Fundamental Forecast for the US Dollar: Neutral
- Amid a sharp rebound in risk appetite, the world reserve currency, the US Dollar (via the DXY Index), fell across the board last week, settling just off of its weekly low.
- New stimulus measures by the Federal Reserve are helping prop up risk appetite. More pressure may be due in the coming days, however, given the expected flow of information and data.
- The IG Client Sentiment Index shows that retail traders are net-short EUR/USD and USD/JPY.
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US Dollar is the World Reserve Currency
The coronavirus pandemic has laid bare just how important the US Dollar is to the global economy. Funding stresses caused by another credit crunch have boosted demand for the greenback, despite the fact that the US economy itself is dealing with the worst of the pandemic: the United States now leads the worlds in total infections as well as deaths.
That the US Dollar (via the DXY Index) is holding near its levels prior to the coronavirus pandemic taking hold of markets in mid-February underscores the near-term significance of the US Dollar to the global economy, regardless of the human and economic cost to the US economy, as grim as it is to say.
US Economic Calendar Starting to Rot
Now that we’re making our way towards the ides of April, we’re beginning to see more and more economic data releases pertaining to March and the end of Q1’19. As one would expect on the back of record jobless claims figures that dwarf the worst the United States as ever seen by nearly 1000%, consumer spending and business investment data have started to turn.
In the coming days, we’ll get to see how much damage has been done to the US consumer, the largest contributor to US GDP. The March US retail sales report is expected to show a decline of -8% over the prior month, while the retail sales control group, the figure used when calculating GDP, is set to drop by -1.8%, according to a Bloomberg News survey. Meanwhile, US initial jobless claims are expected to come in at 5000k, or another 5,000,000 jobs lost.
Atlanta Fed GDPNow Q1’20 Growth Estimate (April 12, 2020) (Chart 1)
The next Q1’20 Atlanta Fed GDPNow forecast will be released on Wednesday, April 15. Based on the data received thus far about Q1’20, the Atlanta Fed GDPNow forecast is looking for growth at 1% annualized. According to the Blue Chip estimate, however, Q1’20 GDP is looking like it may contract by -2.3% annualized; and early estimates for Q2’20 GDP suggest a contraction of anywhere from -20% to -35% is possible.
US Inflation Expectations Weighed Down by Slumping Crude Oil Prices
Energy markets have been battered as the coronavirus pandemic has brought the global economy to a halt. As the world’s largest economies have retreated from economic activity, energy markets have slumped significantly. The spillover effect has been that expectations for inflation have followed lower, no surprise as a major input cost sees significant drops in value.
US 5y5y Inflation Swap Forwards versus Crude Oil Prices (April 2019 to April 2020) (Chart 2)
For all the volatility in crude oil prices – crude oil prices have fallen nearly -65% from their January high – medium-term US inflation expectations, as measured by the 5y5y inflation swap forwards, have rebounded sharply amid the wave of government stimulus measures in recent weeks: stable: after hitting a low of 1.216% on March 12, they currently stand at 1.916%.
US Dollar Net-Long Futures Positioning Plummets, DXY Index Does Not (Chart 3)
Finally, looking at positioning, according to the CFTC’s COT for the week ended April 7 (the most recently available data due to the Easter holiday), speculators increased their net-long US Dollar positions to 15K contracts, up from the 14.1K net-long contracts held in the week prior. Net-long US Dollar positioning has slowly been edging higher over the past three weeks following the sharp selloff beginning in mid-February. Traders are now holding the same composition of net-longs as they were back in late-January.
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— Written by Christopher Vecchio, CFA, Senior Currency Strategist