Dollar Starts the Week on Firm Footing

  • There has been some positive news on the virus front, especially from Italy
  • President Trump announced that social restrictions will likely have to be extended beyond Easter
  • This week, we will get more evidence of just how deep the damage to the US economy could be
  • Brazil reports central government budget data
  • Germany remains at risk; both South Africa and UK were downgraded Friday
  • Oil prices are making new lows to levels not seen in 17 years
  • China delivered another wave of monetary easing; MAS eased aggressively, as expected

The dollar is broadly firmer against the majors as the new week gets under way.  Yen and Aussie are outperforming, while Nokkie and Loonie are underperforming as oil prices continue to plunge.  EM currencies are mostly weaker.  MYR and PHP are outperforming, while ZAR and MXN are underperforming.  MSCI Asia Pacific was down 0.9% on the day, with the Nikkei falling 1.6%.  MSCI EM is down 1.4% so far today, with the Shanghai Composite falling 0.9%.  Euro Stoxx 600 is down 0.7% near midday, while US futures are pointing to a lower open.  10-year UST yields are down 3 bp at 0.65%, while the 3-month to 10-year spread is up 11 bp and stands at +82 bp.  Commodity prices are mostly lower, with Brent oil down 7.8%, copper down 0.5%, and gold down 0.3%.

There has been some positive news on the virus front, especially from Italy, where deaths declined for the second straight day. More countries put restrictions into place over the weekend, including Russia and Thailand.  That said, the global death toll has reached 34K, with over 720K confirmed infections.

DXY retraced over half of its March rally before finding some traction today.  Key levels to look for are the 200-day moving average near 98.02 followed by the last major retracement objective of that move near 97.837.  The euro has retraced nearly two thirds of its March drop but could not break above the $1.1165 area.  Same goes for sterling, which has not been able to break above the $1.25 area.  USD/JPY has held on to most of its recent gains but feels heavy after breaking below the 200-day moving average Friday near 108.35.



President Trump surprised many by announcing that social restrictions will likely have to be extended beyond Easter and until the end of April. The change seems to result from advice from his medical advisors that 100,000 people were at risk of dying.  Trump’s original Easter goal sounded too optimistic to many observers, so the quick turnaround comes as good news as it suggests the administration has become more realistic about intensity of the virus in the country.  Yet as we know, measures to contain the virus are unambiguously negative for the economy and so the expected recovery will be likewise pushed out.

This week, we should get more evidence of just how deep that damage to the US economy could be.  Weekly jobless claims Thursday and March jobs data Friday are expected to show big jumps in unemployment.  During today’s North American session, the Dallas Fed manufacturing index will be reported and is expected at -10.0 vs. +1.2 in February.  February pending home sales will also be reported (-2.0% m/m expected).

On Friday, Bank of Canada delivered an emergency 50 bp rate cut to 0.25% and signaled this is the lower bound for rates.  The bank also announced QE for the first time ever and will purchase a minimum of CAD5 bln per week of government bonds and short-term corporate debt.  Governor Poloz implied the program is open-ended, continuing “until such time as the economic recovery is well underway.  Those things can be done in very, very large amounts — literally unlimited if you like.”  Between QE and plunging oil prices, CAD is underperforming today.  Given this mix, we expect USD/CAD to remain above the 1.40 area for the time being and perhaps eventually retest the highs from this month near 1.4670.  Retracement objectives from this recent drop come in near 1.4205 (38%) 1.4295 (50%), and 1.4385 (62%).

Brazil reports central government budget data, where a -BRL18 bln primary deficit is expected.  Consolidated budget data will be reported Tuesday, where a -BRL14.7 bln primary deficit is expected.  President Bolsonaro continues to downplay the risks of the coronavirus, but Congress was able to approve an aid package for workers that will likely be around BRL44 bln.  February tax collections will be reported sometime this week.  As the crisis widens and the economy stumbles, the fiscal numbers are likely to deteriorate significantly.



Germany remains at risk.  The German Council of Economic Experts warned that even if most virus restrictions are lifted by mid-May, GDP is still expected to contract -2.8% this year.  The council added that if restrictions last longer or production is further halted, the economy could contract by as much as -5.4%. Germany reports March CPI, with inflation expected to slow sharply to 1.3% y/y from 1.7% in February.  State data out already today suggest downside risks to the national reading.  After Germany reports CPI, eurozone March CPI will come out Tuesday and is also expected to fall sharply 0.8% y/y from 1.2% in February.

Late Friday, Fitch cut the UK’s rating from AA to AA- with a negative outlook. The agency attributed the move to the expected weakening of the country’s fiscal position following the huge fiscal effort to combat the virus shock. It also noted uncertainty about the UK’s future relation with the EU as an aggravating factor. Bloomberg estimates that Britain will expand its fiscal deficit to around -7% of GDP given the current announcements.

South African assets are under (additional) pressure after Moody’s downgraded the country last Friday after markets closed.  With the one-notch move to Ba1, the country is now rated below Investment Grade by all three major agencies. The move was expected and, we would argue, partially priced in – although it happened earlier than many had thought. This means that the country’s debt will now be excluded from FTSE’s World Government Bond Index (WGBI), where it had just under a 0.5% weight. Moody’s attributed the move to South Africa’s weak fiscal position and the many economic vulnerabilities that will be exposed by the virus shock. The outlook was kept at negative.  Local bonds yields had a brutal knee-jerk reaction to the announcement but now are up “only” 12 to 20 bp across the curve, and not yet at the highs for the cycle. The rand has depreciated nearly 1%, close to record lows.

Oil prices are making new lows to levels not seen in 17 years. Both Brent and WTI are now trading in the low 20s, and it’s entirely possible that we will see front-month futures trading in the teens soon.  Oil is suffering from a massive supply glut, lack of storage capacity, and unwillingness of Saudi Arabia or Russia to reduce supply. We stick to our view that oil will form a “U” pattern, and that once the US (particularly shale) production capacity becomes debilitated, prices will start to pick up again, possibly even along with another OPEC+ supply cut agreement.  The current agreement expires tomorrow.





China delivered another wave of monetary easing. The PBOC cut the 7-day reverse repo rate from 2.4% to 2.2%, injecting some $7.1 bln into the financial system and continuing on its measured path towards monetary stimulus. In our view, officials in China are being more cautions than other countries in order to avoid allowing further liquidity to exacerbate the nation’s already severe distortions in capital allocation and prevent speculative trading on the back of it. Yet more easing is likely.

Monetary Authority of Singapore eased policy at its semiannual meeting, as expected.  The MAS adjusted its S$NEER trading band by both re-centering it lower and flattening the slope to zero.  This is meant to weaken the S$NEER and to prevent any appreciation.  The MAS sees GDP contracting by -1% to -4% this year but added there’s “significant uncertainty” over the depth and duration of the recession.  The next scheduled meeting is in October but we cannot rule out another move before that.