- Dollar Index has edged higher over the week
- Markets appear to support the Dollar on good and not so good economic prints
- Europe looks to be in a deeper economic dislocation than the U.S.
- The right trade is to short any early Monday bounce in EURUSD as a push toward parity beckons
The Dollar traded higher against most of the major currencies last week as the Dollar Index rose by 0.33% from 99.504 on April 9 to close this past Friday at 99.836. Trading of the Dollar Index may see a small amount of profit taking as the new week begins, however, from a daily, weekly and monthly basis the technical sentiment suggests the market will buy the index without hesitation.
This comes against a rather worrying background for the U.S. economy as another 5.2 million people filed for initial jobless claim benefits last week. The enforced shutdown hit the housing sector as housing starts looked bad. The metric plunged 22.3% month-over-month to an annualised rate of 1.216 million in March of 2020, the lowest since July of 2019 and below market expectations of 1.3 million.
Figure 1: Dollar Index, Initial Jobless Claims, Housing Starts and Philly Fed Index Source: www.investing.com, U.S. Labor Department, U.S. Census Bureau, Federal Reserve Bank of Philadelphia
It was the biggest decline in housing starts since 1984; although the impact of the coronavirus will be only fully visible in the April report. Starts for the volatile multi-family segment slumped 32.1% to 0.347 million while single-family housing which is the largest share of the housing market fell 17.5% to 0.856 million. Declines in housing starts were seen in all regions.
The Philadelphia Fed Manufacturing Index in the US dropped to -56.6 in April 2020 from -12.7 in February and compared with market expectations of -30. It is the lowest reading since July 1980, as the survey’s current indicators for general activity, new orders, and shipments once again fell sharply.
The index for new orders declined further into negative territory, from -15.5 to -70.9, its lowest on record; and the current shipments index dropped to an all-time low of -74.1. Unfilled orders fell 6 points while delivery times rose 13 points, suggesting longer delivery times as the supply chain shows fragility.
It has been suggested that the Dollar is currently a curious currency conundrum as it seems to rise on the foreign exchange markets with both good and bad news. The economy is seen as one that can bounce back quite quickly; plus the impact of the coronavirus shutdown appears to be affecting the rest of the world more.
The IMF has released new forecasts for the GDP growth outlook for 2020, it looks bad for Europe:
U.S. -5.9% Eurozone -7.5% Germany -7.0%, France -7.2%, Italy -9.1% and Spain -8.0%
The Eurozone will struggle to weather the shutdown and given the fact the region was the second major hotspot, with three of the four leading economies badly hit the economic data will most likely worsen more aggressively that in the U.S.
The April data for PMI and Retail Sales are going to be shocking and whilst one cannot be complacent about worries over the U.S. economy, especially if President Trump opens the system up too quickly, there is an ongoing flaw at the heart of the Euro. A sovereign debt crisis is likely to hit unless the ECB absorbs all he new debt and a genuine move toward “Eurobonds” is undertaken.
In the single currency region, the business climate indicator dropped 0.22 points from the previous month to -0.28 in March 2020, the lowest since December and below market expectations of -0.05. The IHS Markit Eurozone Manufacturing PMI was revised lower to 44.5 in March 2020 from a preliminary estimate of 44.8, below February’s one-year high of 49.2. The latest reading pointed to the steepest month of contraction in the manufacturing sector since July 2012
The consumer confidence indicator in the Euro Area was confirmed at -11.6 in March 2020 from -6.6 in the previous month. The 5.0point decline was the largest on record, led by an exceptionally strong fall in expectations concerning the general economic situation.
All this weak economic news has seen the EURUSD unable to break above 1.0900 with any conviction and since last Monday a small corrective channel has started to develop, see Figure 2.
Figure 2: EURUSD One-Week Source: www.investing.com , Spotlight Ideas
The corrective channel may be tested early on Monday, however, with a wealth of weak European data due next week I am looking for the channel to persist and extend the general decline in the level of the Euro.
Of course, the path to break below 1.0638 is congested, however, such is the selling momentum that I do expect a slow drift toward a serious test of parity to emerge over the summer months.