USD has been getting hammered today. DXY briefly slid below the 100 mark, a stunning turnaround given it was at just beneath 103 just days ago.
Two things are going on here.
1) After shockingly bad weekly jobless claims data, investors expect more action from the Fed
Unemployment is rising sharply in the US. According to the latest initial jobless claims data, 3.28 million Americans filed for unemployment benefits in the past week. That's roughly 2% of the US workforce.
To put that into historical context, this number is quadruple the previous record (set in 1982) and double what most economists had predicted. And this number likely failed to capture those who weren't able to file because phone lines were busy and internet websites overloaded (as widely reported).
Given all the doom and gloom that this data epitomizes, shouldn't US equities have sold-off?
Nope. On the contrary, in the immediate aftermath of this data, S&P500 futures bounced some 30 points. You see for equities, at times there can be such a thing as "bad news is good news".
In other words; this latest terrible jobless claims number likely increases the likelihood of more Fed & US government intervention to combat the effect of Covid-19 on the economy. This may seem like twisted logic, but if markets feel like the Fed and/or government is "not doing enough", bad data can be seen as a "wake-up call" that would improve policy, leading to a better end economic outcome.
This has also been the case for USD. Since the data was released, USD has been on the back foot, as expectations of further Fed intervention grow.
2) Recent Fed actions appear to have eased the shortage of USD
Since the Fed began conducting large USD currency swaps last week and announced its new QE forever programme earlier this week, USD has been on the back foot.
In prior weeks, as investors panicked due to the spread of Covid-19 and expectations for a crushing recession grew, cash was in high demand, meaning USD was in high demand. As a result, there was quickly a shortage of USDs that sent DXY surging as high as 103.
However, action by global central bank (but mainly the Fed) to flood the market’s with USD has turned the tide.
Initial Jobless Claims data was just the nail in the coffin.
Looking Ahead for FX markets
“Measures taken on both the fiscal and monetary front and signs of reducing USD funding squeeze suggest that global FX markets may be about to exit the period of profound, indiscriminate moves, where the USD appreciates abruptly” says ING. “This should be particularly helpful for NOK and GBP, which have been vulnerable during periods of the USD funding squeeze” they add.
Hence, USD’s hay day might be behind it for now… that is until markets descend into panic once again, something which seems likely given the current risk climate.
During these uncertain times, we should take some positives and use this time wisely; let's continue to self-educate and be constructive. There are opportunities every day to extract money from the markets.
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