• Joel

Safe Havens Flows Power Strong USD Recovery

USD has been the notable outperformer this week, with DXY recovering back to just shy of the 101.0 mark from just over 98.0 at the start of the week. 

This means that USD has recovered over half of last week’s historic losses, where DXY slipped from near 103 to just above 98. As a reminder, last week, the USD had its worst week in over a decade, with bearish flows a result of aggressive action from the Fed to flood the market with USDs (unlimited QE, huge sums in USD currency swaps with other central banks). 

Part of this could be attributed to some kind of technical rebound, after all, last week's losses were hefty and some kind of rebound was likely due. But the way USD reacted to risk negative events throughout the week suggests to me that there was something else going on… the USD has regained its haven status. 

Throughout the week, Covid-19 cases continued to skyrocket globally (not least in the US, UK and other parts of Europe). Moreover, the devastating impact on the global economy has become more and more evident; early evidence in the UK and Spain suggest a huge spike in unemployment claims. 

The same has been seen for a second week running in the US; Weekly Jobless Claims saw another record-breaking rise, this time by 6.6mln, taking the two week running total of Americans who have applied for unemployment insurance for the first time to roughly 10mln. 

Today’s official jobs report was less able to capture the sudden spike in unemployment given that data was only collected until the 12th of March (prior to widespread US lockdowns measures coming into place) but, nonetheless, still showed a near record-setting 700k rise in unemployment. April data is expected to be the big one, we could see anything up to a 20mln spike!

How did USD react to all of these developments? It consistently ground higher, telling me its safe-haven status has returned. 

And this time, this safe haven status might not be being driven by an underlying shortage of USDs in global financial markets. The Fed announced another big USD liquidity programme just this week; foreign central banks will be able to swap their US treasuries to the Fed in exchange for USD in an outright swap. 

Any lingering signs of USD shortage in the currency swap market quickly disappeared (as seen by the disappearance of the premium for borrowing USD in exchange for JPY at the spot market rate). Admittedly, USD did slip on the announcement of this programme, but it has since recovered and some. 

This tells me that USD’s recent bid might be a little more sticky. What I mean by that is; past USD strength was as much a result of a shortage of USD in global markets than anything else. As we have seen, it is quite easy for the Fed to solve the problem of a global shortage of USDs (or at least lessen the problem) by introducing programmes to flood the market with USD (as they have done). 

But now, USD is really DESPITE much improved dollar liquidity conditions, on a safe haven bid. This tells me that for USD to reverse, we are going to need to see a reversal in risk sentiment. 

This may be hard to come by in the coming weeks. We are almost guaranteed to be hit by a tsunami of horrible March and April data in the coming weeks - maybe the economic reality we now face continues to be way worse than we had expected (like with jobless claims over the past two weeks). If so, that will not be a plus for risk sentiment. 

Maybe we see a slowdown in cases in the US, UK and other major economies which brings the end to lockdowns further into sight… in the coming weeks this is certainly possible. 

Maybe OPEC+ (including the US and Canada) pull something big out of the bag on Monday and trigger a turn around in risk sentiment, which could be USD negative. 

Who knows?! But in the meantime, expect USD to continue to benefit from any risk-averse market flows.



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