USD is getting slammed today, with DXY falling well below the 97.00 level to around 96.70 (its lowest levels since March 12th, the start of the big global USD funding squeeze).
The reason for today’s dollar demise was strength in EUR.
The Eurozone is the US’ largest trading partner and, as such, of the basket of USD majors which make up the dollar index (DXY), EURUSD is by far the largest (with a weighting of roughly 50% of the index). In other words, when EUR does well, USD tends to do badly and vice versa.
So what boosted EUR today?
Increased confidence in the stability and longevity of the Eurozone project.
Because the ECB over delivered on expectations in its latest increase to its Covid-19 QE programme (the Pandemic Emergency Purchase Programme, or PEPP). The ECB increased the size of the programme by EUR 600bln, more than market expectations for a EUR 500bln increase, with purchases to continue in 2021 and reinvestment to continue into at least 2022.
You see the ECB’s QE programmes are pretty much the only thing preventing another debt crisis in peripheral countries (Italy, Greece, Spain, Portugal etc.), which would likely force them out of the Euro.
It’s not just today that USD has suffered because of increased optimism in the stability of the Eurozone. This theme has been ongoing for weeks ever since the Franco-German EU recovery fund proposal which put joint EU debt officially on the table for the first time.
So could tomorrow’s NFP data reverse this trend of recent USD weakness?
In the short-term potentially. A big miss on expectations could see USD bid amid a flight to safe haven assets (like USD, JPY, CHF, gold).
However, ADP data came in well below expectations earlier in the week, with “only” 2.76mln Americans applying for jobless claims for the first time in May compared to expectations for 9mln.
Should we get a similar-sized beat tomorrow, we are likely to see further USD weakness as traders/investors find more reason to be long risk assets.
So then, in answer to the question posed in the title to this article, yes - but only if it is bad.
Even if the data is bad, USD bounce is likely only to be fleeting anyway - everything seems to be working against USD at the moment.
To name a few…
Economic reopening without a surge in infection rates raising hopes for a V-shaped recovery in the post-Covid-19 world, plus growing vaccine optimism mean appetite for risk has been surging over the past few weeks, pressure risk assets such as USD.
The aforementioned increase in confidence in the Eurozone project as demonstrated by the EU gradually getting their act together on the fiscal stimulus front and the ECB’s continued willingness to do whatever it takes.
An Uber dovish Fed is out printing every single other major global central bank on the planet put together - this is arguably the biggest USD negative.
A good or bad NFP print for May doesn’t do much to change any of these dominant narratives, we expect USD weakness to continue (provided we don’t get something like a HUGE escalation in US/China tensions).
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