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Dollar awash in cash! Cheap liquidity from the Fed in a pandemic leading to increased demand for safe-haven assets


We wanted the best, it turned out as always. Inflate the financial markets with liquidity, the Fed could not solve the main problem - to stabilize the US stock indexes. Instead, the central bank received a strengthening US dollar. After two weeks of monetary stimulus swimming in cash, one of which is proved by the fall of the repo rate to normal levels. The problem is only one: instead of buying stocks, investors increase the proportion of safe assets in the portfolios. On how long it will last depends on the fate of the EUR / USD.





S & P 500 fell in response to the disappointing statistics on the US labor market in March. Employment outside the agricultural sector decreased by 701 thousand, forcing recall the darkest days of the 2008 crisis; Unemployment rose from 3.5% to 4.4%, the fastest pace since 1975. And that's just the flowers! The report took into account less than a month, and in mid-spring, the picture will be much more grim. According to Bloomberg Experts predict that the number of applications for unemployment benefits for the 6-day's rest to April 4 to 5 million, three weeks is set to rise to 15 million, that will throw the unemployment rate in April from 4.4% to 10%. 

Dynamics of the US unemployment


Source: Wall Street Journal.

No better situation with the GDP. According to research by Moody 's Analytics, because of social exclusion during the month were off about 29% of the entire US economy. If quarantine will last for two months, it will be about 75% m subsidence of gross domestic product in the second quarter. Ratings of Goldman Sachs to -34% g / g of such gloomy, but optimistic call them very difficult. The fact that the near future of the GDP and the US labor market is drawn in shades of gray, does not allow US stock indexes to rise to his feet. Their weakness, in turn, gives strength dollar. 

Greenbacks enjoys increasing popularity in an environment where investors are swimming in cash, and the level of uncertainty increased too. At present we can identify at least four types of uncertainties that lead to escape safe haven and pushing up volatility: severity and timing of propagation coronavirus; the breadth and duration of exclusion measures; economic consequences of these measures; and finally, the policy response. Source link is an epidemic, so it is not surprising that the slowdown in its dissemination will help to reduce volatility. 


Coronavirus and volatility


Source: Bloomberg.


Of course, the enormity of the cheap dollar liquidity will be a stone tied to the legs of greenbacks, in the period of global economic recovery. He will be actively used as a funding currency for the carry trade. Balance Fed now growing by leaps and bounds. Estimated BofA Merrill Lynch, it will expand to $ 9 trillion by the end of the year, which is equivalent to 40% of GDP. Evercore ISI put the figure at $ 12 trillion (60%). For comparison, the ECB's balance is 40% of the size of the eurozone economy. However, while the restoration of speech is not GDP, inability EUR / USD back above 1,084 will increase the risks of continuing peak.


Source analyst LiteForex


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