Wednesday’s U.S. economic reports were terrible. Retail sales fell 8.7%, the largest one-month decline ever. The Empire state manufacturing survey also hit a record low of -78.2, but, unlike retail sales, which was slightly worse than expected, the forecast for Empire was -35. Industrial production fell 5.4%, which was also slightly worse than expected. The Beige Book was overwhelmingly pessimistic with the Federal Reserve noting that economic activity contracted sharply in recent weeks. They said employment fell in all districts steeply in many cases and all districts reported highly uncertain outlooks among business contacts with most expecting conditions to worsen in the next several months. Yet, the greenback ended the day higher against most of the major currencies. With stocks tumbling and Treasury yields crashing, there’s only one explanation for the voracious demand for U.S. dollars and that’s risk aversion.
U.S. fundamentals are terrible but the greenback caught a safe-haven bid during the first half of the New York session. With currencies, it's always about relative growth – one country’s outlook versus another. Fresh flareups in Europe and Asia suggests that the world really doesn’t have a good handle on the virus. According to the World Health Organization, it is unclear whether recovered patients can be reinfected. Minimally, lockdowns will continue in Australia, New Zealand and Germany. The euro fell more than 1% today after Spain, which had reported a slowdown in new cases, saw the trend reverse with new cases hitting a six-day high. Sometime this week, Germany will also extend its social distancing rules, which were set to ease on April 19. In the UK, 761 more people succumbed to the virus with Scotland and Wales recording their highest daily increase in deaths to date.
Even if some countries or states restart economic activity in mid-May on a rolling basis, borders will remain closed for some time and social distancing rules could remain in place for the rest of the year. This means earnings will stay weak in the second and third quarters. All of this should be negative for the U.S. dollar but it may be even worse for the rest of the world because without a U.S. recovery, there will be no global recovery, which explains why the greenback attracts investors when U.S. fundamentals are weak. Thursday’s Philadelphia Fed survey is expected to be just as disconcerting as the Empire State index, and investors should anticipate double-digit declines in housing starts and building permits especially after the NAHB index hit a record low of 30 in April.
The Bank of Canada left interest rates and its asset purchase program unchanged, which was no surprise given the aggressive measures it had taken in March. However, it unveiled new money market operations, including a new corporate and provincial bond buying program. The central bank also cut its GDP estimates materially. It expect real GDP will be 1-3% lower in Q1 and 15-30% lower in Q2. There is considerable uncertainty surrounding the timing of the recovery and the near-term downturn will be the sharpest on record. This unambiguously dovish outlook sent USD/CAD above 1.4100 intraday. Unfortunately, the pair failed to extend its gains after Bank of Canada Governor Stephen Poloz said 0.25% is the effective lower bound and there’s little purpose to starting QE with the economy in lockdown.
Australian labor market numbers are scheduled for release this evening and the Australian dollar sold off hard ahead of the release. In fact, the Australian and New Zealand dollars were the worst performers on Wednesday. AUD and NZD data were weak with Australian consumer confidence tumbling sharply and house sales in March contracting. Job losses are expected for the first time in five months and the unemployment rate is expected to rise to its highest level in nearly two years. With that said, the forecast of -30,000 is not that low because the employment component of manufacturing and service sector PMIs improved in March.