Dollar Powers Ahead as Equity Markets Sink Again

  • The dollar’s recovery has been nothing short of spectacular
  • The massive fiscal spending planned is starting to have an impact on the back end of sovereign yield curves
  • The White House and Fed are taking aggressive measures; Brazil COPOM is expected to cut rates 50 bp to 3.75%
  • Peripheral bonds are underperforming massively; the UK government and the BOE came out with a huge and coordinated rescue package
  • Japanese banks took up $32 bln from the Fed’s first swap operation; cross currency basis swaps have already started to normalize

The dollar is mostly firmer against the majors.  Yen and Swissie are outperforming, while the Antipodeans are underperforming.  EM currencies are mostly weaker.  PHP and RON are outperforming, while MXN and RUB are underperforming.  MSCI Asia Pacific was down 2.5% on the day, with the Nikkei falling 1.7%.  MSCI EM is down 3.2% so far today, with the Shanghai Composite falling 1.8%.  Euro Stoxx 600 is down 4.7% near midday, while US futures are pointing to a lower open as trading was halted after limit down.  10-year UST yields are up 3 bp at 1.11%, while the 3-month to 10-year spread is up 4 bp to stand at +98 bp.  Commodity prices are mostly lower, with Brent oil down 3.5%, copper down 4.3%, and gold down 2.0%.

The dollar’s recovery has been nothing short of spectacular.  DXY dropped sharply from the February 20 peak to the March 9 trough in twelve trading days.  It basically recovered that ground in only six.  After matching the February high near 99.91, the next target for DXY is April 2017 high near 101.34.  The euro feels heavy near $1.10, while cable is making near lows for this move below $1.20.  Yesterday, both broke below key support levels that sets up tests of $1.0780 and $1.1960, respectively.

Markets are no longer trading on the fundamentals, to state the obvious.  To make matters worse, many markets are not functioning properly, making the moves even more unpredictable in terms of direction and magnitude.  The Fed and other policymakers are trying to address these dislocations, but more and more stresses are being seen.

The massive fiscal spending planned is starting to have an impact on the back end of sovereign yield curves. Granted that we are nowhere near levels seen a few years ago, but the move has been very sharp, especially in the US. The 2- to 10-year curve has steepened from 25 bp at the start of the month to 68 bp now, while the 3-month to 10-year yield is currently trading around 99 bp.  This is the highest since October 2018.

If the steeper yield curves last, they could become a much-needed tailwind for banks. Unfortunately, we don’t think the curve is steepening for “good reasons,” such as improved economic outlook, but due idiosyncratic issues in the Treasury market, including the deleveraging of risk-parity trades. This means that the usual correlation between a steepening curve and outperformance of the banking sector may not hold.


The White House is discussing a stimulus plan worth $1.2 trln, up from the initial $850 bln proposal.  Like Hong Kong and other nations, the US is considering so-called helicopter money to the tune of $1000 (or more) to every American.  The plan would include $300 bln for small business loans, $200 bln in stabilization funds, $250 bln for direct cash payments (with a possible second round worth $500 bln), and tax deferrals.  Note that this would be separate from the bill already passed by House Democrats.

The Fed restarted several facilities that were first introduced during the Great Financial Crisis.  The Commercial Paper Funding Facility can be tapped by companies to purchase commercial paper (CP) rated A1/P1.  While Treasury Secretary Mnuchin said the Fed could purchase up to $1 trln of CP, the facility is really meant to maintain a functioning market by providing assurances that the Fed will always be there as a buyer of last resort.  The Primary Dealer Credit Facility (PDCF) will provide low cost 90-day loans to primary dealers of USTs.  Mnuchin said “The establishment of a PDCF will help address illiquidity, mitigate disruptions in funding markets, support smooth market functioning and help facilitate the availability of credit to American workers and businesses.”

During the North American session, the US reports February building permits and housing starts.  The big data surprise this week was February retail sales, which came in much weaker than expected even before the virus hit.  Canada reports February CPI data, with headline is expected to fall to 2.1% y/y from 2.4% in January and common core is expected to remain steady at 1.8% y/y.  WIRP suggests 35% odds of another rate cut at the April 15 meeting, rising to over 50% at the June 3 meeting.  USD/CAD is on track to test the January 2016 high near 1.4690.

Brazil COPOM is expected to cut rates 50 bp to 3.75%.  A handful of analysts look for either no cut or a smaller 25 bp cut.  IPCA inflation was 4.01% in February, right at the 4% target.  However, policymakers are focused on boosting the sluggish economy.  FX intervention by the BCB is likely to continue.  However, the bank’s communication could be clearer as it’s hard to infer their intention.



The coronavirus has accomplished what the Great Financial Crisis and the Eurozone crisis could not, and that is to loosen up German purse strings.  Chancellor Merkel’s government has already pledged significant domestic fiscal stimulus, but reports suggest that Germany is now open to the issuance of joint EU debt.  Italian Prime Minister Conte reportedly broached the subject yesterday and rather than shooting it down, Merkel said German Finance Minister Scholz and others should explore it.  Up until now, fiscal stimulus has been on a country by country.  Issuing joint EU debt would take Europe one step closer to fiscal union.

Peripheral bonds are underperforming massively.  Italy’s 10-year yield is up nearly 50 bp today, and the spread to Germany is shot up to 317 bp. This is the highest since October 2018, when Italian budget shenanigans spooked the markets.  The 10-year spread is on track to test that month’s high near 327 bp.  Spreads for Spain and Portugal have also begun to take off, but to a smaller extent.

The UK government and the BOE came out with a huge and coordinated rescue package to support the local economy during the virus paralysis. It will include help for airlines, the hospitality industry, and other businesses with £350 bln worth of government-backed loans, grants, and tax cuts.  A 3-month mortgage holiday for those affected was also announced.  The package adds up to over 15% of GDP. On the BOE side, there will be a new lending facility for businesses.

Several other countries are also coming out with new measures. Spain’s government will enact €100 bln of guarantees in company loans and will grant €17 bln in direct loans. Spain’s program is estimated at 20% of GDP. Earlier in the week, France announced a €300 bln loan guarantee program and €45 bln in aid. There has also been talk of nationalization in France after the Italian government announced it was taking control of  Alitalia.

Poland’s central bank cut rates by 50 bp to 1.00% yesterday.  It announced other measures, such as introducing a government bond purchase program and cutting required reserve ratios to 0.5% from 3.5%. Further cuts are likely, and we should also expect more action on the fiscal side as well.



Japanese banks took up $32 bln from the Fed’s first swap operation, and cross currency basis swaps have already started to normalize. We remain confident that there will be no sustained dollar shortage for banks in G10 countries, and that this problem will prove to eventually be a non-issue. The 3-month USD/JPY basis swap nearly halved from -120 bps to -70 bps now. Japan reported February trade.  Exports contracted -1.0% y/y vs. -4.2% expected while imports contracted -14.0% y/y, right at consensus.