DXY: Dollar liquidity plentiful thanks to the Fed, markets increasingly bearish on US outlook

•  The US dollar is down against all G10 currencies over the past week, but also down over the past month and indeed the past three.
• Markets are wondering if the dollar has more to go down the abyss, or will we now see some consolidation. 
• Below, we explore the factors pertaining to dollar weakness and seek to conclude where next for the greenback?

At the time of writing, DXY is trading at 93.05 between a range of 93.04/68., losing 0.23% into the final hour on Wall Street on Thursday.

The day has seen more selling of the greenback and a sell on yesterday's post-Federal reserve relief rally to said highs.

At this juncture, it could be argued that the USD breakdown likely to continue considering the Fed’s dovish resolve, virus-thwarted rebound prospects and Europe’s fiscal agreements in a new cohesion between European leaders, among the key catalysts.

On the other hand, the USD still stretched on the short-term dashboard, so it could be expected that there are increasing consolidation risks.

Trump just can't keep his Twitter fingers to himself

However, a looming regime shift underscores an expected unwind of structural overvaluation and the US President Donald Trump's tweet today has not done sentiment any favours on that front. 

In an unprecedented move, markets took note of today's tweet when Trump raised the possibility of delaying the US presidential election scheduled for November.

Trump, without evidence, repeated his claims of mail-in voter fraud and raised the question of a delay, writing in a post on Twitter, "delay the election until people can properly, securely and safely vote???"

In response, as CNN reports,

a large number of congressional Republicans, including members of House and Senate leadership, openly rejected President Donald Trump's suggestion Thursday that November's presidential election should be delayed, a move that the President would have no authority to make because the Constitution gives Congress the power to set the date for voting.

• The uncertainty pertaining to the elections is not going to be favourable to the dollar in the coming months. 

Trends in the markets correlating to the Fed

Meanwhile, we are seeing plenty of trends in the markets that are consistent with the Fed, namely in the broad correlation since late March between EM's, US equities, gold and a weaker USD. 

Gold’s surge has been a head-turner while we are seeing the equity volatility benchmark, the VIX, slipping to lows since February and the MSCI World Index hovering near 5-month highs.

US rates are now cleary to remain pinned lower amid forward guidance and quantitive easing. The Fed's about-turn is more dramatic than most and the FOMC sounds ready to deliver further stimulus to an economy that needs more help.

Moreover, in yesterdays meeting, the Federal extended its dollar liquidity swap lines and repurchase agreement facility for foreign international monetary authorities through to March 31st 2021 in an effort to alleviate liquidity crunch concerns.

With the Fed’s aggressive monetary easing stance, and a willingness to do more, following a decade of US growth and accompanying higher yields, there is little wonder that the US dollar is now under pressure pertaining to the rate of the coronavirus spread and its impact on the US consumer and sentiment for the economy. 

• These trends are here to stay, not favourable for the dollar.

The US consumer's fears will be the downfall of the economy

Today, the US Gross Domestic Product declined at an annualised rate of 32.9% in 2Q 2020,

The data was not quite as bad as feared (consensus -34.5%), but this is still the biggest decline on record.   

The non-annualised numbers were a 9.5% quarter-on-quarter drop. Then,  if one combines this with the 5% annualised fall in 1Q GDP, it means the US economy contracted 10.6% peak-to-trough in the first half of the year.

Meanwhile, the monthly data showed significant improvement in May and June, which is positive for the Q3 starting point.

It is true, that more recent daily data show momentum fading again, however.

We continue to forecast a +15% q/q AR for real GDP in Q3, although that is down from 18% two weeks ago and it assumes significant slowing on a monthly basis relative to May and June. We have +5% for Q4, but that will depend significantly on COVID developments in coming months,

analysts at TD Securities explained. 

However, by way of international comparison, the 10.6% peak-to-trough fall in US GDP since 4Q 2019 is less bad than the European numbers we had earlier in the day.

Today, Germany showed an 11.9% decline in output, hence a bid in EUR/USD.

• The diverging sentiment shifting towards Europe is supportive of a once thwarted euro, which again, is not favourable to the dollar. 

Optimism wearing thin

The long and short of it, the financial markets are already priced for a vigorous recovery, but the reality is that none of the V-shaped recovery is playing out for the US. 

The US is losing its title on the economic podium and Covid-19 is far from beaten.

Optimism about a vaccine has been able to propel US equities forward, but the timing and its efficacy are still unknown which all makes for greater uncertainty amongst the US consumer. 

A renewed spike in cases is forcing state Governors to backtrack on reopening plans,

Plunging consumer expectations have been reflecting anxiety over a pick-up in Covid-19 cases, the reversal of reopening strategies and worries over the financial implications of the conclusion of the $600 a week Federal unemployment payment.

• Covid is here to stay and until the US can get a handle on it, or a vaccine is on the market for the US consumer, there is little chance of an economic recovery, which is again not favourable for the dollar.

Eyes on US data and EMs

 We are probably going to see some major disappointments in the data over the next coming months, starting with next week’s payrolls number.

Today showed initial jobless claims rose for the second week in a row to 1.434 million while continuing jobless claims rose by 900k, which reinforces the Covid -9 fear factor in the US financial markets.

Looking elsewhere, there is value in EM FX and EMs in general. The correlation there between the US dollar should remain tight considering EM debt liabilities is denominated in USD.

However, we are surely due to some more two-way price action soon amid still-material Covid and geopolitical risks for the entire world, which is a dollar positive factor indeed.

DXY levels

Overall, this is a very strong downtrend and there would not be too many long opportunities,

 Rajan Dhall, MSTA notes in the following full analysis:

• Dollar Index Price Analysis: As the dollar capitulation continues here are some key support levels