As equities climb, the dollar drops
Wednesday 5 August, 2020
Daily Currency UpdateAs the equity markets go, so goes the dollar. But rather than riding the covid-coaster in tandem, the two indices go in opposite directions. In trading this morning, the US dollar rode lows with the euro, pound and Canadian dollar while the S&P 500 climbed higher.
The reasons contradict themselves. More economic pain in the future and easier monetary policy across the US’s major trading partners. The result – traders and investors will take greater risks to capitalize on the new funding from governments.
Having suffered its worst monthly decline in a decade, the dollar’s short-term prospects now rest in the hands of fiscal support plans.
Government relief is crucial in seeing the US through the COVID-19 pandemic. With unemployment benefits ending last week, Congress’s inability to deliver a new round of support risks an even steeper economic downturn as consumer sentiment and spending essentially evaporates.
Currency markets remain tied to risk and fiscal spending at present. If Congress can agree to an extensive and wide-reaching relief program, expect the USD to find support and reverse July’s losses.
Key MoversThe Great British pound edged lower, dipping below 1.30. Fear of second wave of infections derailed the recovery, dampened demand and prompted a shift away from near five-month highs. Despite registering its largest monthly rally in more than 10 years, there are headwinds ahead for the GBP. Brexit negotiations remain at loggerheads as the December deadline looms larger, while the threat of COVID-19 is far from over. It is unlikely the economy will be operating at 100% until well into 2021. We expect resistance on moves approaching 1.33/1.35 with US weakness the key to any sustained upturn.
The Australian dollar edged higher through trade on Tuesday, pushing back through 0.7150 in what was an otherwise lackluster day across both currency and equity markets was. Having crept upward throughout the domestic session following a stronger than anticipated trade surplus and a relatively rosy RBA outlook. The Reserve bank offered few surprises, maintaining its current interest rate setting and only marginally adjusting bond purchases, while re-iterating their view, the economy was performing better than initially expected. While they did point to a sharp decline in GDP through 2020 the promise of a quick recovery through 2021 helped underpin the AUD. The extended and tightened lockdown in Victoria does however pose a significant threat to future growth prospect as the impact to key business across the local economy worsens. Some estimates suggest north of 100,000 business will not survive the new round of lockdown with a rush on insolvencies after job keeper and fiscal support measures ease.
- USD/CAD: 1.323 - 1.336 ▼
- GBP/USD: 1.304 - 1.315 ▼
- EUR/USD: 1.176 - 1.190 ▼
- USD/AUD: 1.381 - 1.399 ▼