• Joel

Is USD Being Hit by Rising U.S. Covid-19 Case Count?

USD has been trading on the back foot today, with DXY slipping back to just above the 97.00 mark from above 97.70 overnight levels.

Risk on seems to have been one major reason for today’s decline; despite opening solidly in the red on Sunday night, US equity bourses are now trading much firmer, as are crude oil and risk FX.

Some are making the argument that the US “second Covid-19 wave” concerns are also denting USD sentiment.

For context, cases being reported in the US have been rising over the past few days, and are back near the levels they were at the peak of the New York outbreak. Some have been putting the higher numbers down to more testing, but the percentage of people testing positive has remained persistently high (this ought to drop if the more cases was the reason for more cases – obviously, not enough testing is yet being done).

The major US hotspots are now California, Florida, Texas and neighbouring states.

In my opinion, the second wave causing USD weakness argument this makes sense, given the economic optimism priced into the greenback in wake of last week’s solid retail sales data. A second wave could easily scupper what has so far been a much better than expected economic recovery.

NEC Director Kudlow does not agree with this outlook, of course.

He was today on CNBC to deliver his usual market pump, saying there are some Covid-19 hotspots in certain areas of the US, but there is no second wave and that he does not anticipate another nationwide shutdown.

However, there are a few other factors weighing on on USD sentiment today.

We had very poor US housing data; Existing Home Sales fell by -9.7% Y/Y in May, much worse than expectations for a drop of -3.0% (although an improvement from April’s lows of a -17.8% Y/Y drop). Total Existing Home Sales in May came in at 3.91mln, well below expectations for 4.12mln.

Moreover, there are increasing signals that USD wholesale funding markets are returning to normal.

Recall last week, when I did a blog about the sharp decline in use of Fed USD swap lines – at the time I argued that this could be source of USD strength, given a tightening in the USD funding market.

Well ING are today making the opposite argument that the drop in usage of these funding lines is a sign that access to USD wholesale funding markets has re-opened, and ought to weaken USD.

Either way, watching how USD reacts to the various themes this week will be very informative as to how the greenback might trade over the coming months.

In other words, if a US second wave does triggers USD weakness at the same time as risk off, does that mean USD is no longer a haven? 



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