01-Apr-2020

1) Dollar Ends Lower After Intra-Day Volatile Swings
2) Oil Prices Are Poor Predictors of Recession
3) Door Opens for Short Term AUD Upside as US Funding Pressures Ease

1) Dollar Ends Lower After Intra-Day Volatile Swings

Although the greenback initially jumped at Asian open due to last minute USD buying at Tokyo fixing at 00:55GMT on end-of-fiscal year dollar demand by Japanese companies, price pared its gains and ended lower on Tuesday after retreat in the U.S. Treasury yields.

Reuters reported the U.S. Federal Reserve on Tuesday broadened the ability of foreign central banks to access U.S. dollars during the coronavirus crisis by allowing them to exchange their holdings of U.S. Treasury securities for overnight dollar loans. The new repurchase program, distinct from the swap lines with major central banks in which dollars are exchanged for foreign currencies, “should help support the smooth functioning of the U.S. Treasury market by providing an alternative temporary source of U.S. dollars other than sales of securities in the open market,” the Fed said. The program is to be running by April 6 and last for at least six months.

Versus the Japanese yen, although dollar briefly rallied to 108.72 at Asian open, price retreated to 108.10 at European open before recovering to 108.72 again. However, renewed selling emerged and knocked price down to session lows of 107.47 in New York on USD’s weakness together with falling U.S. Treasury yields.

The single currency went through a hectic session. Although euro briefly dipped to 1.0985 at Asian open on sudden bout of USD demand, price rebounded to 1.1032 on short-covering but later dropped to session lower of 1.0927 in Europe. However, the pair then staged a strong rebound in tandem with cable to 1.1037 in New York due to renewed USD weakness.

Reuters reported German unemployment rose slightly in March, data showed on Tuesday, but the Federal Labour Office warned that this did not reflect the escalation of coronavirus crisis and its impact on the job market since only figures up to March 12 were included. The number of people out of work rose by 1,000 to 2.267 million in seasonally adjusted terms, the data showed. That compared with an expected rise of 29,000 forecast in a Reuter’s poll. The unemployment rate was unchanged at 5%.

The British pound went through a volatile session. Despite a brief but sharp fall to 1.2241 (Reuters) at Asian open on broad-based USD’s strength, price then staged a strong rebound to 1.2364 at European open before weakening to 1.2285. However, cable later rallied to session highs of 1.2472 in New York due to dollar’s weakness and later swung sideways.

In other news, Reuters reported the European Central Bank is ready to consider all options available within its mandate to support the economy in the current coronavirus crisis, Governing Council member Ignazio Visco said on Tuesday. In a speech prepared for the presentation of the Italian central bank’s 2019 financial statements, Visco listed all the measures adopted by the ECB, which is so far the only European institution that has taken major steps to prop up the economy. The ECB has raised its goal for planned purchases of assets to around 1.1 trillion Euros ($1.21 trillion) this year to fight the pandemic.

On the data front, Reuters reported U.S. consumer confidence fell less than expected in March even as the country grappled with the coronavirus pandemic, which has upended life for Americans. The Conference Board said its consumer confidence index decreased to a reading of 120.0 this month from an upwardly revised 132.6 in February. Economists polled by Reuters had forecast the index falling to 110.0 in March from the previously reported reading of 130.7 in February.

2) Oil Prices Are Poor Predictors of Recession

In the last four decades crude oil price movement in the half year before a recession shows little indication the commodity anticipated the coming slowdown.

The National Bureau of Economic Research (NBER) is a private nonprofit research organization that has dated the start and end of US recessions going back to 1857. Its data has become the standard definition of American economic cycles.

Of the five recessions the US has experienced going back to 1980, two saw price increases in the half-year prior to the onset and three witnessed declines.  In the 1980 recession which began in January and lasted to July, the price for a barrel of West Texas Intermediate (WTI) the US price standard rose 70.1% from an average of $19.10 in July 1979 to $32.50 in the first month of the downturn.

In the six months prior to second part of what is considered a double-dip recession that started in July 1981 and extended to November 1982, WTI prices fell 5.3%, from $38 in January to $36.

In the next two brief recessions prices moved substantially lower.  For the July 1990-March1991 eight month decline WTI dropped 17.7%, from $22.64 to $18.64.  For the March to November 2001 recession, also eight months long, prices had fallen 19.6% in the previous half-year from $33.88 to $27.24.

The 2007-2009 recession had been running almost a year before the financial crash in the late quarter of 2008 enveloped the economy. In the six months prior to the start of the downturn in December 2007 WTI had climbed 23.7% from $74.18 to $91.73.

In two of the five recessions WTI prices rose in the first half of the downturn before reversing lower.  In 1990 crude rose from $18.64 in July, the first month in the NBER accounting, rose to $35.92 in October.  In 2007 WTI soared from $74.18 in December to an average price of $133.93 in June 2008 and then plummeted as the financial crisis entered its obvious manifestation stage.

In three of the above five recessions 1981-82, 2001 and 2007-2009 prices at the finish of the recession were lower than at the start and in 1980 and 1990-1991 they ended higher.

3) Door Opens for Short Term AUD Upside as US Funding Pressures Ease

The Australian dollar edged lower through trade on Tuesday, under-performing as investors adjusted month and quarter end positions, propping up the USD. Having touched intraday highs at 0.6209, the AUD suffered a modest depreciation falling below 0.61 before creeping higher into this morning’s open. Despite a slew of fiscal and monetary policy stimulus measures financial and currency markets remained large stable as volatility eased, with some measures of fluctuation falling to their lowest level in 21 days. That said, as the coronavirus continues to spread and USD funding remains fragile, we anticipate broader volatility and price action across currency markets will remain elevated for some time yet, leaving the AUD vulnerable to another bout of downside pressure.

Attentions remain squarely affixed to developments in the fight against the coronavirus as central banks and governments continue to implement new stimulus measures. The Federal Reserve’s new platform has been engineered to ease the liquidity crunch and improve funding for foreign central banks as swap lines are stretched. Overnight Indexed swap yields remain elevated highlighting the pressure currently enveloping the market and capping AUD gains through the short term. With prices expected to contract through the month ahead and yields normalize the cost of borrowing USD should fall opening the door to a broader USD correction and AUD upside.

The US Dollar crept higher through trade on Tuesday, advancing against most major counterpart as investors adjusted end of month and quarter positions. The dollar closed the first three months of the year as the best performer among majors up some 2.8% while oil and commodity led currency were the biggest looser with the Norwegian Kroner leading pack, having lost almost a 5th of its value, a move directly in correlation with the tumbling oil price. USD upside through Tuesday was capped however as the Fed announced further measure to ease funding pressures. A new program, dubbed the FIMA Repo Facility, has been engineered to improved dollar funding for other central banks. The new platform allows central banks to swap treasuries for overnight USD loans in a bid to further ease liquidity strains and free up capital to drive growth and enhance stability across the global economy. With cash becoming more readily available the dollar will likely struggle to extend its recent upturn through the short term as markets adjust positions and risk sentiment improves.