Covid-19 Fallout Spreads, King Dollar Jumps on Liquidity Squeeze

Summary: The US Dollar jumped on strong demand from global financial institutions seeking short term funds in the world’s most liquid currency to finance their businesses. Which have been struggling to deal with the fallout from the coronavirus spread. US Treasury yields soared. The benchmark 10-year yield closed at 1.08%, a whopping 36 basis points higher. After an initial fall earlier this month due to a drop in US bond yields, the Dollar Index (USD/DXY), a favoured gauge of the US currency’s value against a basket of 6 foreign currencies was up 1.5% to 99.559 from 98.028 yesterday. The Euro, which carries the biggest weight in the Dollar Index, slumped to 1.09548, overnight and near 2-week low before climbing to 1.1000 in late New York. Traders knocked the Australian Dollar which is the most sensitive currency to global growth, down to 0.5959, February 2003 lows before rallying at the NY close to 0.6013, a loss of 1.5%. Against the Yen, the Greenback rallies 1.3% to 107.62 (106.02). The USD/CAD pair climbed to a fresh 4-year high at 1.42759 before easing to 1.4245 as oil prices extended their slide. Brent Crude Oil prices dropped another 4% after Saudi Arabia pledged to increase production. US stocks bounced after the Trump administration pursued a USD 1 trillion plus stimulus package alongside a Fed commercial paper funding facility, first used in 2008. The Dow was last trading at 21,100 (20,485), up 2.6%. The S&P 500 gained 3.35% to 2,528 from 2,425 yesterday.
Data released yesterday saw Australia’s House Price Index (Q4) fall to 3.9%, missing forecasts of 4.5%. Japan’s Revised Industrial Production (February) climbed to 1.0%, beating expectations of 0.8%. The UK’s Average Earnings Index (Wages) rose to 3.1% against forecasts of 3.0% and a previous 2.9%. Britain’s Unemployment rate edged up to 3.9% against forecasts of 3.8%. Germany’s ZEW Economic Sentiment Index slumped to -49.5 against forecasts of -29.7. The Eurozone ZEW Economic Sentiment fared no better, falling to -49.5 versus expectations of -23.1. US Headline Retail Sales fell to -0.5%, missing forecasts of 0.2%, and its biggest drop in a year.


US HL Retail Sales - Forex Factory - 18 March 2020

US HL Retail Sales – Forex Factory – 18 March 2020On The Lookout: The market’s risk tone improved after Wall Street’s recovery due to the White House stimulus measures and Fed’s relaunch of its financial crisis short term debt purchases. This will ease the pressure for offshore Greenbacks. Meantime the Covid 19 spread in the U.S. continues to grow. Fed Chair Jerome Powell said that the epidemic is having a “profound” impact on the economy. The weakness in sales to its biggest drop in a year is a start.

Trading Perspective:  The bounce in the US Dollar and bond yields was the result of liquidity related demand in the commercial funding markets. The Fed has launched its first step to support the commercial paper market. Governments will continue to launch fiscal stimulus to stem the effects of an economic downturn. This will ease demand pressure for the US Dollar and bond yields.
Other global bond yields were also higher but not to the extent of the rise in US rates.

The Dollar’s climb slowed against all the Emerging Market currencies. Against the South African Rand, the USD gained 0.11% to 16.6170. The USD/TRY pair (Turkish Lira) dipped 0.4% to 6.3980. From this writer’s trading experience, the move in the USD/EMS often precedes the USD Majors.
US economic data continue to underperform. The slump in retail sales follows last week’s record fall in US Empire Manufacturing, which is the first regional survey out of the US for March.
Expect further falls in US economic activity as the coronavirus outbreak shuts down businesses in the country. King Dollar will have a difficult time keeping its crown in the days ahead.

USD/CAD – Loonie Double Hit by Strong USD and Weak Oil Prices

The US Dollar skyrocketed to fresh 4-year highs against the Canadian Loonie to 1.42759 overnight before easing to settle at 1.4245 in late New York trade. USD/CAD pair rallied on the back of broad-based US strength and a drop in 5% slump in Brent Crude Oil prices.


Canadian 10-year bond yields rose 20 basis points to 0.97% which is the biggest rise among its global peers. While it’s still behind the US 10-year rate climb of 26 basis points, its not far behind. At the end of the day, a weaker US Dollar due to poor economic data will ease the pressure on the Canadian Loonie.

USD/CAD has immediate resistance at 1.4280 and 1.4320. Immediate support can be found at 1.4210 followed by 1.4180. Look to sell any rallies to 1.4280 with a likely range today of 1.4160-1.4260.

AUD/USD – Battler Climbs Back Above 0.6000, All Eyes On RBA, SCOMO

The Australian Dollar, the world’s prime risk currency due to the country’s commodities exports was knocked down to its weakest level since February 2003 to 0.5959 overnight. The Battler has lost 10% since March 9. Following the Trump administration’s signal of its stimulus bazooka and the Fed efforts to address funding shortages, all eyes will be on the RBA and Scott Morrison’s government actions to further counter the negative effects of Covid-19 on the economy.

AUDTWI – RBA Chart – 18 March 2020 (1)

The Australian Dollar also fell to multi-week and month lows against other major currencies. The RBA’s Trade Weighted Index (TWI) fell under the 60.00 level for the first time since 2008. RBA Governor Philip Lowe will take this into consideration in his speech in Sydney tomorrow.

AUD/USD has good and immediate support at 0.5980 followed by 0.5950. Immediate resistance can be found at 0.6030 and 0.6080. Look for a choppy start with a likely 0.5985-0.6125 range today. Prefer to buy dips at current levels where the Battler is at attractive buying levels.

EUR/USD – Reels Under Weight of King Dollar, Forming a Base

It was a case of up the stairs but down the elevator for the shared currency against its US counterpart. EUR/USD dropped to a two-week low at 1.09548 and its largest one-day decline since June 2018. The Euro rallied to finish its NY trade at 1.1005, down 1.48%. Broad-based US Dollar strength was too much strain for the shared currency, and it tumbled under the pressure.

EURUSD 4 H Chart – FX Street – 18 March 2020 (1)

Where do we go from here? We highlighted the fact that the US Dollar’s strength waned against the Emerging Market currencies. This is a signal that it will follow against the majors. While German and Eurozone ZEW Economic Sentiment Index’s both underwhelmed, the big drop in US retail sales is significant as this is the real economy. The Euro will hold its strong support at 1.0950.

Immediate support for the EUR/USD lies at 1.0980 followed by 1.0950. Immediate resistance can be found at 1.1030 followed by 1.1080. Look for a likely trading range today between 1.0985-1.1085. Prefer to buy dips at current levels.