MUFG: USD maintains strength despite dollar abundance

3 april 2020

By Derek Halpenny, Head of Research, Global Markets EMEA and International Securities

EUR: Selling pressure persists

The euro remained under downward selling pressure yesterday and is little changed today with no clear explanation for the under-performance. Currently, the euro is the worst performing currency versus the US dollar in the G10 space this week to the time of writing, down 2.5%. There could be a number of factors to explain this – some we believe are more credible than others.

Firstly, COVID-19 continues to play out badly in Europe – as before, in particular in Italy and Spain. While there are signs of a peak emerging, one could argue that the policy response in Europe remains less impressive than elsewhere. As has happened in previous crises, the European authorities are slow to reach consensus on policies to address problems. Ursla von der Leyen on Wednesday tweeted on an EU initiative to finance on an EU-wide basis a wage support program for countries that require it. However, reports yesterday indicated divisions with the continued ideological opposition to sharing debt. At present, on average around 2% of GDP in fiscal spending has been announced country-by-country. We don’t think that will prove sufficient and more will be needed, even if as we all hope, Italy and Spain is close to turning a corner and we can start to focus on the potential of lockdowns being slowly reversed by the end of April into May. But with the US COVID-19 situation turning out to be far worse than Europe and with questions over the design of fiscal stimulus (little incentive to keep workers on payrolls as highlighted by the 6.6mn increase in initial claims yesterday), we are sceptical of this relative view being a driver of EUR/USD selling just yet.

Secondly, there has been some speculation on increased US debt issuance in EUR (“reverse yankee”) and the conversion of some of these proceeds then getting switched back into USD through the spot market. Many US corps do use the spot market with the exposed EUR liability left as a net investment hedge. So with there being some increased US names issuing, this could well be a EUR selling factor.

But we would also give credence to the view of SNB being an active seller. In a previous FX Daily Snapshot this week we highlighted the jump in sight deposits at Swiss banks as being a good indicator of very active CHF selling by the SNB. Sight deposits jumped by over CHF 24bn in March alone – the largest increase since January 2015 when the EUR/CHF floor was abandoned. The lack of movement in EUR/CHF through the market turmoil strongly suggests much of the intervention involved EUR buying. SNB balance sheet data as of end 2019 shows just 39% of total FX reserves were held in EUR. To maintain that would imply 61% of the March intervention total to be switched out of EUR with 58% of that going to USD.

While our updated FX forecasts show a weaker USD by the end of Q2 (1.1200 vs EUR), we are not surprised at this juncture to see the dollar remaining strong. Uncertainty remains high and global recessionary conditions will benefit the dollar. But if confidence in lockdowns starting to reverse in Q3, the abundance of USD liquidity will then start to impact spot levels more clearly through June.

GBP: COVID-19 helping GBP? Global COVID-19 growth slowing

There are many ways of viewing the daily COVID-19 data from different countries with the global scale of COVID-19 highlighted by the 1mn infection total hit yesterday.

Obviously the first and foremost conclusion is that the number of deaths is appalling and upsetting and yesterday, sadly, Spain had another record jump with 961 recorded deaths. But here in the UK it is at least reassuring that the number of deaths is rising at a slower pace than in Italy and Spain. Lagging the UK data to when both Italy and the UK reported the 100^th death (and coincidentally the 233^rd death) a divergence has opened up with a slower pace in the UK. A comparison as of yesterday shows a near 30% divergence.

We would also give greater credit to the design of policy response in the UK relative to elsewhere and the attempts to protect employment could prove an important differentiator when hopefully recovery begins to emerge toward the end of this quarter. That will undoubtedly be evident today when we get the US employment report .

But finally, as we have just passed the 1mn level for global COVID-19 infections it is worth highlighting the fact that the global growth rate is slowing. There have been three previous phases to this growth rate (all 5-day averages) – the initial acceleration driven by the breakout in China followed by a slowdown to a growth rate of just 1.0% on 23rd February. Then the RoW drove the growth rate higher to a high of 12.4% on 27^th March but we have now hopefully entered the fourth phase with the growth rate slowing to 9.0% yesterday – the slowest since 19^th March. The death rate is unfortunately still higher but has slowed from 12.9% on 29^th March to 11.6% yesterday. This is being helped by a slower growth rate in the US.

USD: Jobs data in focus

The financial markets are braced for a shocking non-farm payrolls number this afternoon following the 6.6mn jump in initial claims yesterday. While that jump yesterday won’t have a bearing on the NFP print today, the speed of the scale in deterioration in the US labour market means even today’s print, which will be better than next month’s print, will still be shockingly bad. Our MUFG prediction for this afternoon is -255k. The real shocker for NFP will come in the April report released in early May – our initial estimate for that is -10,120k. Bigger than all jobs lost in the Global Financial Crisis. Based on the initial claims data, the Congressional Budget Office updated economic projections yesterday and it now expects the unemployment rate to exceed 10% in Q2 and for GDP to contract by 7% in Q2.