Dollar Snaps Higher: Should You Fade Tuesday’s Rally?

The US dollar traded sharply higher against all of the major currencies as the Dow Jones Industrial Average closed up more than 800 points. After falling nearly 3,000 points on Monday, US stocks rebounded on President Trump’s promise of cash handouts, deferral of tax payments and generous small business loans.  Stocks have a tendency of reversing prior moves on turnaround Tuesday but even with the US government’s proposed package, there are very few reasons to be buying stocks right now. Some investors hope that other governments around the world will follow in the footsteps of France who banned short selling for the next 24 hours with the possibility of a month extension. South Korea banned short selling last week in 3 markets and Italy/UK/Spain have bans on specific shares. If stocks resume their slide in the US, a short selling ban is inevitable.  During the 2008 financial crisis, countries like the US, Britain, France, Germany, Switzerland and Canada all prohibited short selling in financial stocks but it failed to stop the Dow from plunging another 29% two weeks later. 

EUR/USD dropped to 1.10 on the back of the US dollar rally. The German ZEW survey, a measure of investor confidence also fell to its lowest level since the financial crisis. These numbers will worsen after Germany closes its border, schools, non-essential shops and public spaces.  In yesterday’s note, we were looking for EUR/USD to hit 1.10 which happened quickly. Now we see further losses as the Eurozone economy heads to recession. We would not be surprised if the pair tested 1.05 in the coming months. 

Sterling also fell sharply but having hit multiyear lows on the back of Brexit, GBP/USD only dropped to its lowest since September 2019. UK labor market numbers were mixed. Average weekly earnings increased but so did the unemployment rate and claimant count. None of these numbers are reliable however as unemployment is expected to soar in the UK and other countries over the coming months. Hong Kong just reported its highest jobless rate since 2011 and plans to keep schools, which had been closed since January, shuttered past April 20th.

AUD/USD dropped to a 16 year low after the minutes from the last central bank meeting revealed that the Reserve Bank was “prepared to ease further to support the Australian economy….and “would consider moving before the next scheduled policy meeting on April 7th.” They cut interest rates by 25bp at their last meeting. The New Zealand dollar which initially rallied when the government announced a multi billion fiscal stimulus package gave up all those gains and dropped to its weakest level in 10 years. The program which represents 4% of GDP includes wage and income support, tax cuts and investments into healthcare. USD/CAD busted through 1.40 to rise to its strongest level in 4 years. Canada closed its borders yesterday adding to the pressures on the economy. 

The good news is that in the last 24 hours, China reported only 21 new coronavirus cases and South Korea reported only 84 which means that in two of the original hotspots, the virus is peaking. However data is only beginning to reveal the impact of the virus in the US and abroad. Goldman Sachs expects Chinese GDP to be -9% in Q1, versus a prior forecast of 2.5%. Parts of California and New York, two of the three biggest states went into full lockdown mode this week. The Empire State survey which was released on Monday showed manufacturing activity contracting sharply.  According to today’s US retail sales report, spending fell -0.5% in the month of February with core retail sales falling -0.4%. Economists had been looking for spending to rise as virus stockpiling had a potentially positive impact on spending but instead demand slumped. The numbers will worsen in the coming months with retailers, restaurants and other businesses forced to close. For all of these reasons, we believe that the rally in USD/JPY should be faded as we see the pair sinking back below 105.