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Dollar Catching a Safe Haven Bid?

  • Kathy Lien
  • 19 March 2020

Dollar Catching a Safe Haven Bid?

 

Daily FX Market Roundup March 18, 2020

 

Currencies and equities resumed their slide on Wednesday as Tuesday’s recovery proved to be nothing more than a one day reprieve. New measures or plans to fight the economic impact of COVID-19 have been announced on a daily basis but FX traders and equity investors are not impressed, hence the 1,500 point slide in the Dow today. In the last 24 hours, Canada rolled out a massive $82 billion stimulus package to soften the blow of lower oil prices and coronavirus shutdowns. They will provide wage subsidies for small businesses, boost the Canada Child Benefit and defer the tax deadline.  This includes emergency care benefit of up to $900 bi-weekly for 15 weeks.

 

In Japan the government openly discussed an economic stimulus package that would include cash payouts. Australia is expected to announce new measures tonight while Germany offered relief to banks by lowering their capital buffers. With the Eurozone’s largest economy sealing off its border and plant closures for major firms like BMW, the European Central Bank and the German government needs to do more. With unemployment soaring across Europe, all of the carry trade unwind flows that previously drove EUR/USD higher is gone. Investors are now selling the currency on the premise that if lucky, Europe will be in recession and not depression this year. As we discussed in yesterday’s note breaking 1.10 was inevitable for EUR/USD as we look for the pair to head to 1.05. 

 

Despite the major declines in US equities, USD/JPY spent the entire North American trading session above 107 which is incredible considering the grim outlook for the US economy. There’s only one explanation for the dollar’s rally which is a return of its safe haven status but that’s unlikely to last because the worst is yet to come for the US. Large swaths of California have been ordered to shelter in place. The same announcement is expected for New York in the next 24 hours. This lockdown will last for weeks if not months which will crush those economies.  While the Senate is widely expected to pass the House’s coronavirus bill and move onto President Trump’s stimulus measures, no one believes that a one time $1000 check will be enough. If its targeted to the right subset of American workers, there’s question that the cash payment will help cushion the blow but unless the money keeps flowing, a vaccine for the virus is developed or the number of cases truly peak, the impact of any monetary or fiscal stimulus will be short-lived. So the rally in USD/JPY is unsustainable and we continue to see a move below 105.

 

USD/CAD rose to its highest level in 4 years on its way towards 1.45. Canadian CPI numbers were better than expected with prices rising 0.4% in the month of February. That mattered little however as oil prices dropped to 17 year low. The recent moves in USD/CAD is a classic example of how far moves in forex can extend. Currencies are sentiment indicators and when investors panic, the selling can extend faster and deeper than any would anticipate. The Bank of Canada has been one of the most aggressive central banks and today, the government announced strong fiscal measures to support the economy. However like the rest of the world, the bleeding won’t stop until business reopen and activity returns to normal.

 

Sterling, the Australian and New Zealand dollars also fell more than 3% to fresh multi-year lows. Reserve Bank of New Zealand Governor Orr welcomes the move in NZD which he describes as stimulatory. The Reserve Bank of Australia probably feels the same but when economies are shut down and trade suffers, a weaker currency won’t go very far. Australian labor market numbers are scheduled for release tonight along with fourth quarter New Zealand GDP. Weaker data will probably have a bigger impact on AUD and NZD than strong ones.

 

The Swiss National Bank has a monetary policy announcement on Thursday and while the pressure is high for them to ease, interest rates are deeply negative and the central bank prefers market intervention than rate cuts to weaken the currency.

 

For more information, they can be reached at http://www.bkforex.com/.

 

 

 

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About the Author
Kathy Lien
Kathy Lien is Managing Director and Founding Partner of BKForex. Having graduated New York University’s Stern School of Business at the age of 18, Ms. Kathy Lien has more than 13 years of experience in the financial markets with a specific focus on currencies

Ms. Kathy Lien is Managing Director of FX Strategy for BK Asset Management and Co-Founder of BKForex.com. Her career started at JPMorgan Chase where she worked on the interbank FX trading desk making markets in foreign exchange and later in the cross markets proprietary trading group where she traded FX spot, options, interest rate derivatives, bonds, equities, and futures.

In 2003, Kathy joined FXCM and started DailyFX.com, a leading online foreign exchange research portal. As Chief Strategist, she managed a team of analysts dedicated to providing research and commentary on the foreign exchange market.

In 2008, Kathy joined Global Futures & Forex Ltd as Director of Currency Research where she provided research and analysis to clients and managed a global foreign exchange analysis team. As an expert on G20 currencies, Kathy is often quoted in the Wall Street Journal, Reuters, Bloomberg, Marketwatch, Associated Press, AAP, UK Telegraph, Sydney Morning Herald and other leading news publications.

She also appears regularly on CNBC’s US, Asia and Europe and on Sky Business. Kathy is an internationally published author of the bestselling book Day Trading and Swing Trading the Currency Market as well as The Little Book of Currency Trading and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game all published through Wiley. Kathy’s extensive experience in developing trading strategies using cross markets analysis and her edge in predicting economic surprises serve key components of BK’s analytic techniques.