Dollar Extends Slide Despite Recovery In Stocks

The US dollar extended its slide against all of the major currencies on Friday despite the recovery in stocks. As we’ve often said, currency traders are generally more cautious than equity traders and the greenback’s decline reflects their concern about the raging coronavirus pandemic in the US and its impact on the economy.

Today’s University of Michigan consumer sentiment index gave us a first look at how Americans feel after the election. Not only do they worry about how the economy is doing but the sharp decline in the expectations component of the report tells us that they are concerned about the months ahead.

Who can blame them when new virus cases are accelerating at an alarming rate. More restrictions have been issued with Oregon announcing a 2 week partial lockdown and the mayor of New York City talking about school closure. Restrictions like these put many families in a bind and takes a big toll on the economy which explains why local governments have been slow to roll out these measures.

As virus cases rise, lockdown fears should drive investors out of the US dollar and US stocks. Retail sales, the Empire State and Philadelphia Fed manufacturing surveys are scheduled for release next week and they are all potentially big movers for the US dollar. Consumer spending is expected to improve because most of the new restrictions were announced in November but manufacturing activity could slow.

The next two weeks are critical in the COVID-19 battle for the US and Europe. States either completely lose control of the COVID-19 battle, pushing hospitals well beyond the brink or their efforts are fruitful and the curve flattens. Unfortunately with many European nations two weeks into their lockdown and seeing little improvement, the outlook for the US is grim.

Not only do we expect risk aversion to return and stocks to peak, but the US dollar should extend its slide against the Japanese Yen, Swiss Franc, Australian and New Zealand dollars. Euro and sterling have their own troubles that will become more apparent in the weeks ahead.

Nonetheless, investors continued to buy euros even after Germany reported its highest level of COVID-19 cases ever. According to Germany’s health minister, it is too early to consider easing restrictions. Anti-dollar flows are the only reason for the euro’s rise. The market’s been aware of Europe’s deteriorating virus situation for weeks now and the central bank has been very transparent about their intentions.

Whether the Federal Reserve will ease is an open question. We know they have no intention to raise interest rates for the next few years but with restrictions still limited to certain states, the urgency to ease may not be there yet. EUR/USD traders are betting that will change. With that said, there are no major Eurozone economic reports on the calendar next week.

Sterling on the other hand could wobble on retail sales and inflation figures. When the Bank of England last met, they left their inflation forecast unchanged which means that CPI could beat especially after BRC reported stronger shop prices. Retail sales on the other hand should be weaker.

Its also a big week for Canada with inflation and retail sales numbers scheduled for release. Unlike the UK, stronger numbers are expected from Canada. The Australian and New Zealand dollars should also outperform. Australian labor market numbers are due for release and the PMIs show job growth in the manufacturing and services sector.