This will be a challenging week for the U.S. dollar. On Friday, I outlined three reasons why the U.S. dollar should continue to fall. And as markets reopened Monday, investors did not hesitate to take the greenback lower. They sent the U.S. dollar tumbling against all of the major currencies, and this drove USD/CHF to its weakest level in more than five years and EUR/USD to its strongest in two years. After breaking down last week, USD/JPY accelerated its slide, dropping to its lowest level in four months. Investors have plenty of reasons to be weary of owning U.S. dollars. On Friday, we talked about the end to extra jobless benefits, the prospect of double-digit declines in GDP growth and a dovish FOMC.
Today, we saw some of these concerns begin to materialize. Officially, the $600-a-week extra unemployment benefits that kept more than 20 million Americans afloat is set to expire on Friday, but many states ended payments already. With the White House touting a trillion-dollar relief package, many market participants are holding out hope that Congress will come up with a powerful deal to keep the recovery going. Unfortunately, it seems that Senate Republicans are looking to cut the weekly benefit to $200 from $600 with another one-time $1,200 stimulus cheque. This proposal falls grossly short of what the economy and unemployed Americans need, and should be met with disappointment by the markets.
Economists are looking for GDP growth to contract by 35% in the second quarter, but the data may be much worse. The Atlanta Fed, for example, predicts a 52.8% decline. Durable goods, which is a key input into GDP, rose more than expected, but excluding transportation, order growth slowed to 3.6% from 3.3%. Ten-year Treasury yields continued to fall, hovering not far from record lows. This decline is a reflection of the market’s concerns about the U.S. economy and its expectations for a dovish Fed. In other words, bond traders are positioning for ongoing accommodation, cautious comments from Federal Reserve Chairman Jerome Powell and a pledge from the central bank to do more if needed.
The U.S. dollar fell the most against the euro and Japanese Yen. The slide in USD/JPY was no surprise as it was only a matter of time before the pair would break down. This is also the busiest week for earnings and any negative results could trigger further USD/JPY weakness. The rally in EUR/USD also makes sense as Europe continues to lead the recovery. Last week’s PMIs and today’s German IFO report confirms the region’s ongoing recovery. Second-quarter GDP numbers are also due for release from the Eurozone and Germany. While growth is also expected to contract at a faster pace, the decline in the Eurozone will be more moderate than the U.S. which could extend the rally for EUR/USD. With that in mind, EUR/USD has rallied 11 out of the last 12 trading days. In the past two months, the pair has appreciated nearly 9 cents, which is a big move over a very short period of time.
But virus cases are suddenly rising in France, Germany and Spain, raising concerns for a second wave. If these numbers start to grow more consistently, it would provide a strong case for profit-taking in the euro. Sterling also rallied on the back of U.S. dollar weakness, rising to a four-month high. EU-UK trade talks are in the works with very little progress. There are no major UK economic reports on this week’s calendar, so the currency should move purely on risk appetite and U.S. dollar flows.
The Australian, New Zealand and Canadian dollars traded higher, with NZD leading the gains. Stronger Chinese industrial profits helped, but the rally in AUD could come to a screeching halt tomorrow if inflation data falls short of expectations. CPI is expected to fall sharply in Q2, exacerbating concerns for investors already worried about the jump in new cases and record deaths in Australia. Authorities are struggling to contain the second wave in Victoria with a six-week lockdown and border closures.