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Dollar Highlights This Week: Strong Start But Investors Could Turn Cautious

Published 12/05/2020, 05:05
Updated 09/07/2023, 11:31
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The US dollar kicked off the new trading week stronger against all of the major currencies. Friday’s Nonfarm Payrolls report showed massive job losses in the month of April but these ugly numbers were still better than expected, paving the way for a recovery in the greenback. Yesterday’s gains should be no surprise considering how the greenback traded after the jobs number, especially since there were no US economic reports to threaten the move on Monday.

Investors will tread more cautiously as the week progresses with inflation data on Tuesday, Fed Chairman Powell’s speech on Wednesday and retail sales on Friday. Aside from Powell, we’ll hear from a number of Fed officials including Bostic, Kashkari, Harker, Bullard, Quarles, Mester and Kaplan. The big question for the greenback is the possibility of more easing. The Fed promised to provide ongoing stimulus but are negative rates on the table? Last week Fed fund futures started pricing in negative rates in December 2020 but yields popped back above zero after NFPs. For the time being, we don’t think there’s any value to fanning speculation about negative rates, so Powell will most likely brush them off. There’s no question that the outlook by all policymakers will be cautious because no one knows how successful reopenings will be or how quickly a second wave will return but for now, the future looks brighter. As for CPI, the sharp decline in oil and gas prices last month should drive inflationary pressures lower.

The other big focus this week will be the Reserve Bank of New Zealand’s monetary policy announcement, Australian labor market numbers, Chinese retail sales and revisions to Eurozone GDP. The New Zealand and Australian dollars were the worst performing currencies Monday which could be a sign of what’s to come in the week ahead. Both currencies traded near their 6 week highs last week and are due for a correction. The Reserve Bank of New Zealand is not expected to change policy but last month Governor Orr said negative rates are not ruled out and they will be thinking about additional stimulus in May. Since that statement on April 20th, data has been mixed with credit card spending and building permits plunging, but the trade balance improved and employment change remained positive in Q1 instead of falling as economists anticipated. Business confidence also improved in May after falling sharply in April. With New Zealand’s 2 month lockdown coming to an end, schools and businesses reopening, it may not be necessary for the RBNZ to ease again but the option is on the table and that alone could lead to NZD profit taking front of the week.

The Canadian dollar weakened against the greenback on Monday but on a relative basis, we expect the loonie to outperform. Not only was Friday’s labor market report significantly better than expected but Saudi Arabia also voluntary cut crude oil production by another 1 million barrels in June. This announcement caught the market by surprise but the actual impact on crude was short-lived.

Sterling fell harder than the euro which was virtually unchanged against the greenback. No major economic reports were released from Europe but first quarter GDP numbers are due from the UK this week which will be very market moving. As reported by our colleague Boris Schlossberg:

“In the UK Boris Johnson’s government announced an easing of the lockdown measures with some non-essential retail to open in June while most of the economy was to be open in July. The announcement, however, was marred by confusion on new social distancing rules and cable fell to session lows trading below the 1.2400 figure as a result.”

For the euro, policymakers are still talking about last week’s German Constitutional Court ruling which is creating some downward pressure on the single currency.

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