• Joel

USD Slammed, Why?

USD got hammered on Wednesday, with DXY falling as low at the 99.00 level, its lowest level since the start of May. The move lower in USD saw EURUSD move to 3-week highs of just shy of the 1.1000 level and AUDUSD move to just shy of the 0.6600 mark, levels not seen since the start of March. 

How no fresh news, in particular, seemed to be behind the move. So why did USD get slammed? 

Key market themes seem to be working against the USD this week. 

1) Greater hope for EU Unity boost EUR, weighing heavily on USD (EUR is USD largest trade-weighted counterpart). 

As we have covered earlier in the week, on Monday, France and Germany proposed a joint plan for the EU Recovery Fund. The fund will be worth some EUR 500bln, will give out mostly grants and will be, in part, funded by joint EU debt. 

This last point is key; analysts and commentators have been crying out for the EU to issue mutualised debt for years as a show of unity, with these calls growing deafening since the onset of the Covid-19 economic crisis. 

The thinking is that the Eurozone either moves towards greater fiscal integration, which involves greater transfers of wealth from richer to poorer member states, or face break up (obviously, the threat of Eurozone break up is a BIG negative for EUR). 

Germany had always been against such a step, until Monday’s proposal. With Germany (the EU’s largest and most powerful member) on board with joint EU debt, it seems only a matter of time until the likes of the Netherlands, Austria, Sweden and Denmark (the other skeptics) also say yes. 

It is these hopes that have boosted EUR so much this week (contributing to USD downside), whilst also giving a big boost to the market’s risk appetite. 

2) That brings us on to my next point - constructive market sentiment. 

Today the S&P 500 reached levels not seen since the 6th of March (from which point the Covid-19 sell-off really went wild). Well over half of the losses incurred since the onset of this crisis have now been recovered. The recovery seen in the Nasdaq is even more impressive; the Nasdaq 100 is actually up on the year, and is within earshot of all-time highs. 

This may seem crazy, as most of the world is still in some form of fairly severe lockdown. But that is the power of a timely, proper policy response to a crisis. 

In other words, markets confidence has been greatly restored by the urgency with which global policymakers and central banks have pumped fiscal and monetary stimulus into the global economy. 

Given that USD is widely seen as a safe haven asset, the improvement in market sentiment seen since the global equity market rout in late February/early March has been a net USD negative, and continues to be so this week. 

3) Fed - King of the dovish central banks

This links nicely to my final point as to why USD is softening.

Apart from the fact that the Fed has pretty much ruled out negative rates (unlike other central banks such as the BoE and RBNZ), the Fed is pretty much the King of the doves. 

How many other central banks are essentially now lending directly to (and propping up) the entire economy. 

How many other central banks have flooded the market with liquidity (issued in their currency), via HUGE repos and international swap lines? (A few, but none to the extent of the Fed). 

The amount of stimulus undertaken by the Fed, as shown by the huge rise in the bank’s balance sheet as a percentage of GDP, dwarfs that of other central banks. For this reason, many analysts are USD bears in the medium to long term. 



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