Stocks Up, So What’s Driving Strong Demand For Dollars?

Investors bought US dollars against all of the major currencies on Tuesday. With stocks extending their recovery and Treasury yields ticking up, we saw broad-based demand for US assets. No US economic reports were released but the unwinding of GME like short bets by international funds could be one of the reasons for recent dollar demand. For the first time since November, USD/JPY rose above 105 but even after a 5 day rally, the pair has been slow in extending beyond this psychologically and technically important level. How the US economy is faring will come into focus tomorrow with non-manufacturing ISM and ADP scheduled for release. Friday’s US non-farm payrolls report is the most important piece of US data on this week’s calendar and tomorrow’s releases will help gauge the extent of labor market recovery last month. Although the service sector is expected to slow alongside manufacturing, improvements in the employment component and ADP could sustain the dollar’s rally into NFP.

Euro dropped to a 2 month low against the US dollar despite better than expected Eurozone GDP data. After growing 12.4% in the third quarter, the Eurozone economy contracted -0.7% in Q4. Ongoing lockdowns mean this contraction will persist into Q1, putting the region into recession. One of the Eurozone’s greatest challenges is their slow vaccine rollout. The UK vaccinated more than 10% of its population while Germany and France have less than 3% of their population vaccinated. The percentage is even lower in the US but export controls and greater supply issues mean longer-term problems for the Eurozone. Sterling also followed euro lower with no data on the calendar.

The worst performing currency was the Australian dollar which was hit hard by the combination of US dollar strength and a dovish central bank. AUD/USD fell to its lowest level this year, breaking below 76 cents in the process. Although the Reserve Bank left interest rates on hold, they said rates could remain unchanged until 2024. They also increased bond purchases by $100 billion which is a big move because it represents their concerns about the economy. Virus cases may be low but so is inflation. The economy is performing better than they expect and GDP should return to their pre-pandemic levels by the middle of this year but the currency is at the upper end of the range and further accommodation was needed given the lack of inflation or wage growth. We should hear more about this tonight from RBA Governor Lowe.

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