If there’s one thing that’s certain in forex, it is that the U.S. dollar is king. The greenback traded higher against most of the major currencies despite another round of worrisome data. More than 5.2 million people filed for jobless claim benefits last week, housing starts fell by the largest amount in three decades and the Philadelphia Fed index hit a 45-year low of -56.6. Yet, the data wasn’t as terrible as the market had feared. Economists were looking for claims to rise by 5.5 million with investors bracing for another 6 million print. Building permits also fell less than expected. However, the reaction in equities and currencies confirms that other investors are not optimistic. In fact, the primary reason for the dollar’s strength is ongoing pessimism.
For the past few weeks, we’ve been talking about why the greenback rises on good news and bad because investors perceive the outlook for the rest of the world to be worse. This is one of the reasons why the euro could test its 3-year low of 1.0636 versus the U.S. dollar. While Europe slowly crawls out of the depths of the COVID-19 shutdown, the region was the second major hotspot, which means economic data will worsen more quickly. We’ve mostly seen February and March data, such as this morning’s Eurozone industrial production numbers, which showed a modest 0.1% decline in February. The April numbers will be ugly. European nations are also restarting business activity sooner than the U.S., which can be positive or negative for the currency depending upon whether they learn from Asia’s mistakes or see a second wave of cases.
There’s still a lot to be worried about for the U.S., especially after the small business loan program, which officially ran out of money today. Aside from the loans running dry, the distribution is running weeks behind. Most small business owners are reporting that money has not been received and the longer this continues, the greater strain it puts on the economy and the longer it takes for recovery.
The Australian dollar’s reaction to last night’s labor market numbers is another example of investors taking good data with a grain of salt. Economists were looking for the country to shed 30,000 jobs, but instead Australia added 5,900 jobs. The unemployment rate also ticked up to only 5.2% against 5.4% forecast. The data could have been much worse but lockdown rules did not really begin until the fourth week of March in Australia, so the bulk of the job losses would have been in April.
The Australian and New Zealand dollars should remain under pressure ahead of key Chinese data. First quarter GDP, industrial production and retail sales numbers are scheduled for release. Economists are looking for GDP to contract by 12% in the first quarter, but smaller declines are expected for retail sales and industrial production. We haven’t seen a double-digit decline in quarterly GDP growth for China since its economic reforms in the late 1970s. The real contraction is probably much worse than 12%, and it will be interesting to see if they show that deterioration or try to show a more moderate slowdown.