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The currency market last week ended with a global depreciation of the US dollar. The main reasons for this dynamics is the beginning of a massive program of stimulus measures from the Fed and the US Treasury, as well as a slight increase in demand for risky assets from investors.
It has already been announced that the Fed will increase its balance by 4-5 trillion dollars in this cycle of easing monetary policy. This is an important factor in the weakness of the dollar. In addition, as we have already indicated, coordinated measures by the world Central Banks, which include the Bank of England, the ECB, the Central Bank of Japan, etc., will support dollar liquidity. This, in turn, is the reason for its almost unlimited supply in the financial system and, as a result, weakness.
But at the same time the question arises: why then do we not observe its strong decline, as it was 10 years ago?
The fact is that the dollar, by and large, continues to hold against major currencies, although it is under pressure because of its attractiveness as a global safe haven in times of catastrophe in the world. While the US currency is at the center of the global financial system, this trend will be observed. Such situations have been repeatedly noted in history throughout the twentieth century.
In our opinion, despite the overwhelming situation around the spreading of coronavirus around the world, the weakening of the dollar could continue, due to large-scale incentives again and the desire of investors to buy much cheaper assets. Thus, markets hope that unprecedented support measures will smooth the impact of COVID-19 on the global economy. However, we believe that the problems for it lurk precisely in the duration of the quarantine measures that were announced primarily in Europe and North America. China, followed by Asian markets, began to recover from the peak of the pandemic, but unfortunately, they cannot exist on their own. China, Korea, the Philippines and other countries producing large volumes of exported goods will be hard if demand in Europe and America does not grow in a month or two.
That is why we believe that the month of April will become a certain turning point for the global economy and the prospects for further weakening of the dollar against the backdrop of growing demand for risky assets. If tough measures to fight the pandemic in Europe and the United States do not lead to a weakening of the pressure of the coronavirus during this month, then the global economy will face a global and even stronger recession. In this case, the observed rebound in the stock markets will stop and a new collapse in the value of shares, as well as commodity and commodity assets, will begin. In this case, demand for the dollar will rise again, and we should expect a decline in the exchange rates of major currencies, even the yen and the franc.
Nevertheless, observing the development of the situation in Italy, we believe that it will be possible to overcome the pressure of the pandemic in April, so the continued weakening of the dollar will be possible, which will be scattered with its local increase in the wake of high volatility.
Forecast of the day:
The EUR/USD pair is trading with an increase in the wake of the weakness of the dollar under the influence of large-scale stimulus measures from the Fed and the US Treasury. We believe that if demand for risky assets grows today, and this probability is demonstrated by futures for European and American stock indices, the pair can get local support and, breaking the level of 1.1090 and increasing to the level of 1.1185.
The USD/JPY pair has every chance for local growth to the level of 109.00 after breaking the level of 108.00.
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