Fed firepower + massive job losses = Weaker dollar

There’s a lot to talk about today. Equities traded sharply higher on the back of another big announcement from the Fed. The greenback traded lower in response against all of the major currencies. The main focus today was jobless claims, which gets as much as attention these days as non-farm payrolls because they give investors the most up to date look at how the labor market is doing. According to the latest report, another 6.6 million Americans filed for unemployment benefits, 1.1 million more than estimated. Last week’s number was also revised higher giving us a total of 16.7 million Americans out of work in the last 3 weeks. These numbers only include people who were able to file their claims given the widespread reports of jammed hotlines to confirm their unemployment status. Continuing claims rose less than expected but at 7.5 million, these numbers doubled over the past week.  

This staggering amount of job losses surprised no one but the Federal Reserve’s almost instantaneous policy announcement caught the market completely off guard. The Fed introduced another $2.3 billion program to support mid sized businesses with less than 10,000 employees and $2.5 billion in revenues. Included in the program will be financing to institutions lending through the Payroll Protection Program. It will also increase 3 existing credit facilities for households and businesses. According to Fed Chairman Powell who gave an economic update a few hours after the announcement, the second quarter will be very weak with a very high increase in unemployment that he expects to be temporary. There’s reason to believe that the rebound can be robust once the virus runs its course and most people expect that to happen in the second half. He was the first to admit that the economy’s performance is dictated by the virus, which implies that no one can really predict the timing of the US/global recovery. What is clear though is that the Fed only has the power to lend not spend. They came out in force today in response to weak data that included the University of Michigan’s consumer sentiment index which fell to an 8 year low in the month of April. This was the largest one month drop ever.  Producer prices also declined but less than expected. 

More than a million jobs were lost in Canada last month but instead of falling, USD/CAD broke below 1.40 on expectations for production cut from OPEC. Yet its been a rollercoaster with OPEC nations squabbling over the baseline and specific amount to cut. USD/CAD which dropped as low as 1.3931 is now trading near 1.40. Regardless of what OPEC does, it is very clear that between IVEY PMI and the employment report, the Canadian economy has been hit hard by COVID-19. Unfortunately this is only the first set of data to reflect the damage – the April numbers will be just as bad.

EUR/USD rose above 1.09 on positive developments in Germany. The country’s trade and current account surpluses grew more than expected in the month of February thanks to uptick in exports. While Spain and Italy look to extend their lockdown restrictions, German Chancellor Merkel said tighter measures to slow the virus may not be necessary. EU Finance Ministers also reached a deal today to provide further support to member nations.  

Meanwhile the best performing currencies today were the Australian and New Zealand dollars but their moves were driven entirely by US dollar weakness. New Zealand card spending actually plunged in March. Sterling also traded higher after the Bank of England said it would boost its “Ways and Means Facility” to allow the government to issue more debt. Data wasn’t terrible with increases in industrial and manufacturing production but the country’s trade deficit ballooned in February.  Prime Minister Johnson’s condition is improving, helping sterling as he moves out of the ICU ward.

Most markets are closed tomorrow for Good Friday but US consumer prices and the G20 meeting will be in focus.