USD: Risk sentiment set to remain fragile, supporting the US dollar – MUFG

Analysts at MUFG Bank, point out that a risk aversion environment supports the US Dollar. They see Trump’s COVID infection setting up many possible scenarios, increasing uncertainty that could add to the concerns about a slowdown in US economic activity. 

Key Quotes

“Last week we argued the potential for US equities to remain weak but that didn’t transpire and in the week since to yesterday’s close, the S&P 500 is 2.5% higher, outperforming the other key G4 markets. We favoured the dollar also on the basis that month-end flows. Those flows didn’t transpire either. But even still, the dollar only fell 1,0% to yesterday and of course is now rallying with equity markets ending the week down. The hopes of a fiscal stimulus package have evaporated and we have now had the announcement that President Trump has tested positive for COVID-19. So we remain of the view that the dollar will be well supported within the 1.1600-1.2000 EUR/USD range with a test to the downside more likely.”

“President Trump’s COVID infection will undoubtedly curtail risk appetite next week. We wouldn’t read too much into how it impacts the result – there are many ways of looking at this.”

“The NFP print today of +661k still means nearly half of the 22.16mn workers remain without a job as high frequency data shows the economy slowing. Our US analyst currently forecasts +35% Q/Q in Q3 GDP followed by just +1.1% in Q4. We are not far from Q4 reverting to contraction again. The pick-up in COVID infections in New York that leads to tighter restrictions could be the tipping point. Even if a fiscal stimulus deal is reached, the political uncertainty after Trump’s COVID infection and potentially tighter COVID restrictions will keep US equity markets fragile and continue to provide support for the dollar.”

Credit: FX Street

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