Is U.S. Dollar Catching A Safe Haven Bid?

Currencies and equities resumed their slide on Wednesday as Tuesday’s recovery proved to be nothing more than a one-day reprieve. New measures or plans to fight the economic impact of COVID-19 have been announced on a daily basis, but FX traders and equity investors are not impressed, hence the 1,500-point slide in the Dow today.

 

In the last 24 hours, Canada rolled out a massive $82-billion stimulus package to soften the blow of lower oil prices and coronavirus shutdowns. The federal government will provide wage subsidies for small businesses, boost the Canada Child Benefit and defer the tax deadline. This includes emergency care benefit of up to $900 bi-weekly for 15 weeks.

 

In Japan, the government openly discussed an economic stimulus package that would include cash payouts. Australia is expected to announce new measures tonight, while Germany offered relief to banks by lowering their capital buffers. With the Eurozone’s largest economy sealing off its border and plant closures for major firms like BMW, the European Central Bank and the German government needs to do more. With unemployment soaring across Europe, all of the carry trade unwind flows that previously drove EUR/USD higher is gone. Investors are now selling the currency on the premise that if lucky, Europe will be in recession and not depression this year. As we discussed in yesterday’s note breaking 1.10 was inevitable for EUR/USD as we look for the pair to head to 1.05. 

 

Despite the major declines in U.S. equities, USD/JPY spent the entire North American trading session above 107, which is incredible considering the grim outlook for the U.S. economy. There’s only one explanation for the dollar’s rally, which is a return of its safe haven status, but that’s unlikely to last because the worst is yet to come for the U.S. Large swaths of California have been ordered to shelter in place. The same announcement is expected for New York in the next 24 hours. This lockdown will last for weeks if not months, which will crush those economies. While the Senate is widely expected to pass the House’s coronavirus bill and move onto President Donald Trump’s stimulus measures, no one believes that a one-time $1,000 cheque will be enough. If its targeted to the right subset of American workers, there’s question that the cash payment will help cushion the blow, but unless the money keeps flowing, a vaccine for the virus is developed or the number of cases truly peak, the impact of any monetary or fiscal stimulus will be short-lived. So the rally in USD/JPY is unsustainable and we continue to see a move below 105.

 

USD/CAD rose to its highest level in four years on its way towards 1.45. Canadian CPI numbers were better than expected with prices rising 0.4% in the month of February. That mattered little, however, as oil prices dropped to a 17-year low. The recent moves in USD/CAD is a classic example of how far moves in forex can extend. Currencies are sentiment indicators and when investors panic, the selling can extend faster and deeper than any would anticipate. The Bank of Canada has been one of the most aggressive central banks and today, the government announced strong fiscal measures to support the economy. However, like the rest of the world, the bleeding won’t stop until businesses reopen and activity returns to normal.

 

Sterling, the Australian and New Zealand dollars also fell more than 3% to fresh multi-year lows. Reserve Bank of New Zealand Governor Adrian Orr welcomes the move in NZD, which he describes as stimulatory. The Reserve Bank of Australia probably feels the same, but when economies are shut down and trade suffers, a weaker currency won’t go very far. Australian labor market numbers are scheduled for release tonight along with fourth quarter New Zealand GDP. Weaker data will probably have a bigger impact on AUD and NZD than strong ones.

 

The Swiss National Bank has a monetary policy announcement on Thursday and, while the pressure is high for them to ease, interest rates are deeply negative and the central bank prefers market intervention than rate cuts to weaken the currency.

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