How USD could react to the worst US GDP data of all time
The most important data release of the month is approaching.
At 1330BST/0830EDT on Thursday, we will find out by how much the world’s largest economy, that of the US, shrunk as a result of the Covid-19 pandemic and associated lockdown measures implemented in Q2 of 2020.
The data will almost certainly show that Q2 was the worst quarter in US economic history, with markets forecasting an extraordinary 34.1% decline in GDP (Q/Q). To put that in perspective, that means that US national income was cut by one third, when you total the nation’s entire earnings over the three month, Q2 period. That is truly catastrophic, but a catastrophic number like this is by this point expected.
More optimistically, timelier, higher frequency data has shown that the US economy appeared to bottom out in April, and improved at a much faster than expected rate in May and June, with many states in the US reopening faster than anticipated.
But this positive momentum appears to be stalling in July, as a result of a resurgence in Covid-19 cases in the US in economically important states such as California, Texas and Florida, which have been forced to halt and even backtrack on reopening plans.
Wells Fargo’s assume “that a generalized lockdown of the economy, such as what occurred in March and April does not occur, though localized set-backs, such as the re-imposition of business closures in California, may occur.”
Thus, though markets are highly interested in how bad the worst three months in US economic history went, they are already looking forward to Q3 2020 and asking whether the growth recovery will disappoint.
How the data might affect USD?
If the data comes in much better than expected; for example, Q2 GDP comes in at -20% rather than -35% we could see risk on flows into equities, risk FX and crude oil markets. How USD reacts will depend on whether markets are looking at USD as a safe haven (which they haven’t over the past two or so weeks), in which case USD would sell off, or would rather push USD higher as a result of improved US economic optimism.
As alluded to above, do note though that any much stronger than expected number might have its positive market impact somewhat numbed by the fact that the US economy’s recovery over the past few weeks appears to have slowed down as a result of the Covid-19 resurgence.
Conversely, if the data comes in much worse than expected; for example, Q2 GDP comes in at -45% rather than -35%, we could see risk off flows (i.e. weakness in equities, risk FX and crude). Again, how USD behaves depends on whether it is being looked at as a safe haven or a normal currency; if traders see USD as a safe haven, bad GDP data may push it higher or, conversely, they might want to push USD lower as a result of greater US economic pessimism and the dovish Fed implications.
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