DXY testing positive territories around the psychological 100 level against bullish funda backdrop

• DXY finding territory back in the 100 handle.
• Tradewars are back to the fore and deteriorating relations between the US and China is initially DXY supportive.
• General geopolitics, COVID-19 uncertainties are favouring USD.

DXY is currently trading back in the 100 handle for the first time since 28th April when 100, following a number of attempts, finally gave way to the 100.80 sell-off. At the time of writing, DXY is trading at 100.05 having travelled from a low of 99.75 to a high of 100.20.

The FX space is paying close attention to equities reacting to nations relaxing social distancing measures and trade war escalations. The uncertainty is overwhelming and supportive of the USD as being the least dirty shirt in the laundering basket for investors looking for yields. "USD denominated assets offer a unique advantage," analysts at TD Securities argued:

• With global yields suppressed, and negative in some EU bond markets, USTs are a relative high yielder (especially with higher debt issuance in the future). The search for higher risk-adjusted returns will continue to force investors out the risk curve. Indeed, US markets have outperformed their peers on a stock-to-bond ratio basis since the GFC and even in the current crisis. This, in turn (and all things equal), will likely extend the USD's status safe-haven appeal and prolong the USD bull run.
• CV-19 amplifies these trends. Global bond yield suppression has left the USD with relative yield appeal while anaemic global growth prospects has elevated the more defensive US equity structure.

Tradewars supports DXY's bullish outlook

Meanwhile, further support comes for the dollar as Washington engages in a so-called new Cold War with Beijing. The American hawks are back criticizing China for downplaying the impact of the COVID-19. US President Donald Trump continues to elevate China's "culpability" for the epidemic. Trump's administration is also reportedly mulling an initiative to remove global industrial supply chains from China and weighing new tariffs to renew a trade war. 

Weekend news sent the dollar higher when it was reported that US Secretary of State, Mike Pompeo, was insisting on accusations that the virus originated in a laboratory in Wuhan, Central China's Hubei Province. More on that here: Pompeo and Trump ratcheted up US and China tensions.

 Duelling with words

There has been some duelling with words between the US press and China's, after all, a duel of words is preferable to outright war, one which some have speculated to be a high probability at the current rate of escalation.

Since the start of this week, there has been a slew of bombshell stories, albeit getting less attention that what might be expected from markets. Had they been surfaced during the 2018/19 trade wars, they would have been front-page news and trigging massive risk-off events in financial and commodity markets. 

Following the ABC interview with Mike Pompeo, the Global Times backfired, with Pompeo's anti-China bluff strategy reveals all-or-nothing mentality to fool US voters – GT. However, a Reuters news started circulating with the news that an internal Chinese report seen by Xi Jinping had concluded that in the post-pandemic era Beijing will face the toughest international anti-China pushback since 1989.

These followed prior headlines, again, printed by Reuters, that according to anonymous officials, the Trump White House is going to “turbocharge” the extraction of supply-chains from China. This would mean that the US is considering higher tariffs, targeted sanctions of Chinese individuals and various financial incentives such as tax cuts or subsidies encouraging the world not to deal with China as part of the, “Economic Prosperity Network”.

According to the Reuters article, the United States is pushing to create an alliance of “trusted partners” dubbed the “Economic Prosperity Network,” one official said. “This moment is a perfect storm; the pandemic has crystallized all the worries that people have had about doing business with China,” said another senior US official.

The US government is working with Australia, India, Japan, New Zealand, South Korea and Vietnam to “move the global economy forward,” Secretary of State Mike Pompeo said April 29. These discussions include “how we restructure ... supply chains to prevent something like this from ever happening again,” Pompeo said,

– Reuters reported. 

COVID-19 and US data a spanner in the works for bulls

Meanwhile, while for many businesses around the world a desire to hold dollars may be largely unrelated to the day to day fundamental backdrop of the US economy, analysts at Rabobank argued a case for the downside for USD:

As the initial panic phase of the crisis ebbs, fundamental factors will start to re-assert themselves on currency movements and the USD is unlikely to be totally immune to a horrific round of domestic economic data. The USD may also prove to be sensitive to doubts over whether the US has sufficiently reduced the rate of reproduction of Covid-19 to instil confidence in workers and consumers regarding President Trump’s plans to reopen the economy. 

We have the US April jobs report this Friday which could be a test of the USD’s resolve.

The market has already had a glimpse of rapidly deteriorating jobs market through the weekly initial jobless claims. On the back of this the market consensus for the non-farm payrolls number is an shocking plunge of -21mln. While these data could cause a wobble in the USD,

– warned analysts at Rabobank. 

DXY levels