The US dollar proves its safe haven status

Marius Paun | London, UK | Senior dealer | Thursday, 19th March 2020

It looks that US Fed’s bold moves to cut interest rates, first from 1.75% to 1.25% followed by another one to 0.25% two weeks later, have done nothing to stop the hemorrhaging in the world markets. So now the White House seeks to a stimulus package potentially worth $1 trillion to battle the economic impact from the outbreak.

Treasury Secretary Steven Mnuchin warned the Congress that unemployment could reach 20% if they fail to act and that ‘Americans need cash in the next two weeks’. There would be some conditions attached, notably the companies would have to give up temporarily or even permanently the so called stocks buy-backs – where companies have been able to use the cheap credit to buy back their own shares, rather than invest / expand, in order to support the price.

The US package could include:

  • $500 – $550 billion in direct payments or tax cuts
  • $200 – $300 billion in small business assistance
  • $50 – $100 billion in airline and other industries relief (tourism and energy come to mind)

Sadly, the rebound following the announcement was short lived and US stocks trading was suspended yet again for 15 minutes (fourth time this week) after another ‘circuit breaker’ was tripped up. So far whatever they throw in, it just does not do the trick.

Bloomberg reported that world exchange market capitalisation has lost 27% since mid-February a jaws-dropping $23.8 trillion in market value. Financial media has looked back at the history of markets turmoil and concluded that S&P 500 moved at least 4% in either direction for 8 consecutive sessions which is unprecedented and tops the previous record of 6 sessions in November 1929.

After being accused that they aren’t doing enough to address the selloff triggered by the coronavirus pandemic, the European Central Bank also announced on Wednesday night, in an emergency move, that it will start purchasing securities worth 750 billion euro. The program called ‘Pandemic Emergency Purchase Programme’ will apply ‘equally to families, firms, banks and governments’. In total the ECB’s planned bond buying for the current year will top 1.1 trillion euro, the biggest annual amount ever. In reaction, European government bonds surged, but the shares were fluctuating between gains and losses Thursday morning, whilst looking for direction.

As if that is not enough and the world economy seems to be heading into recession, there’s another worry flashing red right now, rising interest rates. It could be because the planned stimulus package in the US will add $1 trillion in new debt on top of the already $1 trillion deficit. In times of distress, interest rates usually fall. Higher rates could mean higher borrowing costs for business or individual loans.

Yields could have gone up also because investors are fearing a potential liquidity crisis. The current coronavirus could eventually turn into a financial crisis where credit dries up and that’s why central banks around the world are reassuring investors they will do ‘whatever it takes’ to keep the markets functioning. That potential metamorphosis is the last thing they want, a big no-no.

If there is one asset doing well during the current turmoil it’s definitely the US dollar. As a standalone currency it is best expressed by the US dollar index, which is a measure of the US dollar against a basket of its major trading partners’ associated currencies from the EU, Japan, the UK, Canada, Sweden and Switzerland.

The long-term chart shows the US dollar index has crossed above 100 mark (currently at 101.54) with the current month also displaying wild swings low of 94.61 and a high of 102.04. The price is above the moving averages and the short-term average is above the long-term average.

On the upside 101.5 – 102 is the next resistance, last touched in March 2017. If the bulls can manage to get the market to cross above, it will signal momentum is gathering pace and a test of recent high at 103.81, reached on January 2017, could be on the cards.

On the downside, the next support is just below 100. This level acted as good resistance in early and late 2015 before eventually it gave way and turned support. The next downward target is 98 which should be even more challenging for the bears to overcome.