Wednesday, November 25, 2020

DXY may have some limited upside potential today, but it likely will only be temporary

  • Dollar
  • DXY
  • US payrolls


Analysts’ Pick:  DXY may have some limited upside potential today, but it likely will only be temporary

  • Initial claims ex. Louisiana declined in the previous week and should continue that trajectory as damage layoffs is limited due to only several states in the US shutting businesses
  • Continuing claims to continue to decline as holiday season hiring is likely to extend into December
  • Household spending will probably face growing weakness with the exhaustion of unusually high savings and declining income
  • Dollar may find some temporary strength from potential weakness in economic data and near oversold levels
  • Medium-term weakness in the dollar is still expected after a healthy yet minimal upside correction

A flurry of economic data for the US is set to be released. Of those being reported, an updated jobless claims dataset and October's household spending report should draw the most interest. Initial jobless claims unexpected jumped to 742,000 last week, the first increase in initial benefit claims after four consecutive weeks of losses. While lockdowns appear to have had some impact on the data, most of the upside appears to have stemmed from a spike in claims in Louisiana. Removing Louisiana from the overall dataset shows that initial claims continued to dip from the week before. Louisiana’s uptick appears to have some relation to either damage from previous storms or renewed lockdowns, but we will likely have to wait on any possible revisions to the dataset for clarification especially since new unemployment benefit claims appear to be led by real estate, rental and leasing services.

Last week’s spike in initial claims was mainly due to an unusual uptick in claims in Louisiana


We may see more upward pressure on initial claims this week, but seasonal adjustments look more likely to be in favour of a drop. Renewed restrictions have put some pressure on layoffs, but it continues to be limited by only a few states enforcing restrictions that have caused some businesses to close. Stay-at-home orders are also limited to mostly California, Oregon and New Mexico and is likely to have only marginal impact on layoffs. A probable decline is expected as a result, assuming that the uptick in Louisiana is an error or one-off event. We expect a drawdown of approximately 40,000 after adjusting for seasonal factors, bringing initial claims closer to 700,000 for the week ended November 20th.

Most states remain open in the US, implying that pressure on layoffs should mostly be limited


We expect continuing claims to continue to fall at a slower rate, in line with last week's data. As before, exhaustion of the 26-week limit to jobless benefit claims most states impose will continue to be a factor to the downward pressure. Aggregated claims (including claims from Pandemic Emergency Unemployment Compensation (PEUC) and Pandemic Unemployment Assistance (PUA) federal programs) managed to fall below 20 million in the week ended October 30th. Investors should continue to watch the aggregated claims data since it will provide a better estimate for overall unemployment in the US. The upcoming holiday season is likely to continue to drive employment, as retailers and logistic services add more workers to their roster to better accommodate an expected spike in demand with household savings still at above pre-pandemic average levels. This should also implicitly suggest that November's payroll data (coming out next week) will likely see a moderation of hiring seen in October's report.

Aggregated claims dips below 20 million, expect more decline from holiday season hiring with some impact from surging Covid-19 cases


Household income will more likely decelerate in October as US President Donald Trump's executive order to extend enhanced benefits came to an end in the month prior. This would mean that savings from earlier in the year will continue to dwindle down at a quicker rate than before as households dip into their savings without a solid increase in income for the holiday months. A further slowdown will likely come in November's dataset after the surge on Covid-19 cases puts more downward pressure from renewed lockdown restriction in parts of the US, with the services sector likely seeing the most impact. A slowdown in October’s retail sales also suggests that any gains in consumption was probably muted during the month. As a result, we expect spending to grow closer to 0.3%, while income declined approximately 0.1%, which is below the median forecast by economists surveyed by Bloomberg.

A likely decline in income following the expiration of enhanced benefits resulting from Trump’s executive orders and dwindling savings to weigh on spending moving forward


Hence, we expect some limited risk aversion to come later today ahead of the Thanksgiving holiday in the US. The big advances across risk assets over the past week also suggests that profit taking may start to ensue, which could put some downward pressure across financial markets. That said, we still see medium-term upside to risk assets as more vaccine news is likely to materialise with several other drug makers reaching the final leg of their respective phase three trials. The short-term risk to this is renewed lockdown measures and over optimism in financial markets from vaccine developments since benefits is likely to only materialise beyond Q1 2021. As a result, we see the Dollar Index rebounding slightly towards 92.53's level during market open in the US, but is unlikely to push past that level and instead revert back into its overall downward trend and retest a low at 91.74 in the medium-term.

Technical Analysis:


DXY has continued to show weakness over the past three weeks following the US presidential elections. However, that momentum looks to have eased in the short-term. This is likely due to the influx of funds going back into the US, keeping the greenback supported. RSI is approaching closer to oversold levels in the index, signalling that we could see a rebound in the dollar as traders take profits. Fundamentals suggest that this upside is unlikely to be maintained, and its 100-day moving average should provide a strong resistance level in line with that. We expect a small technical rebound towards 92.53’s level as a result, with little upside strength to go beyond that level and step back into a downward cycle closer towards the low seen in September.

Support: 91.71 / 91.34 / 91.00

Resistance:  92.53 / 93.02 / 93.88

DXY Chart (H4)