The dollar remains bid today, despite a period of relative calm in bond markets, financial conditions, and USD funding markets.
This suggests that the dollar strength we have seen this week is not panic buying, but simply a steady demand for greenbacks after last week’s sell-off. How long this dollar strength continues is anyone’s guess. As a point of comparison, the dollar’s broad upwards trend after the 2008 crisis lasted roughly from August 2008 to February 2009. On the Bloomberg dollar index this was worth a 22% appreciation.
There are myriad differences between 2020 and 2008 for macro markets.
Different initial levels for FX rates, different policy responses, and international circumstances mean that it would be foolish to assume a similar response in currency markets in 2020. The Fed is going all out to provide USD liquidity, and it seems to be working. In addition to a broad range of swap lines with global central banks, the Fed announced a new facility to open repurchase facilities for central banks, in an effort to further shore up USD liquidity provision.
Global central banks, including the Fed, are acting with extreme aggression to ease credit conditions, meaning the policy response will hit the real economy much faster than in 2008. On the whole, the conditions that drove very rapid and sustained USD appreciation in 2008 are not present, with one vital exception: the fact that global growth is about to nosedive. If this is sufficient to drive a significant dollar bid remains to be seen, but as far as price action this week is concerned the answer seems to be “yes, for now”.
A few additional news headlines and some thoughts:
- The Brent crude oil benchmark has rallied further after more headlines relating to crude oil talks between the Russia and Saudi Arabia, after Donald Trump reiterated previous comments about Russia and Saudi Arabia entering discussions on his prompting to reduce the current supply glut. This morning has seen actual news flow from Saudi Arabia challenge this idea: anonymous officials speaking to Bloomberg said that the Kingdom would boost supply to more than 12 million barrels a day this month, the largest on record. Official communications from Saudi Arabia have said that the supply increase will stop only if all global producers, including the US, agree to cut output.
- Markit PMIs confounded by lead time noise. Final manufacturing PMIs for March were released for the UK and Eurozone this morning, and both indices actually rose from their flash reading earlier in the month, and beat expectations. Once again this was due to a quirk in the construction of the indices: increases in supplier lead times increase the index as a whole, despite the fact that in this instance they point to supply disruptions, not demand increases.
- USD funding stress eases Following the announcement of a foreign USD repo facility for central banks yesterday, USD cross-currency basis swap spreads are now positive for JPY, EUR, and GBP swaps. This suggests that the Fed’s swap operations over the past two weeks have been successful in alleviating pressure on USD liquidity overseas. In another sign that the Fed’s interventions have worked, the New York Fed announced yesterday that it received no bids for its overnight USD repo facility yesterday.
Chart 1: DXY index
Chart 2: Cross Currency Basis Swap pricing swings into positive – USD funding no longer commanding a premium
Author: Ranko Berich, Head of Market Analysis