Yesterday, the DXY dollar index ticked higher on an apparent bounce from last week’s losses. The move could be hardly attributed to safe-heaven pressures as per the relaxed, or even positive, performance of most financial conditions indicators.
The USD narrative for today’s price action, however, seems somewhat tainted by recent developments in oil markets leading to the recovery of some currencies; and broad negative sentiment for the release of the US jobless claims in the last week of March. With dollar liquidity conditions under control for now, after a plethora of measures from the Fed, markets are trading with no clear direction on the impacts of the coronavirus and its economic aftermath. Recent macro and survey data is probably still underestimating the potential depth of the crisis and inviting widely divergent potential views on the path of the recovery. Prolonged USD strength remains a possibility as long as massive uncertainty dominates markets, but policy action and potential market response are also variables to take into account when forming an outlook for the greenback.
Oil markets showed some signs of recovery on the news that President Donald Trump is attempting to intervene in the current price war between Saudi Arabia and Russia, and that a deal would be made in a “few days”. However, Russian officials denied such prospects this morning, reportedly saying talks “are not planned yet”. Whether Trump’s verbal interventions can help sustain the oil recovery is yet to be seen, but it is hard not to imagine a scenario where the US eventually faces a trade-off between halting production itself and coping with further layoffs. In a meeting with US oil executives yesterday, Trump discussed the idea of raising tariffs to Saudi Arabia imports, as a way to protect the domestic industry. Some studies estimate that 10% of the world oil could collapse with Brent crude around $25pb, bringing a long wave of employment losses along with it. Traders are also forecasting that crude demand could fall as much as 25% next month, despite reports that China is set to fill its strategic reserves on the back of low prices.
US initial jobless claims: the worst ever data release?
- Today’s US jobless claims figure has a strong claim to being quite literally the worst single economic data release of all time, in terms of its significance for both the US economy and global markets. More than 6.4 million people made jobless claims after 3.3m made claims last week. The significance of this is difficult to overstate:
- Some 6% of the US workforce has been made jobless in the past two weeks. The size and speed of this shock are unprecedented. If we think of the economy as consisting of workers creating goods and services, at a ball-park guess this represents an approximately 6% drop in the gross domestic product in two weeks, compared to an approximately 4% drop over 2008 and 2009.
- It’s now becoming clear that US unemployment is highly likely to rise further. For example, GS estimates a peak of 15% in the second quarter. After the last two weeks, it appears the US is roughly at 10% already. The scale of this shock is simply unprecedented – see chart.
- The US lockdown measures are no more severe than those taken in other economies, so there is reason to believe other economies are facing shocks of a similar magnitude. Even in the best case scenario where the virus shock is brief and gargantuan monetary and fiscal stimulus is successful in the US and elsewhere, the sheer loss of productive capacity will take a long time to recover
The euro, meanwhile, keeps trading on diminished confidence in the policy response in the area. Despite Italy showing some signs of stabilization as per the decreasing number of new daily cases, investors are losing faith in the scope of any upcoming policy decision. While the proposal of joint debt “coronabonds” keeps landing on deaf ears, some other alternatives on the table seem somehow insufficient by comparison. Reports from a Eurogroup meeting yesterday suggest leaders are coming closer to agreeing on the issuance of credit lines via the ESM. Another initiative round on the idea of releasing a €100bn plan to bailout employment in the area, through a lending scheme backed by EU member countries. Additionally, plans for raising a fund of €20 billion financed by bilateral donations for emergency spending were put on the table.
In the EM space, the Mexican peso keeps leading losses against the greenback after S&P downgraded both Pemex and the sovereign grades and Fitch announced it will conclude a revision this month. Pressure on the peso has barely lifted off today on the back of mildly recovered oil prices and dollar auctions carried out yesterday. $5bn in 84-days repo operations were allotted yesterday to 10 out of the 35 contestants, yet underscoring the $6,32bn bid by the market. Banxico will continue to conduct these operations with 1-day notice on the remaining $55bn credit swapped with the Fed. Yet, currency pressures are very likely to build on top of this liquidity supply, given the large economic impact the coronavirus crisis poses for Mexico and its slow policy response.
Olivia Alvarez Mendez, FX Market Analyst
Ranko Berich, Head of Market Analysis