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Exchange Rates 06.04.2020 analysis

Even though the Federal Reserve pumped financial markets with liquidity, it failed to stabilize US stock indexes. Instead of buying shares, investors continue to increase the share of reliable assets in their portfolios. The fate of the EUR / USD pair depends on how long this lasts.

The S&P 500 index responded with a decline to disappointing statistics on the US labor market in March. Last month, the number of people employed in the non-agricultural sector of the United States fell by 701,000, forcing experts to recall the darkest days of the 2008 crisis. At the same time, unemployment has shown the fastest growth since 1975, from 3.5% to 4.4%. Given the reflection of data for an incomplete month, the picture in the middle of spring promises to be much more gloomy. According to forecasts by Bloomberg analysts, the number of applications for unemployment benefits in the United States for the six-day period by April 4 will amount to 5 million. In the next three weeks, the figure may grow by 15 million. As a result, the unemployment rate in April will jump from the current 4.4% to 10%.

According to Moody's Analytics estimates, due to social exclusion, about 29% of the US economy was "disconnected" during the month. If quarantine lasts two months, it will be about reducing national GDP by 75% in the second quarter. In this regard, The Goldman Sachs forecast of a 34% decline does not look so pessimistic, although it is difficult to call it optimistic as well. Thus, the immediate prospects for the US GDP and the US labor market are far from being drawn in bright colors. This does not allow US stock indices to stand on their feet. It is their weakness that first of all gives strength to the greenback.

Exchange Rates 06.04.2020 analysis

The US currency is still in high demand as the level of uncertainty goes off scale. At present, there are at least four types of uncertainty that force investors to resort to safe-haven assets and increase market volatility: the severity and timing of the spread of coronavirus, the breadth and duration of social exclusion measures, the economic consequences of these measures, and, finally, the response policy.

Meanwhile, the colossal amount of cheap dollar liquidity could become a stone tied to the legs of a greenback. It is assumed that during the recovery period of the world economy it will be actively used as a funding currency for carrying trade operations. The balance sheet of the American Central Bank is now growing by leaps and bounds. According to Bank of America, the figure will expand to $9 trillion by the end of the year, which is equivalent to 40% of the US GDP. Evercore ISI experts, in turn, call the figure $12 trillion (60%). For comparison: the ECB balance is 40% of the size of the eurozone economy. However, there is no question of restoring the GDP of the currency block. The failure of the bulls on EUR / USD to return quotes above 1.0840 will increase the risks of continuing the peak of the main currency pair.

"The dynamics of the USD suggests that it is not the time to sell the American currency, despite the fact that the Fed has actually launched an endless QE," said Nordea Bank strategists.

"The launch of the printing press in the United States gives reason to expect a fall in the dollar on the horizon of six to twelve months. Moreover, the scale of losses of 10% looks quite real. However, at the moment, the level of uncertainty is too high: the scale of the coronavirus pandemic is growing, and most countries are at the beginning of the path that China has traveled. Therefore, the full damage to the global economy from the virus has not yet been taken into account in quotes, "they added.

Although experts are convinced that the dollar will weaken in the future, they see a significant risk of new attacks of its strengthening in the short term. The bank admits that during severe shocks the EUR / USD rate may fall to parity or even lower.

Performed by Viktor Isakov,
Analytical expert
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