Chart of the Day DXY (US Dollar Index)
DXY (US Dollar Index) Testing Trend Support
A more positive trading session overnight, with US and Asian equities up, as the US Fed unveiled further stimulus measures yesterday, including open ended asset purchases and that Wuhan will end its 10-week lockdown on April 8th. However, the US Senate again failed to approve a $2tln stimulus plan (although Treasury Secretary Mnuchin is reported to have said it will pass today), while PM Johnson put the UK into lockdown for the next three weeks. The USD is a little weaker on the news, but generally, FX markets remain within recent but wide ranges. In Europe, we start to get the flash PMI readings for March, which will start to highlight the impact of the coronavirus. Earlier Japanese PMIs showed services dropping more sharply than manufacturing, followed by the French PMIs – with services falling to 29.0 from 52.5 and manufacturing to 42.9 from 49.8 to take the composite to 30.2 from 50 – their lowest since the survey began in 1998.
In the US, the Markit PMIs usually get less attention than the better-established ISM surveys, but their timeliness seems set to guarantee interest. Market watchers look for very large declines in both manufacturing and services.
The US Fed unveiled unprecedented measures on Monday, to backstop the US economy from the COVID-19 impact. The Fed’s decisive action is seen as effective to prevent the financial market from becoming a compounding factor to worsen the COVID-19 impact to the real economy and US households. The latest Fed measures include:
- To continue its asset purchasing program “in the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions and the economy”.
- Using its full range of authority expanding bond purchases to include agency commercial MBS as well as US$300bn new credit programs for employers, consumers and businesses.
- Implementing an extensive range of new programs for companies, households and small businesses in what it calls ‘aggressive action to confront severe disruptions’.
- Widening money market mutual fund facilities to include variable-rate demand notes and bank certificates of deposit.
- Will purchase US$75bn of US Treasuries and US$50bn of agency MBS each day this week. 6. Daily and term repo rates to be reset to offering rate of 0.0%.
From a technical & trading perspective the DXY is in the process of testing pivotal trend support which currently comes in around 100.70/50 area if buyers step in again here we will likely witness new cycle highs eclipsing the 2017 103.80 cycle highs before a more meaningful correction will likely develop. A failure to find sufficient bids at the trend support will likely encourage a further set back to test the breakout area of 99.80. Note CitiFX Quant highlight likely USD buying pressure into month end.
CitiFX Quant – “The preliminary model estimate based on 20 March asset index closes points to a strong +4.5 standard deviation signal to buy USD across the board. The signal to buy USD is strongest since October 2008 when it measured +5 standard deviations in G10 crosses on average. The collapse in equity indices, with the MSCI US index among the worst performers in major markets, is the main driver of this month’s signal. We estimate that foreign investors with US assets need to buy USD worth 59bp of global hedged index following AUM to reduce hedges. This is offset by roughly -20bp of USD-based investors’ selling needs to reduce hedges on non-US assets. Asset allocation and hedge ratio assumptions explain the imbalance. Of the net 39bp estimated USD buying need, equity investors drive 43bp and fixed income investors -4bp. There will be no major economic releases ahead of the month-end fix. Investors will likely keep an eye on asset price moves to gauge the likely extent of USD buying needs on 31 March.”
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