Why is USD getting slammed this week?
It has not been a good week for USD. DXY made highs earlier in the week around the 96.70 mark, but has since slipped to fresh one month lows of beneath 96.00. USD fundamentals have not been positive this week. As such, traders eye a test of the June 10th low of 95.72 sometime in the near future.
So why has USD been getting slammed?
1) The Fed’s dovish shift
Commentary from key Fed speakers has become increasingly dovish over the past week or so. Last week, Fed Vice Chair Clarida said that the Fed WILL do be doing more stimulus in the near future.
Since then, numerous more FOMC voting members have expressed concern about a slowdown in US economic activity and the labour market in recent weeks amid the recent uptick in Covid-19 cases seen since mid-June.
Another concern being raised by some Fed members is the fact that the US government is yet to get its act together regarding further fiscal stimulus. Most importantly, emergency unemployment insurance measures are set to expire at the end of the month; many millions of Americans currently depend on this income support for their livelihoods – should it be pulled away, the Fed is becoming increasingly concerned about the devastating effect this would have on the US economy.
While the Fed are sounding more and more dovish, other major central banks (such as the ECB today and the BoC yesterday) seemingly have less to worry about. Their countries have contained the virus comparatively better, and are feeling the economic benefits of this at the moment.
This central bank divergence: i.e. an increasingly dovish Fed, while ECB, BoC, BoE, RBA, RBNZ stay on hold/become less dovish is a BIG USD negative.
Expect further action to come from the Fed in the coming months, be that yield curve control or adjusted forward guidance, or even further liquidity programmes if needed.
2) Continued rise in US Covid-19 cases
Meanwhile, this week has not been a good one for the US in terms of its Covid-19 outbreak;
Cases have increased by more than 60k per day every day so far this week, while the 7 day-moving average of new cases moved to above 63k yesterday, up from 52k the week before. Meanwhile, deaths are finally starting to catch up with the faster rate at which the virus has been spreading, though most think that due to better treatment (Remdesivir and steroid treatment), daily deaths will not reach levels seen back in April.
Looking at things on a state by state basis; cases are increasing now in most states, though the steepest curves are in Florida, Texas, Louisiana, California and Idaho (the same hotspots we have been talking about for the past few weeks).
(As noted by Fed officials above) The worsening Covid-19 outbreak in the US is clearly going to act as a drag on the country’s economic recovery. Looking at other major economies such as China and the Eurozone, who are showing signs of continual economic improvement, the US economy is looking much more fragile.
Faster global vs US economic growth is a recipe for a weaker USD, hence this week’s price action.
3) EUR optimism
EUR is USD’s largest trade-weighted counterpart and EURUSD makes up roughly 50% of the weighting of the DXY (the DXY is a basket of USD major crosses, and is weighted by trade volumes with the US). As a result, when EUR does well, USD typically does poorly.
EUR has had a very good week. Optimism ahead of tomorrow’s EU27 Leaders Summit, where EU leaders convene to try and thrash out a deal on the EU Recovery Fund, appears to have grown throughout the week. Comments from German and French officials in the last two days that they are optimistic a deal can be done appear to be helping.
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