5 Reasons Why USD Investors Are Bailing Out
DAILY FX MARKET ROUNDUP 02.27.20
BY KATHY LIEN, MANAGING DIRECTOR OF FX STRATEGY FOR BK ASSET MANAGEMENT
U.S. markets are in full-blown correction mode. Stocks fell for the sixth consecutive trading day with the Dow losing close to 1200 points in the process. Since equities peaked on February 12, the Dow dropped as much as 10% with similar losses seen in the S&P 500 and Nasdaq. Throughout this time, the Japanese yen and Swiss franc have been the main beneficiaries of risk aversion but investors also sought safety in the U.S. dollar. That changed today when investors dumped the greenback, driving it lower against all of the major currencies except for the Canadian dollar.
Many of our clients are asking why the dollar relinquished its safe-haven status and it all boils down to the fear that the U.S. will be next to experience a sudden increase in coronavirus cases. The virus is spreading rapidly in Asia and Europe. The Center For Disease Control warned of more outbreaks and President Trump failed to reassure investors that the virus can be contained. Only 445 people have been tested for the virus according to the CDC as of February 25. This compares to 7,100 people who have been tested in the UK and tens of thousands more abroad. In just one province in Canada (Ontario), 629 tests were conducted. So the price action in the market reflects the fear that the number of cases will explode when the testing requirements broaden. The deepening sell-off in U.S. stocks and Treasury yields also drove investors out of U.S. assets. Ten year Treasury yields dropped to a record low of 1.24%. These moves indicate that investors are looking for a response from the Federal Reserve. So far we’ve heard very little from Powell and company but futures are pricing in 75bp of easing this year. While this may seem aggressive, if the selling doesn’t subside, Powell will have to reassure investors by suggesting that a rate cut is possible.
5 REASONS WHY INVESTORS ARE DUMPING THE DOLLAR
- Fear that the U.S. is next for major coronavirus outbreak
- President Trump fails to reassure investors, sending stocks tumbling lower
- Markets in full correction mode with another 2% drop in equities
- Ten-year yields drop below 1.3%
- Fed fund futures pricing in 75bp of easing this year
The only currency that was hit harder by selling today was the Canadian dollar. Oil is getting crushed by the coronavirus. The price of crude dropped to a 1-year low as investors worry that the virus could lead to the biggest demand shock since the 2008 financial crisis. With suspended flights and economic activity in China slow to recover after grinding to a halt, global oil demand could contract for the first time in 10 years on a quarterly basis. OPEC will respond with production cuts but that may not be enough to stem the slide. The Bank of Canada meets next week and the worry is that it could surprise with a rate cut. We think that’s unlikely given the Bo
C’s previous comments about the limited virus impact but surely its confidence has weakened. Fourth quarterly and monthly GDP numbers are scheduled for release on Friday. A significant slowdown is expected for Q4 but forecasts are low so an upside surprise is possible as well.
The best-performing currency was the euro, which rose nearly 1% against the U.S. dollar. The currency pair benefitted from stronger Eurozone confidence numbers and a downward revision to the personal consumption component of U.S. Q4 GDP. It is difficult to foresee the rally in EUR/USD continuing with the virus spreading quickly across Europe. The German and Italian economies were faltering before we even heard about the virus and with the outbreak hitting the industrial heartland of Italy, 2020 could be another ugly year for Europe. Italy was one of the weakest European economies in 2019 while Germany barely avoided recession. For all of these reasons, we expect the rally in EUR/USD to hit a brick wall quickly.