Thursday, April 16, 2020

Will risk aversion in financial markets help the dollar reach new highs?

Tags
  • Dollar
  • Federal Reserve
  • DXY
  • US payrolls

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Analysts’ Pick: Will risk aversion in financial markets help the dollar reach new highs?

  • Initial Jobless claims likely to continue to range at record levels for the week ended April 10th
  • Rising loan loss provisions and a depleted small businesses loan program in the US signals that demand for the greenback is likely to continue to rise
  • Our outlook for the Dollar Index is tilted towards the upside as a result, possibly reaching 100.24’s level.

The consensus estimate from economists for initial jobless claims for the week ended April 10th is currently at 5.5 million. This is in line with our own forecasts as well, as workforce cutting should continue amid the coronavirus outbreak but ease a little from the previous few weeks as a result of more stimulus packages from the US government and Federal Reserve.

Initial Jobless claims likely to stay at record levels despite seemingly peaked

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Claims in some of the larger affected areas were seen to be starting to drop off. Non-seasonally adjusted figures show that claims in Pennsylvania and California fell 120,959 and 132,875 respectively for the week ended April 4th, implying that new claims in those states are likely starting to peak as loan and financial aid programs start to kick in. But a report from Bloomberg using data from the US Department of Labour suggests that while some states are starting to experience a slowdown in new jobless claims, other states may have room for more claims as the percentage of claims to overall labour force starts to catch up to Michigan and Pennsylvania which stands at roughly 17% and 16% respectively.

Jobless claims as a share of labour force suggests that we may see more new claims as other large states in the US regress towards Pennsylvania and Michigan’s figures

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Hence, initial jobless claims should still continue to range between the 5 to 6 million range as the lockdown in the US continues to climb. While this should have some adverse effects for the greenback, it may prove to push the dollar higher as market participants start to flock to cash instead of safe haven assets.

In addition, while the rate of new infections of the coronavirus in the US has slowed, corporate earnings data as well as economic data have been worse-than-expected. All the major banks in the US missed their Q1 earnings estimates, thanks to a sharp increase in loan-loss provisions which implies that businesses are expected to default on loans, probably as a result of financial distress during this lockdown period. Economic data for the dollar has also been tilted to the downside.

Major US Banks’ provision for loan losses spiked for Q1 2020

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The next major event for the dollar will be whether US lawmakers can come to an agreement for the replenishment of its US$349bn small businesses loan program which was started to help SMEs to stay afloat amid the coronavirus crisis. With the Democrats wanting to include more details to the program to reduce delays and expand aid to state governments, the US$349bn fund is expected to deplete later today, without fresh funds topped up in the near future. This would imply that more small businesses will experience financial distress the longer it is delayed, increasing demand for cash.

Consequently, we expect the dollar to increase as a result of both increasing demand for cash and higher risk aversion in the financial markets. The Dollar Index may rise as a result and possibly break 100.00's level again, and trade higher towards 100.24's level. But this is likely to be in the short-term, as Congress will likely be pushed to approve fresh funds for the loan programs, as well as additional stimulus packages if needed, as seen from the past few weeks. These actions should help keep the greenback below the recent high of 102.82 in the medium-term as a result of flooding the market with fresh funds.

Technical Analysis:         

DXY

The bears managed to pull the dollar down below 100’s level once again, but failed to break the 50% Fibonacci level of 98.82. We likely will see another cycle of an uptrend for the dollar as bulls take over possession, already breaking past the 61.8% Fibonacci level, although bears are likely to put up a strong fight for that level. If Congress doesn’t approve of fresh funds for the loan program to small businesses soon, greenback bulls are likely to be able to continue to charge forward, possibly breaking 100.00’s resistance, setting the trading range for the Dollar Index to be firmly within the 61.8% and 78.6% Fibonacci range. With claims looking more likely to continue to show weakness in the US labour market, we expect the Dollar Index to break pats the 100.00 resistance level and trade higher towards 100.24.

Support: 99.46 / 98.82 / 98.29

Resistance: 100.00 / 100.24 / 100.75

DXY Chart (H4)

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