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Timothy Fox - Head of Research & Chief Economist
Published Date: 03 May 2020
The dollar lost ground last week amid improving risk appetite in global markets, underpinned by the prospect of reopening economies and as central banks reaffirmed their commitment to providing ample support as necessary. Sentiment turned weaker on Friday, however, with President Trump escalating his complaints against China and making allegations about its role in the coronavirus epidemic, which returned some support to the dollar at the end of the week.
Despite the continued litany of bad economic data in the US and elsewhere the markets took heart from the apparent progress countries are making towards easing lockdowns, as well as from new central bank measures. US Q1 GDP sank -4.8% on an annualized basis, the sharpest drop since 2008, while Eurozone GDP fell by -3.8% q/q. There were also an additional 3.8 million US jobless claims last week, bringing total initial claims over the past six weeks to over 30 million. While the Fed projected an even more pessimistic view of the economy that in did back in March, it pledged to take additional steps as needed. Other central banks also announced new stimulus steps, with the Bank of Japan pledging to buy an unlimited amount of bonds, while the ECB also provided some new liquidity-boosting measures reducing interest rates on some of the programs it has put in place to support economic growth. The move was more or less what the markets had anticipated, causing its rally to peter out and retreat from above 1.10. Further adding pressure to currencies at the end of the week was the ratcheting up of pressure on China from the White House, with U.S. President Trump calling for China to be held accountable for the coronavirus pandemic, and hinting at retaliation against Beijing.
The mere mention of a return to tariffs and the possibility of consideration being given to cancelling debt obligations to China are clearly things that make financial markets very nervous, especially so soon after the trade war ended in January and in the midst of the worst global recession in decades. It now looks very unlikely that phase two trade talks will start this year, especially with political pressures in Washington starting to build. The USD benefited from these renewed tensions but it too early to say how far the White House will be prepared to go in pressuring China with jobs and the economy at risk. However, we think it is too early to rule out more USD strength just yet with US-China tensions probably set to increase further and with the easing of lockdowns likely to prove more complicated than many assume.
Much of this week's focus will remain on economic data. The U.S. employment report will be the highlight at the end of it which could see a massive drop in non-farm payrolls in excess of 20 million, with the unemployment rate rising to 16%. Central bank meetings include the BoE and the RBA, with neither expected to change their headline interest rates which are both close to zero. The BoE’s Monetary Policy Committee meeting on Thursday will be accompanied by its quarterly Inflation Report which will include large downward revisions in the central bank's growth and inflation forecasts. The RBA’s meeting will also be followed by its Statement on Monetary Policy on Friday, which will also detail its outlook.
Impacting liquidity Japanese markets will be closed for Golden Week through Wednesday, while China is also on holiday at the start of the week.
Source: Bloomberg, Emirates NBD Research
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