3 Reasons Why Dollar Could Fall Further Next Week

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3 Reasons Why Dollar Could Fall Further Next Week

Daily FX Market Roundup July 24, 2020

It has been a rough week for the US dollar. The greenback traded lower against all of the major currencies falling to multi-month and in some cases, multi-year lows in the process. USD/JPY which has been consolidating in a tight range for more than a week finally broke down on Friday, dropping below 106 to its weakest level in 4 months. The dollar’s weakness was the most pronounced against the euro and Australian dollar – EUR/USD rose to its highest level since September 2018 while AUD/USD hit a one year high. Chances are, investors will continue to sell US dollars in the coming week for the following reasons:

#1 – Extra Jobless Benefits Disappear

Come Monday, more than 20 million Americans will lose the $600 a week extra unemployment benefits that kept them afloat for the past few months. The official deadline is July 31st but based on the way states calculate and pay these benefits the last payment for most people would be as of July 25th and July 26th. Not only will these households see an immediate drop in income but many businesses such as grocery stores and retailers will feel the effects as well. Unless these benefits are extended quickly, we’ll see more foreclosures, bankruptcies and in turn more retail job losses. The fear of the recovery unraveling could send the US dollar to fresh lows. Congress is struggling to come up with another relief package but the supplement they end up providing won’t be as generous. At most we expect them to pay 70% of prior income but average extra payment to unemployed Americans could fall to as low as $200 a week. With the funeral and remembrance ceremonies for former US Representative John Lewis scheduled for the coming week, the real negotiations won’t begin until the first week of August.

#2 – Double Digit Contraction Coming for Second Quarter US GDP

Second quarter US GDP numbers are also scheduled for release and as so well put by Tim Smart, Executive Editor of US News (yes, I know), it might turn into a third quarter hangover for the markets. Lockdown measures were first implemented at the end of the first quarter and the shutdown in activity caused a 5% contraction in GDP. Nearly all US states were in full lockdown for the better part of Q2 and economists expect a -35% contraction in growth. Unfortunately, the data could be much worse as the Atlanta Fed predicts a -52.8% decline. Anything in excess of 40% will be a shock that could send equities and currencies plunging lower. USD/JPY in particular will fall quickly and aggressively. Even if the data is better, the dollar could decline versus high beta currencies such as the euro as the market compares the contraction in the US with the expected -12% drop in GDP projected for the Eurozone in the same quarter.

#3 – Federal Reserve Meeting

The two greatest threats to the US economy are two things the Federal Reserve has no control over – the rapid spread of coronavirus in the US and the government’s fiscal response. A few weeks ago, Chairman Powell warned lawmakers not to become complacent as the US economy remains extraordinarily uncertain. Since then, the outlook worsened, extra unemployment benefits expired and the packages that Congress are discussing could fail to impress. For all of the reasons, we expect nothing but ongoing dovishness from the Fed along with a pledge to keep monetary policy accommodative for the foreseeable future. Last month, they said rates will remain at zero through 2022. How the dollar trades will depend on Powell’s tone. Back in June, he said a second half recovery is likely but with virus cases rising rapidly, his outlook may have dimmed. The big question is negative rates – any mention of that being an option will be bruising for the dollar. Regardless, we expect the greenback to extend its slide before and after FOMC.

Kathy Lien
Managing Director

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