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Mark O' Donnell
 · 
Research Analyst
June 3, 2020
 · 

US Dollar weakens as investors’ crave risk

US Dollar weakens as investors’ appetite for risk increases

The US Dollar index weakens for the 7th straight day as investors' appetite for risk increases. The AUD/USD has broken the 0.69 mark, with the USD weaker against its G10 currencies, with global indices rising on forward optimism on a quicker recovery from the effects of the Coronavirus. US Indices have seemed to quickly discount the effects of the protests as they continue for the 8th straight day.

It is interesting to note how strong expectations and consensus have been on the market. It seems to have some binary optimism-o-meter, where the market is like "okay if my optimism-o-meter is above 1, markets rise." Markets, in general, tend to be forward-thinking. However, as of late, future optimism has been trumping future imminent damage. It has taken much imminent danger to earnings to change the market consensus drastically but has only required a little to brighten up the markets' spirits. It kind of reminds me of this video – US Indices only plummeted when push finally came to shove, when the Coronavirus was on the mainland. But indices are up, on earnings expectations months, even years down the line.

Around mid March was when the bulls boat hit the cliff

Fundamentally, the demand for the US Dollar is slowing down

Fortunately, fundamental signs are supporting the depreciation of the US Dollar. China's manufacturing sector has seen an increase in appetite for Iron from Australia, Oil breaching $40 showing demand picking up, and institutional and retail investors after being taught to buy the dip, have been buying the dip. However, as from my article yesterday, there has been this massive disconnect between Wall Street and main street. It almost seems like every time an event happens, which would typically fuel a risk-off rally, the market seems to reset their time horizon further. However, if we ignore the Coronavirus and protests, economic data is still abysmal.

  • The consumer, constantly noted as the 'backbone of the US economy", is currently living on government programs and credit
  • ADP Employment and Non-Farm Payroll (NFP) are set to print better numbers but still will be relatively weak
  • Businesses will realize that they don't need many employees – can run leaner

Some still believe in a "V-shape" recovery, weakening the US Dollar

Mark Mobius, co-founder at Mobius Capital partners, still expects a V-shape recovery, pointing to the market moves as an indicator to future gains. He is bullish on further employment recovery, predicting that the US Government will implement fiscal stimulus in the form of infrastructure spending in order to give many Americans work.

It would be wise to keep some dry powder for a potential second wave when keeping the US market in mind or investing in countries with a better Coronavirus outlook. Investor's temperament must stay in check while seeing markets slowly tick up – the possibility of a second wave was highly likely in the United States before the protests, now they might just be adding fuel to the fire. It may be tempting to buy companies at an all-time high. But before you press that buy button, remember this video and remind yourself how the markets have been in the past couple of months.

Anish Lal has a great video on the weakening of the US Dollar against the Euro. You can watch it here.

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