What’s Driving Dollar Higher Today?

Many major currencies are trading higher this morning as stocks staged a voracious recovery at the NY open. The Dow Jones Industrial Average jumped over 1,000 points or 6.5%. In a normal market this would be considered a very bullish move but in bear markets, we often see these fierce rallies. Today's recovery was driven by the prospect of a deal on the White House's coronavirus virus stimulus bill. Speaker of the House Nancy Pelosi said on CNBC this morning "there's real optimism for an agreement in the next hours."

Investors were also happy to hear the G7's pledge to do whatever is necessary to "restore confidence and economic growth and to protect jobs, businesses and the resilience of the financial system." This includes pledges to:

• Provide funding needed to respond to COVID-19

• Provide bilateral and multilateral assistance to strengthen foreign governments prevention efforts

• Commit to delivering fiscal effort to help economies recover through liquidity support and fiscal expansion

• Maintain expansionary policies

• Release available capital and provide liquidity buffers

• Call on oil producing countries to support international efforts to promote economic stability 

• Support IMF and World Bank efforts. Stand ready to contribute resources to help vulnerable countries

President Trump also promised ventilators to New York, 3M and other manufacturers are producing more masks while labs are ramping up testing. Manufacturing data from the US, Eurozone and UK were not nearly as weak as investors feared, paving the way for recoveries in euro, sterling and other currencies. USD/JPY rebounded from 110.10 to a high of above 111.00 while pairs like USD/CAD soared from 1.4380 to 1.4520 before stocks opened for trade. The dollar is strong because of funding shortages and ongoing demand for safety. On a technical basis, there are signs of a bottom in euro, sterling and the Australian dollars but with the German composite PMI index plunging to 37.2 from 50.7, Eurozone index dropping from 51.6 to 31.4, and the UK Composite index falling to 37.1 from 53, the path of least resistance for these currencies is still lower. US Markit PMI index dropped to 39.1 from 42, a rather modest decline.

Traders still need to remain cautious however after the White House's warning that Coronavirus has an attack rate of 1 in 1,000 in New York. Other metrics including new home sales, composite and service PMIs fell sharply abroad which means now is not the time to be overly optimistic. Data across the globe will worsen, raising fears of the toll on the global economy.

This Thursday's US jobless claims report will be particularly telling as unemployment rolls should exceed 1.5 million. If jobless claims hit 2 million, we could see fresh lows in equities and currencies. President Trump's vow to reopen the economy sooner rather than later is recklessly dangerous unless its accompanied by a sharp dip off in virus cases, rapid readily available turnaround in testing and ideally a vaccine. All of this is possible but the bar is high and the government needs to facilitate and not obstruct progress.

New Zealand trade, UK inflation and US durable goods numbers are scheduled for release on Wednesday. February trade data from New Zealand may not show much COVID-19 impact because the manufacturing PMI index increased. Prices in UK could actually rise as shortages lead to price increases according to manufacturing and service providers. US durable goods on the other hand could fall sharply.

Investors should expect more action from governments around the world. All eyes are on the potential stimulus package from Washington. Bailouts are also being considered for various US industries, the ECB is talking ETF buying and Germany is open to discussing joint bond issuance. The impact of most of these announcements could be short-lived.