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When will the USD stop falling during the long way to economic resurgence?
Lucia Han
2020-07-20 904

Abstract: the USD index is in trouble amid a slow slog of economic recovery; Gold price rallied and silver did the same; Were crude oil demands expected to pick up as U.S. oil inventories were pleasantly surprising? European economic revival starting, will the EUR/USD make a comeback? The virus saw it second wave, and Australian economic data failed miserably.

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Uncertainty over the economic recovery left the USD out in the cold again

Last week, America's retail sales data, often described as "terrible figures", came in at 7.5% for June, above market expectations of 5% but well below May's 17.7%. 

In addition, the number of laid-off workers seeking unemployment benefits remained stuck at 1.3 million, 1.25 million higher than the estimated but down slightly from 1.315 million. 

As a result, the data reversed a triple-negative run against the USD index early last week and ended Thursday up at 96.303, only to give up gains on Friday. It finally ended the week down 0.67% at 96.013. 

In the week, the Fed's Beige Book said the economic outlook was highly uncertain and that current relief policies were preventing workers from returning to work. Thus, the market is eager to unveil the new U.S. economic stimulus bill as the U.S. economic assistance policy is about to expire, leading to increased market anxiety. Also, there are concerns about the effectiveness of the stimulus bill. 

So for, the concerns are including:

1. How to cut corporate and personal taxes;

2. Whether to increase assistance to state and local governments;

3. Whether to continue the second economic stimulus payment.

The U.S. Senate will resume under the New COVID-19 Guidelines this week as lawmakers debate how to revive the struggling U.S. economy.

 In addition, the U.S. manufacturing PMI, due this week, is expected to show optimism about whether the second wave of the COVID-19 pandemic in June had a real impact on the economy.

Gold is still shining and may continue to rise steadily

At the start of last week, gold was in a deep correction, trading in a narrow range between $1,790 and $1,815, and at one point breaking below the $1,800 mark. But its rally was since supported by increased risk aversion as tensions between China and the United States have grown. Gold closed up $1808.9, or 0.56% for the week. 

And while the U.S. retail sales figures were better than expected, they did not boost Treasury yields. At the same time, the Fed's balance sheet size expanded for the first time in July, so gold may continue to gain in the short term.

Risk points that may affect gold trend include:

1. Whether the China-US relations will deteriorate; 

2. How vaccine is developed;

3. Whether the stock market can maintain the upward trend. 

Besides, because of the severe U.S. recession, the Fed is not likely to insulate the country from aggressive stimulus-induced inflation for a long time to come, so the long-term outlook for gold remains positive. 

With the exception of gold, silver has been on a tear this week, briefly topping the $19 mark and leading the way for precious metals to reach $19.46, its highest level since September 2019, and perhaps a windfall given the market's more bullish outlook.


U.S. oil inventories showed a positive surprise, and oil prices could rise again

Last week's EIA and API data surprised the oil market. EIA and API inventories fell by 7.493 million barrels and 8.322 million barrels, respectively, much more than expected. 

The week's OPEC+ meeting also added a little cheer to the crude oil market, with Saudi Arabia's energy minister saying the OPEC+ agreement to cut output in June had been implemented at 107%. 

Meanwhile, both Saudi Arabia and Russia are inclined to ease production cuts, so the meeting decided to cut the output between August and September from 9.7 million b/d to 7.7 million b/d. 

Besides the consensus, they also stressed that the easing of production cuts will not lead to a flood of oil supplies. Saudi Arabia ascribed the easing mainly to improved economic activity and increased demand in crude oil as a result of shrinking global inventories.

Last week still saw a flurry of good news on vaccine development, so the oil market rose slightly after these big news. But U.S. crude and Brent crude were down $40.58 and $43.09 for the week, respectively. 

And the crude oil market still faces the uncertainty that the worsening pandemic will lead to the downward demand for crude oil. Thus, while investors will be looking at the EIA and API data this week, the geopolitical crisis in the Middle East, whether the U.S. can reverse the pandemic, and progress on vaccines should be the focus. 

In addition, the August U.S. crude oil contract will change this week, so investors should keep an eye out for ensuing risks.

Will the EUR to USD shine again as EU released its interest rates?

Last week's star performer was the EUR to USD, when the European Central Bank announced its decision on interest rates. As predicted, Europe chose to leave interest rates and the coronavirus emergency stimulus on hold. Its quantitative easing program will entail net asset purchases of 20 billion euros ($21.9 billion) per month under the asset purchase programme, with temporary purchases of 120 billion euros by the end of the year, and PEPP purchases will be extended by six months, until at least the end of June 2021. 

Consequently, the decision brought the EUR to USD to briefly rise as high as 1.1411 before rebounding. The euro closed last week at 1.14253, up 1.14 percent for the week. Separately, the President of the European Central Bank expressed concern last week about the upbeat outlook for the economy, saying that while economic activity was reopened, the economic prospect was uncertain. 

After the EU's executive European Commission unveiled plans for a 750 billion euro recovery fund and backed a Franco-German proposal for joint debt issuance, with the bulk of the fund - €500 billion - earmarked for grants to severely virus-hit member states, talks stalled again over the weekend over the terms attached to access to funds. 

Whether the EU's decision on the recovery fund can achieve positive results will have a direct impact on the EUR/USD. This week will see euro-zone PMI figures for June, which are expected after better-than-expected data from France and Germany in May.

Australia's economic recovery has stalled, with the AUD still struggling to break 7

Australia recorded extremely bad unemployment according to last week's data. The number of unemployed rose nearly 70,000 in June, pushing the unemployment rate up 7.4% by 0.3% the month before to its highest level in 22 years. What's worse, a second wave of coronavirus in Victoria has led to another lockdown, which could degenerate July's unemployment figures. 

Despite encouraging results from closely linked Chinese economic data last week, it failed to rescue AUD's downward trend. AUD was repeatedly thwarted in its attempts to break 0.7 although it briefly topped the mark and tried to gain ground. It fell significantly after the unemployment announcement, closing the week at 0.69951, down 0.67%. 

The Reserve Bank of Australia (RBA) has adopted the yield curve to control the economy, but yields on Australian government bonds are now above their current 0.25% interest rate, resulting in speculation about when the RBA will buy government bonds again to limit the rise. 

This week will see the release of the RBA minutes and a speech by the RBA President on recent patterns in the Australian and global economies. Since the RBA had previously said the recession was smaller than previously thought, it is not clear whether the speech will signal a reversal. Therefore, investors can watch for measures of yield curve control.


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