.  Weekly Fed custody data show that foreign central banks sold over $100 bln of UST holdings in the three weeks ending March 25.  Recall that during that period, the US Treasury market stopped functioning normally as too many investors rushed to sell their holdings to raise cash.  Total Fed custody holdings stand at $2.89 trln currently.  According to the latest TIC data, countries that have large UST holdings but no Fed swap line in place include China, Hong Kong, Taiwan, Saudi Arabia, India, Thailand, and Israel.

Canadian government officials now put the total cost of its fiscal package to combat the virus impact at around CAD250 bln ($176 bln).  Finance Minister Morneau broke down the major portions as follows:  CAD71 bln for wage subsidies, CAD105 bln for direct support to companies and households, and CAD85 bln for delayed tax filings and tax rebates.  Morneau refrained from giving an updated budget deficit forecast, but we note that the CAD250 bln figure represents about 10% of GDP.  Canada reports February trade (-CAD2.4 bln expected).

 

EUROPE/MIDDLE EAST/AFRICA

The EU has broken into two camps with regards to their visions for a virus rescue plan.  France has proposed the creation of an economic recovery fund that would be funded by “the joint issuance of debt instruments to mutualize the cost of the crisis.”  France also proposes that the European Stability Mechanism be used to set up credit lines specific to the impact of the virus.  Germany and the other so-called creditor nations have so far resisted the so-called debt mutualization.  However, the Netherlands is hoping to compromise with a proposal to create an emergency fund of around EUR20 bln that can only be used for virus-related emergency aid.

Elsewhere, the European Commission will reportedly unveil a EUR100 bln plan to help member governments pay companies to keep workers on the payroll.  It appears to be some sort of lending scheme underpinned by guarantees from EU member states.  What’s interesting is that after a country asks for aid, the EU would sell bonds backed by those guarantees on international debt markets.  If this plan moves forward, this sort of shared liability would go a long way towards establishing debt mutualization.  That’s a mighty big if, as Germany and others will surely resist.

Despite significant support from the ECB and central governments, corporate credit spreads in Europe remain very elevated. The Itraxx crossover index (high yield) is still over 600 bp, about three times higher than at the start of the year. The moves have been less dramatic for the respective IG and financial sector credit indices, but both are still well above levels seen over the last several years. The ECB’s balance sheet surpassed €5 trln last week as it ramps up its purchase programs.

Oil futures shot up today on a few different headlines. First, President Trump is due to meet with the heads of large US energy companies on Friday. It’s unclear what could come out of it, but it suggests the administration is putting the troubles in the sector high on his priority list. In parallel, he will continue trying to persuade Saudi Arabia and Russia to agree on some sort of supply curb – though we remain skeptical. Separately, reports suggest that China will begin to fill up its oil reserves.

 

ASIA

The Reserve Bank of New Zealand ordered banks to stop paying dividends to their parent companies.  This follows similar moves in the eurozone and UK to help shore up the financial systems.  The move directly impacts Australia’s four largest banks, which typically use the dividend payments from its New Zealand subsidiaries to pay out their own dividends to their shareholders.  RBNZ Deputy Governor Bascand said the move is meant to increase capital levels to  “further support the stability of the financial system during this period of economic uncertainty.”