The US dollar is broadly higher this week, but at this point, it looks like a recouping of some of last week’s sell-off, as opposed to the beginning of another leg of intense dollar buying of the sort seen in mid-March. In particular, the fact that US dollar funding pressure appears to have eased significantly, while financial conditions have not tightened further suggests that for now, markets are willing to take the first wave of bad data from the virus shock in their stride.
Crude oil will be in focus next week, after a series of increasingly desperate verbal interventions from Donald Trump this week culminated yesterday in the US President claiming that Saudi Arabia and Russia would cut production by 10-15 million barrels. The truth of the President’s prediction remains to be seen – but with the President speaking to oil industry executives today and an OPEC+ meeting scheduled for Monday two opportunities for a reality check loom for markets. Also in focus, next week will be meetings from the Israeli and Australian central banks on Monday and Tuesday respectively.
Next week’s data calendar will contain a few “virus shocks” of the sort seen this week, including the Bank of Canada’s Business Outlook Survey on Monday.
USD pares back last week’s losses, but March’s scary dollar strength nowhere in sight.
Non-farms print seven times worse than expected and markets aren’t even surprised
US non-farm payrolls fell by 701,000 in March, seven times the median forecast submitted to Bloomberg. The figures come as a shock because the reference period for which they were reported does not include the final two weeks of March when the US lockdown began in earnest and almost 10 million initial jobless claims were made. This suggests companies began a hiring freeze and laid off workers in anticipation of disruptions.
The fact that the labour market was already imploding before the strictest lockdown measures were imposed underlines once again that the US and the global economy is heading into a shock of unprecedented suddenness and severity. As bad as this week’s data is, things are likely to get much worse in the coming months as global lockdowns continue – a conservative estimate would be that US unemployment will increase in the order of 10-20 million in a matter of weeks.
The fact that non-farm payrolls can print seven times worse than expected without triggering a rout in the dollar and US equities shows the extent to which markets are expecting the global economy to fall into a dark hole in the coming months. In addition to low expectations, the rapid and aggressive global policy response to the covid-shock can probably be thanked for the lack of volatility on today’s release.
In previous global crises…
The US dollar has reigned supreme, but the 2020 shock may yet prove different. The greenback is already starting from a high base against many peers, while the Fed is hosing markets with every imaginable form of liquidity in an attempt to prevent a dollar funding crunch. If the Fed remains successful in providing markets with adequate dollar funding, and responds to the terrible shock to the real economy with an escalating asset purchase programme, they may be able to stave off further dollar appreciation – or even cause the greenback to weaken.
The Obama-Trump labour market expansion comes to a crashing end
Author: Ranko Berich, Head of Market Analysis