Updated: Apr 16, 2020
Amid a much more risk off tone in the market today, USD has back on the front foot. DXY advanced a full big figure on Wednesday, moving to just shy of the 100.0 mark from overnight levels of well below 99.0.
In recent weeks, hugely dovish Fed action (limitless QE, huge main street lending programme, huge USD currency swaps with other global central banks) had put USD under serious pressure (bringing DXY well back from 103 highs), while supporting global risk assets (global equities and risk FX like AUD, NZD, CAD, EMFX).
“Don’t fight the Fed” is the saying that has again been doing the rounds. Basically, if the Fed is throwing everything at supporting markets, things are going to be alright, right?
Fear that everything will not “be alright” appears to be creeping back into the market today, which is why we have seen havens such as USD, JPY and US and European Core government bonds supported while risk assets such as global stocks, crude, AUD, NZD, NOK, CAD and EMFX.
A stark reminder that the rally seen in risk assets over the past few weeks might be overly optimistic, and detached from the economic reality that we face, came in the form of a dump of US data today.
March Retail sales was bad (headline was -8.7% M/M, while core was -4.5% M/M). Likewise, March Manufacturing Production was bad (headline was -6.3%, while industrial production was down 5.4%).
The real shocker, however, was April NY Fed Manufacturing Index data, seen as one of the timeliest updates on the state of US manufacturing. It posted a record decline to a record low level, coming in at -78.2, more than 40 points below expectations for -35 and more than 50 below last month’s -21 reading.
According to Pantheon Macroeconomics, the NY Fed data implies April Manufacturing ISM will come out in the 35 region, another HUGE drop.
The data clearly spooked markets; USD and other havens strengthened in wake of the release, while risk assets were sold further.
Still, risk assets are generally way higher than their Covid-19 crisis lows. However, the more dire April data we see (like the NY Fed data today), the more this risk rally is likely to be tested!
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