US DOLLAR OUTLOOK: BULLISH
- US Dollar[1] may rise on liquidity demand amid virus-induced risk aversion
- FOMC[2] rate decision and outlook in press brief may amplify this dynamic
- Deteriorating global growth prospects driving demand for haven assets
US Dollar May Rise on FOMC Rate Decision, Outlook
Overnight index swaps are not pricing in a rate cut at the upcoming FOMC meeting on April 29, though the subsequent press briefing and commentary therein may induce cross-asset volatility. The US Dollar may rise if Fed Chairman Jerome Powell paints a worrisome picture for global growth in light of the coronavirus pandemic as the central banks pumps trillions of dollars of liquidity into the financial system.
At the time of writing, the Fed’s balance sheet stands over $6.6 trillion. In an attempt to calm inter-bank stress, monetary authorities also announced a temporary suspension on limits of uncollateralized intraday credit exchanges. However, the most controversial measure – arguably – that the Fed has done is agree to purchase junk-rated bonds as part of its broader asset-purchasing policy measure.
The $2.3 trillion in programs would allow midsized businesses and US cities and states access to credit that they would otherwise find far more difficult to acquire in tumultuous times. After the measures were announced, corporate bond-tracking ETFs surged while the US Dollar slumped and junk-rated fixed income assets saw their biggest capital inflow in two decades. However, investors are not out of the woods yet.
Greenback May be Lifted by Demand for Liquidity
Following the market-wide selloff in global equities and other growth-anchored assets, the US Dollar surged along with signs of increased stress in credit markets. The spread on credit default swaps (CDS) widened to crisis-era highs as the coronavirus undermined confidence in the ability of
