The USD pushed to multi-year highs despite the Fed’s massive stimulus – what’s going on here?
Source: Economic Events Calendar March 23 – 27, 2020 - Admiral Markets' Forex Calendar
Selling pressure on the DAX30 CFD remained high over the last week of trading, despite the massive monetary stimulus from the Fed on March 15. It cut rates to 0.0%-0.25%, launched a massive QE program of USD 700 billion, and announced swap lines with global central banks to make sure that enough USD are available and cut reserve ratios for banks to 0.
The aspect, in regard to the swap lines, is especially noteworthy since the world has built an enormous pile of USD debt over the years (especially over the last decade with the massive Fed QE), where 12.8 trillion USD debt can be found in the books of banks around the globe. In the current global economic downturn (as currently seen), central banks around the globe are desperate for US dollar which can only be printed by the Fed.
In fact, this US dollar shortage will likely continue and force market participants to keep on dumping their Equity positions with the target to stay as liquid as possible.
That may also very well explain why the planned stimulus package potentially worth more than 1 trillion USD, including direct payments to Americans, didn't start a massive Short squeeze, but only had a limited impact on US Equities, and also on the highly positively-correlated German DAX30 CFD index. The ECB 'bazooka' on Wednesday evening also only saw a late reaction (if it was an reaction to the 750 billion Euro stimulus package at all, probably mainly technically driven).
That said, we stay bearish for the DAX30 CFD for the time being, still see a chance that European governments continue their discussions and probably make a decision on fiscal policy measures which could result in a sharper bounce against the region around 7,500/8,000 points.
While we saw the DAX30 CFD recapture the region around 9,150/200, which slightly brightens the technical picture and could cause a sharp bounce with stronger bullish momentum, resulting in a re-test of the psychological important region around 10,000 and probably as high as 10,250/300, bulls should stay very cautious: the next leg down may be similarly brutal, and push the German index even lower:
Source: Admiral Markets MT5 with MT5-SE Add-on DAX30 CFD Daily chart (between December 5, 2018, to March 20, 2020). Accessed: March 20, 2020, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.
In 2015, the value of the DAX30 CFD increased by 9.56%, in 2016, it increased by 6.87%, in 2017, it increased by 12.51%, in 2018, it fell by 18.26%, in 2019, it increased by 26.44% meaning that after five years, it was up by 34.2%.
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While volatility remained elevated over the last week, not just in Equity markets, but also in the Treasury and forex markets, 10-year US Treasury yields made it back above 1%.
As a result, the heavily sold US dollar saw a revival, in fact, the USD Index Futures pushed significantly above 100.00 points and saw a massive squeeze on the upside.
While rising US yields potentially added to the squeeze higher, the main driver was probably one which points to more volatility and trouble especially in credit markets ahead.
In fact, the current high USD demand came from the latest emergency step taken by the Fed on January 15: after the Fed cut rates to 0.0%-0.25% and launched a massive QE program of USD 700 billion, the main focus seems to lie on the announced swap lines with global central banks to make sure that enough USD are available and cut reserve ratios for banks to 0.
The aspect in regards to the swap lines is especially noteworthy, since the world has built an enormous pile of USD debt over the years (especially over the last decade with the massive Fed QE), where 12.8 trillion USD debt can be found in the books of banks around the globe. In the current global economic downturn (as currently seen), central banks around the globe are desperate for US dollar which can only be printed by the Fed.
That said, we conclude that at least short-term the demand for USD should stay high, despite the massive monetary stimulus from the Fed, a technical target on the upside in the USD Index Future can be found around 105.00 points:
Source: Barchart - U.S Dollar Index - Weekly Nearest OHLC Chart (between January 2017 to March 2020). Accessed: March 20, 2020, at 10:00pm GMT
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Despite the massive monetary stimulus from the Fed last week, the Euro couldn't profit.
The reason for the drop back below 1.1000 might be from a combination of the stronger bounce in 10-year US-Treasury yields back above 1.00%, and by the fact that the foreseeable economic downturn in Europe similar to the 2008 financial crash wasn't yet countered by the outlook of a massive fiscal stimulus announced by European governments, and the massive monetary stimulus announced from the ECB on Wednesday evening, as well.
In fact, the ECB went "all in", and launched a 750 billion euro emergency bond purchase scheme in a bid to stop a pandemic-induced financial rout from shredding the euro zone's economy.
But in our opinion, the main driver for the US dollar higher respectively the selling in the Euro can be found in the shortage of USD liquidity in European markets which was resolved by the Fed decision on March 15, where it was decided to reinstate the swap lines with global central banks to make sure that enough USD are available and which were actively used from the ECB over the last week.
As mentioned in the USD section above, we could imagine this strong US dollar to continue and keep the selling pressure on the EUR/USD.
With the first break below 1.0750, a further drop in the EUR/USD as low as 1.0500 and probably even lower stays a serious option.
On the other hand, we still expect the yield differential between US and European bonds to continue to converge, seeing a push above 1.1500 probably even higher in the mid-term:
Source: Admiral Markets MT5 with MT5-SE Add-on EUR/USD Daily chart (between January 21, 2019, to March 20, 2020). Accessed: March 20, 2020, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.
In 2015, the value of the EUR/USD fell by 10.2%, in 2016, it fell by 3.2%, in 2017, it increased by 13.92%, 2018, it fell by 4.4%, 2019, it fell by 2.2%, meaning that after five years, it was down by 7.3%.
Volatility in forex markets and US yields remained elevated over the last few days, and particularly in the highly yield sensitive USD/JPY.
Interestingly enough and despite the fear among market participants, keeping selling pressure on Equities high, the USD/JPY saw a push as high as 110.00 and even higher.
While one explanation is certainly the sharper bounce in US-Treasury yields back above 1.00%, in addition to that the massive USD shortage and re-installation of swap lines with global central banks from the Fed on March 15 may have added to the demand in the currency pair.
Still, taking a step back, we expect volatility to stay very high, seeing US yields under further pressure and thus favour the Short-side in the USD/JPY.
On the other hand, we remain very cautious in regards to overly-optimistic USD/JPY Short engagements. This is because we not only expect further strong USD demand given the USD shortage and usage of the re-installed swap lines of the Fed from the BoJ which could result in an ongoing squeeze higher and a test, probably even break of the region around 112.00/30.
In addition, the Bank of Japan will probably very aggressive in regards to a strengthening JPY given recent very bad economic data in regards to the Japanese GDP growth in Q4 and given the damaging impact on exports a too strong JPY might have.
That in mind, we should expect nearly any time verbal interventions from the BoJ, openly expressing concerns over instability in Japanese financial sector and economy, warning between the lines that an intervention from the BoJ might be on its way and keeping USDJPY solidly above 100.00.
Source: Admiral Markets MT5 with MT5-SE Add-on USD/JPY Daily chart (between January 9, 2019, to March 13, 2020). Accessed: March 13, 2020, at 10:00pm GMT
In 2015, the value of the USD/JPY increased by 0.5%, in 2016, it fell by 2.8%, in 2017, it fell by 3.6%, in 2018, it fell by 2.7%, in 2019, it fell by 0.85%, meaning that after five years, it was down by 9.2%.
The situation in Gold continued to stay very tense over the last week of trading.
While the picture in Gold, given the recent developments around the massive monetary stimulus from the Fed on March 15, remains, in the mid- to long-term, clearly bullish and a run above 2,000 USD seems only a question of time, short-term the picture stays way more complex and selling pressure on the precious metal is likely to persist.
As already pointed out in the US dollar section above, one of the key drivers of recent volatility not only in Equity markets, but also the massive selling pressure in classic "safe-haven" assets like Gold, resulted out of a credit crunch and liquidating everything to stay solvent.
In this regard, the swap lines which were mentioned in the Fed emergency statement onMarch 15 are to make sure that global central banks have enough USD come into play: the enormous pile of 12.8 trillion USD debt which was accumulated over the years (especially over the last decade with the massive Fed QE) and which now can be found in the books of banks around the globe, will likely keep the pressure on credit markets up and result in further liquidations, and also in Gold, in our opinion.
So, the drop in Gold during the financial crisis in 2008 where a deflationary shock resulted out of the credit crunch had a negative impact on the precious metal in the short-term, but seeing a massive move up from 2010 onwards could repeat this time again.
While mid- to long-term the mode in Gold stays bullish, short-term a drop below 1,440/450 USD would technically darken the picture, activating 1,250/260 USD as a first target:
Source: Admiral Markets MT5 with MT5-SE Add-on Gold Daily chart (between December 19, 2018, to March 20, 2020). Accessed: March 20, 2020, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.
In 2015, the value of Gold fell by 10.4%, in 2016, it increased by 8.1%, in 2017, it increased by 13.1%, in 2018, it fell by 1.6%, in 2019, it increased by 18.9%, meaning that after five years, it was up by 28%.
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