What’s Grabbing Attention in Currency Market?

At the time when individuals hoarded basic commodities, investors stocked the US dollars. No wonder why, as it’s a known fact that the US dollar is one of the world’s safest currencies. Hence, the outcome was obvious, the demand for the US dollar surged exponentially, leading to an appreciation of the currency against other currencies across the globe. On the other hand, the Australian dollar was seen under pressure owing to negative investor sentiment amid the coronavirus crisis.

However, both these currencies are displaying a reverse trend now, with the US dollar retreating and the Australian dollar rebounding.

In this backdrop, let’s discuss some interesting occurrences in the currency markets driving this reverse trend:

Improved Global Market Sentiment Advancing AUD

From dipping below ~0.58 to surging above ~0.60, the AUD/USD currency pair improved significantly this week in the wake of improved market sentiment. At the time of writing, the currency pair was recorded at 0.61 level.

Source: Thomson Reuters

The Australian currency began to appreciate on buoyed risk-sentiment, that occurred following the stimulus measures announced by the Federal Reserve and the RBA.

The US Senate has recently approved the Fed’s massive USD 2.2 trillion economic rescue package to aid households and the economy during the pandemic. The package is targeted to expand unemployment benefits, offer direct payments to most Americans and enable small businesses to make payroll at the time their workers stay at home.

The vast package accounting for about 10 per cent of the US GDP, was announced in the wake of rising number of coronavirus cases in the US, that have now surpassed COVID-19 confirmed cases in China.

In addition, the Fed’s commitment to continue purchasing assets for smooth market functioning, magnified positive investor sentiment.

The recovery in the Australian currency was also partially driven by the RBA’s monetary policy measures declared to stabilise hammered markets and confidence.

Recently, the RBA lowered the cash rate to 0.25 per cent, declaring a quantitative easing programme for the first time to stabilise the economy. Moreover, the central bank kept the 3-year bond yield to about 0.25 per cent and pumped $105 billion into lenders and banks.

All these measures stimulated revival of the AUD; however, the sentiment on the currency still remains on the downside amidst the government’s latest efforts to prevent the spread of the pandemic, including domestic lockdown.

US Dollar Slips Amidst Surging Demand for Unemployment Benefits

The US Dollar Index, which measures the strength of USD against a basket of other currencies, has declined significantly this week, from ~102.6 in the beginning of the week to 99.0 at the time of writing, following the Fed’s stimulus measures and unprecedented surge in applications for unemployment benefits.

Source: Thomson Reuters

The US Labor Department’s recent data has revealed that a record number of Americans, about 3.3 million filed for unemployment benefits last week (15^th March 2020 to 21^st March 2020) as the US announced shutdowns in several areas to prevent COVID-19 spread. This is the highest number of initial unemployment claims in the history of the nation. The country’s last high was 695k claims filed in 1982. The USD lost its strength considerably following the release of the data.

Economists are now expecting further job losses in the US in the coming months due to coronavirus.

In addition to the surge in demand for unemployment benefits, the stimulus measures announced by the Fed also eased the dollar rally. Moreover, the supply of the US dollars improved after the Fed opened swap lines with various central banks of the world.

Under the swap line agreement, the Fed accepts the currencies of other countries in exchange for the US dollar. The Fed already has permanent swap arrangements with the central banks of Japan, England, Canada, European Union countries and Switzerland. Last week, the Fed established temporary swap lines with further nine central banks, including Brazil, Australia, New Zealand, South Korea, Singapore, Mexico, Sweden, Norway and Denmark.

Though the US Dollar Index is continuing to retreat, its further trajectory has to be carefully accessed.

Will US Dollar Demand Soar Again?

Amidst the existing uncertain market scenario, economists expect the US dollar to bolster as it usually stays strong when the economies lose momentum. In fact, some market experts are anticipating it to strengthen by the end of this quarter in the wake of strong corporate demand.

As per one of Australia’s big four central banks, the Commonwealth Bank of Australia (ASX:CBA), the US dollar can gain strength soon as a result of the continuing threat from the coronavirus pandemic, which can again hamper global credit markets and generate US dollar funding stress. Moreover, the bank pointed to the scramble for US dollars at quarter end and crumpled supply at the same time as the US banks close their balance sheets.

In a nutshell, although the US dollar panic buying has eased significantly supported by the Fed’s stimulus measures, the uncertainty remains over the further trend in the USD. Likewise, the Australian dollar might not retain its upward momentum as end of the coronavirus pandemic is not yet visible.