Thursday, October 15, 2020

Does the dollar still have room to drop even with stimulus only expected after elections?

Tags
  • Dollar
  • US Retail Sales
  • DXY

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Analysts’ Pick: Does the dollar still have room to drop even with stimulus only expected after elections?

  • Our short-term and long-term outlook for the dollar is tilted towards the downside as economic data continues to improve and sensitivity to stimulus news fades
  • Initial jobless claims will be distorted by California’s overhaul of its applications system, while continuing claims dip as more unemployed workers reach their 26-week limit for claims eligibility
  • Retail sales data may get a stronger-than-expected boost thanks to amplified seasonal adjustments after August saw a decline in non-adjusted retail sales
  • Markets increasingly pricing in certainty for a Democrat win may also contribute to a weaker dollar, but it also provides upside risk in the form of over-confidence.
  • Opposing risk for the Dollar Index may materialise from a weaker euro, since the accelerating pace of daily Covid-19 cases increasing the likelihood for additional lockdown measures in the bloc

The next two days may see the dollar being more economic data driven as stimulus measures start to take a back seat until the end of the November presidential elections. Market sensitivity towards more fiscal stimulus delays appear to have eased, as yesterday's market performance in the US suggests that delays may only have a slight downward impact on financial markets.

Initial jobless claims data to face distortion from fraud investigations and systems overhaul. This week's initial jobless claims data will be distorted again as California rolls out an overhaul of its jobless benefits processing system. Figures from the state were put on hold since the week ended September 19th, pausing on accepting benefit applications for the two weeks from then. The state has since restarted accepting applications after the successful overhaul of its systems but headline figures will continue to use data prior to the period as a placeholder for last week's claims. Stakeholders using the data as part of models or analysis should this be mindful of these distortions. While California has become a larger contributor to the unemployment pool in the US (California's share of unemployment benefit claims recently reached to about 28% of claims nationally), the overall trend in the US labour market for initial claims still remain mostly in line with earlier analysis. Initial jobless claims continue to flatten, which should be somewhat comforting since it means that the rate of layoffs has eased. However, the extreme levels that it has flattened at suggest that layoffs are still at all time high levels.

Initial claims continue to flatten out at high levels even excluding distortions from California

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Continuing claims on the other hand will only be representative of claimants reaching the 26-week limit for unemployment benefits. The pace of declines in continuing claims is still slower than the initial run up of layoffs in the early stage of the pandemic. This indicates that hiring is still only occurring at a slower pace than needed for a proper recovery in the labour market. Moreover, the metric is distorted by workers who have exhausted the 26-week ceiling that states have on the maximum number of claims for unemployed workers. Hence, while both initial jobless claims are likely to put some downward pressure on the dollar as we expect these headline figures to continue to show improvements, the longer-term impact is still downside pressure to the economy as a result of prolonged unemployment.

Continuing claims continue to be distorted by claimants exhausting their 26th week of benefits

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We expect the Empire Manufacturing Survey and Philadelphia Fed Business Outlook Survey to continue to be the bright spots for the US economy as companies better adapt to the pandemic environment and continue to work through backlogs for excess demand in the previous months. Last month’s figures for both surveys were particularly upbeat. With no significant down event during the period to both surveys - and instead possible optimism for fiscal stimulus measures to come ahead of the November elections earlier this month, both readings are likely to be strong. However, similar to the median economist estimate, we expect both indices to normalise slightly downwards to reflect some easing from the strong reading in September.

High levels of backlogs suggests business sentiments' momentum may be sustained in to October

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As for retail sales data, seasonal adjustments will probably be in favour for the index in September's reading. Retail sales during the month of August tends to be strong before easing in September thanks to the impact of back-to-school purchases. With disruptions to the school-term and study environment of students due to the Covid-19 restrictions, August's non-seasonal adjusted figure fell from July, indicating that the usual trend has been disrupted due to Covid-19. This may as a result work in favour for September’s data as it gets an additional boost from seasonal adjustments in an attempt by the Census Bureau to smoothen out the curve. In addition, the strong auto sales and relatively stable gas prices may also help lift the headline figure. In the short-term, this will likely work against the dollar as traders and investors become more obliged to enter into short-dollar positions due to low demand for the greenback's safe haven properties and higher likelihood for a Democrat win which implies a higher propensity of fiscal spending in the coming quarters. The focus for longer-termed plays will be on the overall trend of retail sales in the US as personal savings continue to ease. This comes especially true with the imbalance in the negative impact of Covid-19 in the labour market (lower skilled workers less likely to be kept on payroll which results in high personal savings figures more applicable to the middle- and higher-income segment of the labour market).

Auto sales gained at a faster pace in September with mostly stable gas prices

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Consequently, our view is for the Dollar Index to have more room to fall, possibly retesting the 92.79 level during the week. In the long-term we still view the dollar as more likely to weaken, which coincides with market predictions for a higher probability for Democrats to win the Senate and Presidency. The risk to the strategy will be the euro, which contributes the biggest weightage for the Dollar Index, as the bloc continues to see accelerating daily Covid-19 cases and increasing likelihood for additional lockdown measures.

Technical Analysis:

DXY

The dollar index continues to hover within its tight range between 91.50 and 95.00. MACD suggests that the index is in an uptrend, but previous months signals that the index may not be able to maintain a strong bullish signal. Furthermore, the overall 200-day trend for the dollar is still well into bearish territory. With a resistance level at 93.98 and 94.15 there may not be a catalyst to push the index back into a short-term bullish trend. Hence, we expect DXY to continue to trade within its range with some possible downside potential back towards 92.79’s level.

Support: 92.79 / 92.17 / 91.73

Resistance: 93.98 / 95.35 / 96.10

DXY Chart (H4)

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