Will the dollar extend its slide in May?

The first day in May kicked off with losses for currencies and equities. The Dow Jones Industrial Average tumbled more than 600 points while the Australian and New Zealand dollars dropped approximately 1%. These declines were driven by weaker than expected manufacturing activity in Australia and reports that the US is looking for ways to punish China over the coronavirus outbreak. Investors completely shrugged off the smaller than anticipated deterioration in the ISM manufacturing index and uptick in construction spending. On Thursday President Trump threatened to hit China with a fresh round of tariffs that could nullify last year’s hard won trade deal. Investors are not happy with the possible return of a trade war at such a vulnerable time for the global economy and society. Nevertheless, the White House is looking to point fingers and if they proceed with punishing China, it could be at the expense of equities.

One of the most common phrases in investing is Sell in May and go away. This refers to the strategy of divesting stocks in May and reinvesting in November. This year there are very good reasons to sell in May but returning in November may be too late. Everyone expects this month’s data releases, which will be for the month of April to be weak and the possibility of disturbingly soft data could lead to broad based weakness in equities and currencies. 

Speaking of data, we’re looking at another busy week. Labor market numbers are due from the US, Canada and New Zealand. The Bank of England and Reserve Bank of Australia have policy announcements and PMI/ISM reports are due from many countries. Australia also has retail sales while China releases its latest trade data. Of all these reports, the labor market numbers will be the most market moving, particularly the US numbers because non-farm payrolls are expected to drop by more than 2 million but the outcome could be worse.

The prospect of major job losses in the US and Canada should keep the US and Canadian dollars under pressure.  USD/JPY and CADJPY in particular are vulnerable to losses. USD/CAD jumped on Friday after the Bank of Canada named Tiff Macklem as their new Governor. Carolyn Wilkins, the current senior Deputy Governor was the front-runner and widely expected to be Poloz’s successor. However, the bank chose Tiff Macklem who held the same post as Wilkins under Mark Carney and was widely expected to be Carney’s successor at the time. New Zealand’s labor market numbers may not be terrible because remember the data is for the first quarter and their lockdown began on March 25^th, the very last week of Q1. The economy is also reopening so investors may look past weakness. The New Zealand dollar should continue to outperform the greenback, loonie and Aussie. While the Reserve Bank of Australia may not be eager to ease again, their general outlook will be cautious with PMI services and retail sales likely to be weak.

EUR/USD made a move above 1.10 on Friday - its strength is remarkable considering the ECB’s negative outlook and the additional stimulus they provided this past week. However, as our colleague Boris Schlossberg noted, perhaps the simplest reason is the divergence in monetary and fiscal policies between the EZ and the US. Although both regions are trying to maintain expansionary posture, the massive monetary and fiscal spend in the US is far greater and is starting to perhaps weigh on the dollar.

Unlike euro, sterling traded lower despite an unexpected uptick in house prices and in line mortgage approvals. This decline could be partially attributed to the downward revision in manufacturing PMI but it may have more to do with the outlook for the Bank of England. We know that they are dovish after warning last week of the “fastest and deepest slump in possibly several centuries.” It is not clear whether they will ease further but economic projections will be updated and we can expect a grim outlook. Also note that the monetary policy committee will release its rate decision at 6 GMT on May 7^th instead of 11 GMT.