The new trading week kicked off with an aggressive sell-off in crude and renewed gains for the U.S. dollar. The primary focus today was the Canadian dollar, which sold off aggressively on the back of falling oil prices. The front crude futures contract dropped more than 300%, turning negative for the first time ever. As reported by our colleague Boris Schlossberg, oil has fallen to its lowest level in two decades on “the collapse of global demand with market dynamics further exacerbated by the price war between Saudi Arabia and Russia,” but this is more than a demand issue. Given the extent of the breakdown in oil, technical factors are probably in play as well will be revealed in the future. With that said, the impact on the oil industry will be significant. We expect the U.S. government or OPEC and OPEC+ nations to make some sort of statement in an attempt to turn prices around in the next 24 hours.
Oil firms in Canada and the U.S. have been hit hard by low prices but this latest decline will push many oil related businesses into bankruptcy. Canadian retail sales and inflation numbers are due for release later this week. The consumer spending data is for February, so it may not be terrible, but softer numbers are still expected. The path of least resistance for USD/CAD should be higher.
The greenback strengthened against all of the major currencies despite declines in Treasury yields and equities. Over the past few weeks we’ve talked a lot about why investors are attracted to the greenback even as the U.S. eclipses the rest of the world in the number of COVID-19 cases. According to Johns Hopkins data, current cases in the U.S. exceed 750,000 with the next country reporting the highest number of cases being Spain at 200,000 cases. The U.S. dollar is a safe-haven currency and the general view is that without a U.S. recovery, there cannot be a global recovery. Investors are also encouraged by President Donald Trump’s push to reopen the economy along with reports that manufacturers will restart factories in early May. Over the weekend, the president also took the unusual step of talking up the dollar. He said the dollar is very strong and strong dollars are overall very good. On Friday, the Fed said it would continue to taper its Treasury and Agency bond purchases.
In a nutshell, here are the 4 reasons why the U.S. dollar was so strong on Monday:
1. Stocks Down 500 Points, U.S. Dollar Catches Safe Haven Bid
2. President Trump Says “Strong Dollars are Overall Very Good”
3. Fed Continues to Taper Treasury and Agency Bond Purchases
4. Investors Optimistic about Trump’s Plans to Restart Economy
Aside from jobless claims, there’s also very little U.S. data on the calendar this week, so risk on/risk off, curve flattening data and stimulus headlines will drive dollar flows. In contrast, there’s a tremendous amount of data from the Eurozone, UK and Canada, so euro, sterling and the Canadian dollar will be in focus.
From the Eurozone, April PMIs, the German ZEW and IFO surveys are scheduled for release. While this morning’s trade numbers were better than expected, the April data should be very weak. Europe is still in strict lockdown, Germany says there are no current plans to ease restrictions, Spain and Italy could limit travel into 2021. Economic activity has ground to a halt and that should be reflected in the data. EUR/USD is also weak on a technical basis and we look for the pair to drop to 1.08. From the UK, April PMIs, retail sales, jobless claims and inflation numbers are scheduled for release. Most of these reports are also expected to be very weak, which could kick off a new leg of GBP/USD weakness.
The outlook for the Australian and New Zealand dollars are far less grim. The RBA releases the minutes from its last meeting tonight followed by a speech from RBA Governor Philip Lowe – a cautionary tone is widely expected but the central bank is also reluctant to bring rates lower or to increase quantitative easing. More importantly, Australia and New Zealand seem to be getting real control over COVID-19. There were no new cases in South Australia and Northern Territory over the weekend. With only 12 deaths and only nine new cases yesterday, New Zealand is ready to reopen the economy next week. Consumer prices also rose more than expected, helping to drive gains in NZD.