Dow futures are down 500 points this morning and the sell-off is accompanied by fresh gains for the U.S. dollar. The greenback kicks off the New York session stronger against all of the major currencies with the exception of the Japanese yen. However the battle between the more desired safe haven (USD or JPY) has kept the pair frozen in a narrow 80-pip range for the last 48 hours. Ten-year Treasury yields are also down sharply as investors shift from equities to Treasuries.
The oil collapse created all-out pandemonium in the financial markets with everyone still trying to figure out what triggered the historic move. OPEC nations are talking about production cuts, while U.S. President Donald Trump said the U.S. will be increasing its strategic petroleum reserve, yet none of this eased selling. When one major market is disruptive and illogical, risk aversion seeps into all other assets. Weak data could add to market declines with existing home sales scheduled for release this morning. The main focus for U.S. dollar traders is the vote to increase aid in the emergency stimulus bill. It is expected to pass today and head for the House. However, it may not be an unanimous vote, which means it will be passed back and forth again between the two chambers.
Sterling and the New Zealand dollar are the weakest currencies this morning. Sterling hit a two-week low. On Monday, we talked about the possibility of very soft April data. While the labor numbers this morning were for February and March, the subtle deterioration is a sign that the worst is yet to come. Jobless claims ticked higher, the unemployment rate increased and most importantly average weekly earnings sank to 2.8% from 3.1%. According to the Bank of England’s chief economist Andy Haldane, the first half GDP figures are set to be pretty ugly. UK inflation data is due for release tomorrow and given the drop in shop prices, the risk is to the downside. GBP/USD is trading comfortably below the 20-day SMA for the first time since late March – paving the way for a deeper slide.
The New Zealand dollar was hit by comments from Reserve Bank of New Zealand Governor Adrian Orr last night. He said Quantitative Easing is better than negative rates to deal with a sharp virus impact, but negative rates are not ruled out. RBNZ said they will be thinking about more stimulus in May.
The Australian dollar is also down almost 1%, but the gains were more modest than NZD because the Reserve Bank of Australia is less sanguine. They expect the national outlook to fall around 10% in the first half of 2020 and for the unemployment rate to be around 10% by June. However, RBA Governor Philip Lowe sees no signs of stress in their financial system and would describe current conditions as a contraction rather than recession.
The pressure on oil prices drove USD/CAD to two-week highs despite mixed retail sales numbers. Bear in mind their latest numbers were from February – Canadian retail sales rose 0.3%, but excluding autos they were flat, which was a slight improvement from January but weaker than expected.
The euro on the other hand is one of the most resilient currencies this morning. The German ZEW survey hit a decade low of -91.5 vs. forecast of -77.5 but the expectations surged from -49.5 to 28.2 to its highest level in five years. This dramatic swing is a reflection of investor confidence that the economy will start to turn around in the second half as the country gradually eases restrictions. Chancellor Angela Merkel warned about easing too fast but starting this week, smaller shops reopened to serve customers, and students will return to school gradually. Italy, one of the countries hit the hardest by the virus, is also talking about gradually easing their lockdown from May 4.