Friday, April 24, 2020

Will today’s durable goods orders report push the Dollar Index back nearer towards 102’s level?

  • Dollar
  • US earnings' season
  • US Durable Goods Orders
  • DXY


Analysts’ Pick: Will today’s durable goods orders report push the Dollar Index back nearer towards 102’s level?

  • Our outlook for the dollar remains tilted to the upside in the short-and-medium-term
  • Durable goods orders later today may be worse-than-expected as unemployment and high  uncertainty amid the Covid-19 virus is likely to drag on investment
  • In the medium term, demand for cash may rise as more companies look to raise cash to remain liquid ahead of a likely economic recession

Expect the dollar to remain strong during this time, as risk is likely to remain skewed to the downside in the short-term. Today's durable goods orders looks likely to continue to be worse-than-expected, which may lift the dollar more, as the economic impact becomes more apparent in the US.

Durable goods orders will likely be plagued by a sharp decline in aircraft orders amid the airline industry crisis


The market currently expects headline durable goods orders to hit -12% in March's preliminary report. This may be worse, as apparent from the high implicit levels of unemployment as well as the immense pressure on the transport industry. Taking a look at the airline industry, Delta airlines earnings report earlier in the week already highlights the pressure airlines are facing not only in the US but also in the rest of the year as lockdowns and travel restrictions affect demand for travel. This implies that no airlines will be ordering more aircrafts amid this Covid-19 crisis, as airlines will conserving cash to maintain liquidity.

Global Revenue Passenger Kilometres (RSK) sharply dropped in 2020 amid the Covid-19 outbreak


Adding Boeing’s production woes of its 737 Max aircraft to the current airline industry crisis, we see March's number of orders or aircrafts impacting the headline reading much more than expected. Demand for machinery and production equipment will likely fall sharply as well. Businesses laying off employees at a record rate, likely in an effort to preserve cash and reduce their cash burn rate, also implies that any new investments will be put on hold or cancelled. With the US economy headed for a likely recession, orders will probably sharply drop. The high rate of unemployment also has a secondary effect, lower consumer consumption. With a record number of Americans losing their jobs, the level of disposable income in the country is also sharply reduced. Being a consumption driven economy, more US businesses are heavily invested into domestic demand, which has an implied sharp decline in the short-term. Consequently, investment into capital goods will likely drop as well. Using other financial crisis as references, we expect that durable goods orders will fall much faster than before thanks to the rapid rate of globalisation and technological advances, declining closer to -14% than -12%.

Initial jobless claims amounted to a total of approximately 26 million in the last five weeks


As a result, in the short-term the dollar should see more upside as more economic data impacts the financial markets and investors increase their position in lower risk assets. Beyond that, the dollar should be able to be boosted as more earnings reports are released. Multiple companies are already selling debt in order to raise cash, signalling that demand for cash is likely to increase as the Covid-19 crisis continues. While actions from the Fed and the US government is likely to ease demand for the dollar, we expect the net effect to still be positive. Hence, the Dollar Index may break the 100.93 resistance level later today on the announcement of durable goods orders, while trending higher towards the 61.8% Fibonacci retracement level of 101.18.

Technical Analysis:         


Greenback bears hit some roadblocks late in March, with investor sentiment continually being lifted by the huge stimulus packages from both the US government and the Fed. But bulls are likely to stay cautious ahead of the earnings season as both corporate and incoming economic data is likely to drive the dollar higher as risk sentiment grows. MACD shows that the dollar has shifted back into an uptrend, with prices moving above the 20-day and 50-day moving averages supporting this. Fundamentally this should be supported by demand for the dollar as more companies raise cash through issuing debt. Also, with DXY breaking past the 50% Fibonacci retracement, we expect prices to trend within the 61.8% and 50% Fibonacci retracement zone in the short-term, providing some upside for the index. Hence, the Dollar Index may be able to break 100.93’s level later in today, while trending higher towards 101.76’s level in the short-term.

Support: 100.26 / 99.98 / 99.63

Resistance: 100.93 / 101.76 / 102.96

DXY Chart (H4)