Hope (and the IMF) Stall Dollar Rally

Overview:  In the war against the novel coronavirus, humans are striking back, and appear to be gradually getting the upper end, especially in place in Europe, and possibly the US, which has been particularly hard hit.  Risk appetites are surging.  Nearly all the equity markets are higher today, with India playing catch-up after yesterday’s holiday to lead the way with gains in excess of 8%.  Most of the major bourses in the Asia Pacific region gained around 2%.  Europe’s Dow Jones Stoxx 600 initially rose more than 3% in the European morning, led by consumer discretionary, industrials, and financials, before running out of steam. The S&P 500 gapped higher yesterday, leaving a bullish three-day island in its wake, and is set to gap higher again today.  The 2800 area corresponds with about the halfway mark of the sharp decline since late February’s record high.  Safe-haven flows into fixed income are unwinding with benchmark 10-year yields up mostly 3-5 bp, thought the US 10-year yield is up 7 bp to almost 0.75%.  The US dollar is falling against most of the world’s currencies.  Among the majors, the Norwegian krone and Australian dollar that have been hit the hardest since the beginning of last month, are leading the way higher.  Emerging market currencies are also mostly higher, led by the Hungarian forint and Czech koruna.  Gold initially extended its gains to almost $1680 in Asia before retreating.  It is slightly lower on the day near $1650.  May WTI is consolidating in yesterday’s range, which was in the previous session’s range as the market awaits OPEC+ talks later this week.  

Asia Pacific

More details of Japan’s large fiscal stimulus have been announced.  Although the package seems to include some spending that had already been announced, the overall cost is estimated to be nearly 20% of GDP (~JPY108 trillion).  Cash payments to households and tax deferrals seem to be the initial focus with aid to business coming later.  Separately, Prime Minister Abe has declared a state of emergency in Tokyo and six other prefectures for the next months.  

With the cash target rate at the zero-bound (25 bp), an asset purchase program already launched, and a yield curve control introduced to cap the three-year yield at 25 bp, expectations for the RBA meeting were low, and it did not disappoint.  Australia is being hit by a terms of trade shock.  The price of its leading exports has plummeted–iron ore, coal, and liquified natural gas.  Australia is the world’s largest exporter of LNG, which tracks oil pricing.  The price of LNG fell by roughly 2/3 in Q1.

For the first time since the pandemic crisis broke, China reported no new fatalities.  Separately, China reported its foreign exchange reserves fell by $46 bln in March to $3.06 trillion. It is the largest decline since Q4 2016 when in a three-month period, the reserves fell about $155 bln.  The other reserve currencies outside the dollar, like the euro and yen, were little changed in March, though sterling fell almost 4%.  The reserves are thought to be held mostly in government bonds, and fixed income rallied strongly last month.  Valuation does not appear to explain the decline in the value of China’s reserves, which suggests intervention to support the yuan.  The US dollar met strong resistance around CNY7.12. 

The dollar is in a relatively narrow range against the yen of roughly JPY108.65 to JPY109.30.  It has been confined to the upper end of yesterday’s range. The greenback slipped in early Asia but has edged higher into and through the European morning.  It seems pulled between the risk-on mood, which often is a drag on the yen and the broad-based dollar weakness.  The Australian dollar is approaching $0.6200.  The highs set late last month are near $0.6215.  Above there, the next target is around $0.6270 and then the $0.6400 area.   The greenback is testing the lower end of is roughly three-week trading range against the Chinese yuan (~CNY7.05-CNY7.12).  


Japan and Singapore have been hit with what some are calling a second wave ostensibly from relaxing social distancing too early.  Denmark indicated it wanted to begin reopening in a week, with kindergartens and primary schools after Easter.  Austria was the first to put forward a concrete plan.  On April 13, small shops will be allowed to reopen, followed by larger stores on May 1. Restaurants and hotels are targeted for mid-May. Strict mask rules and social distancing will be maintained. Public events are envisioned to begin in July.  Of course, it is a tentative strategy and not carved in stone.  There is likely a psychological benefit for managing expectations and, arguably, providing a sense of hope, in addition to, of course, reviving the economy.  At the same time, the de-synchronization of the shock and responses offer natural experiments, as it were. 

Separately, as tragically, Spain reported an increase in fatalities. UK Prime Minister Johnson, who was hospitalized over the weekend, was moved into intensive care.  The succession in the UK (without a constitution) is not clear, but Foreign Secretary Raab has been deputized. 

The Eurogroup of EMU finance ministers is to make a recommendation to the heads of state of the collective measures that should be undertaken.  There has been a campaign to introduce some common inter-governmental bonds, different that the ESM and EIB collectively responsible bonds that already exist and can be expanded.  Given the heavy debt burdens in the periphery, the creditor nations are still reluctant to mutualize debt.  Their misgivings have not been addressed by hyperbolic claims that out of several options, corona bonds are the only way that Europe will survive. Moreover, even if there could be an agreement, and there is not, it might take too long to launch and get the funds where they are most needed.   

The ECB, the SNB, and the BOJ have all shown to thus far reluctant to push policy rates deeper into negative territory.  Even before the crisis, some argued there was a push back against negative interest rates despite robust defenses by Lagarde and Kuroda, among others.  The G7 central banks and the RBA and RBNZ have brought policy rates to the effective zero-bound.  The central bank of Israel kept the door ajar to negative rates when it cut the base rate to match the record low of 10 bp from 25 bp.  It also offered low rate loans to banks and repos for which corporate bonds would be accepted as collateral.   The Bank of Israel is already engaged in a bond-buying program three-times bigger than in 2008-2009.  It plans on buying ILS50 bln of bonds. The government unveiled an ILS80 bln stimulus plan (~6% of GDP), with a focus on low rate loans.

The euro has built a base near $1.0770 and is around a cent above it at a four-day high.  The next chart points are $1.0900-$1.0920.  Intraday support is seen near $1.00820-$1.0840. Sterling has traded on both sides of yesterday’s range (~$1.2210-$1.2325).  Like the euro, sterling’s gains in Asia have been sold into in the European morning.  Initial support for sterling is seen near $1.2250.  Technically, the close is important, provided it is beyond yesterday’s range.  


The crisis response was an opportunity for the US to re-assert the role of the dollar and dollar-funding as an international public good, a utility as it were, rather than simply an expression of immediate economic interest, and a weapon to be deployed to reward friends and punish enemies.  The Fed’s reactivated swap lines were a step in the right direction. Still, the deployment was narrow and limited to several countries that were understood to be important for the stability of the US market and admitted a few others.  Similarly, the new repo lines were also to promote stability in the US Treasury market.  Into this gap between the US nationalistic response and the systemic needs, the IMF has indicated it will venture by offering dollar loans to those countries that lack Treasuries.  

US efforts to get funds to small businesses was stymied by the sheer demand and the crashing of the Small Business Administration’s portal.  The Federal Reserve has stepped in to help smooth the timing of the launch of its SBA loan purchases by offering to provide term financing to banks against the loans issued by the SBA under the Paycheck Protection Program.  Under this program, banks provide loans to small businesses to pay for rent, utilities, and wages for up to eight weeks.  The loans convert to grants if the firms retain or rehire their employees.  

It appears the US indifference curve to the oil cartel shifts around $20 a barrel.  Russia has accused Saudi Arabia of ramping up production to punish US shale producers, and Saudi Arabia accuses Russia of the same thing.  Ironically, they are both right.  The rise of China was a powerful disruptive force in the manufacture of goods.  The emergence of the US as not just an oil producer, but the largest oil producer is also extremely disruptive.  Of course, Russia and Saudi Arabia want the US to participate in any production cuts, but it difficult to envision. Nevertheless, drills are being abandoned.  The Baker Hughes drill count is off 17% since mid-March to 664.  The decline is beginning from half the last cyclical peak, which bottomed in 2016 near 400 when the price of WTI was around $33.50.  Shifting the forum at which the US makes a concession from OPEC+ to the G20 does not make up for the practical difficulty.  Much of the US shale production is in private hands in a fragmented industry.  The industry seemed ripe for rationalization, with mergers and acquisitions, and larger producers moving in. The low prices and rising storage costs are exerting their own discipline production, and this, in turn, may help the industry mature.  But squeezing out the marginal producer with lower prices is not a sustainable strategy, even if it buys time.  Without participating in some sort of extra-market agreement, the marginal producer will return as quickly as prices allow.

The US dollar is trading at a six-day low against the Candian dollar near CAD1.40.  Last week’s low was near CAD1.3980, and the low from the second half of March is around CAD1.3920.  A break of this area could spur a move toward CAD1.3830, a (61.8%) retracement of last month’s rally.  The dollar posted a bearish shooting star candlestick against the Mexican peso yesterday. It has rallied to new record highs (~MXN25.7850) and then reversed and sold off below its opening level to below MXN24.59.  There is follow-through dollar selling today, and bids were found near MXN24.16.  Below there support is seen around MXN24.00.


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