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Asia-Pacific Currencies Pressured by Demand for Highly Liquid U.S. Dollar

The rout in the financial markets and near-certain global recession caused by the coronavirus pandemic, fueled a run on demand for the highly liquid U.S. Dollar.
James Hyerczyk

After a one-week reprieve, the U.S. Dollar came roaring back against the Japanese Yen, Australian Dollar and New Zealand Dollars last week. The catalyst behind the rally was demand for safe assets on a worsening global economic outlook.

Once again, the rout in the financial markets and near-certain global recession caused by the coronavirus pandemic, fueled a run on demand for the highly liquid U.S. Dollar. According to Reuters, that blew up the cost to borrow dollars in funding markets, with three-month FX swap spreads rising to 2008 financial-crisis levels last month.

But those spreads have snapped back after the Federal Reserve’s effort to improve dollar liquidity by making it easier for other central banks to swap their currencies for dollars, pushing speculators to cut their bets in favor of the dollar last week.

So basically last week’s rally by the U.S. Dollar was fueled by a combination of fresh central bank buying and speculator short-covering.

Japanese Yen

The Japanese government and the Bank of Japan had to be happy with the drop in the Japanese Yen, but more importantly the better-than-expected economic data.

Last week, the USD/JPY settled at 108.468, up 0.491 or +0.45%.

Preliminary Industrial Production came in at 0.4%, beating the 0.0% estimate. The previous month was also revised higher to 1.0%.

Retail Sales were a big surprise, jumping by 1.7%. This was much better than the -1.5% forecast and -0.4% previous read.

The Tankan Manufacturing Index came in lower at -8, but this was better than the -10 forecast. The Tankan Non-Manufacturing Index was 8, also higher than the estimated 3.

Finally, the Final Manufacturing PMI was 44.8, matching the forecast.


Australian Dollar

The Australian Dollar tumbled last week with most of the selling fueled by demand for U.S. Dollars. The economic data was mostly better than expected, while the Reserve Bank of Australia (RBA) monetary policy meeting minutes offered little fresh news.

Last week, the AUD/USD settled at .5995, down 0.0172 or -2.79%.

On the plus side, Private Sector Credit, the AIG Manufacturing Index, Building Approvals and Final Retail Sales all came in better-than-forecast. However, there were dips in Commodity Prices and the AIG Construction Index.

Australia’s central bank was worried about the potential for a “very material contraction” in economic activity when it unveiled quantitative easing in an emergency meeting last month, minutes released on Wednesday showed.

New Zealand Dollar

The New Zealand Dollar’s plunge was fueled by demand for the U.S. Dollar and a steep drop in ANZ Business Confidence. Last week, the NZD/USD settled at .5859, down 0.0184 or -3.05%.

According to ANZ Research, headline business confidence plummeted 45 points to -64 in March, close to a record low. A net 27% of firms expect weaker activity for their own business (down 39), the lowest read ever (the survey began in 1988).

Survey responses received in the second half of the month (about a third of all responses) were more negative.

Retail Sector own activity collapsed 56 points from +15 to -41. Services and construction also plummeted by more than 40 points.

Expected profitability, investment and employment intentions fell sharply. A net 23% of firms intend on laying off staff, including a net 35% of retailers.

Inflation expectations dropped another 38bp to 1.51%, the lowest in 3 years.

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