Weekly Market Recap

Dollar decline and differentials

17/08/2020

Week in review

Unemployment rate increases to 7.5%
Consumer confidence plunges to 75.9 from 87.9
Business confidence declines to -14.0 from 0.0

Week ahead

Australia preliminary retail sales
U.S. and Eurozone PMIs for August
Japan real GDP 2Q

Thought of the week

The 7% decline in the U.S. dollar since mid-May has helped the prospects in emerging market equities and dollar price commodities such as gold. Several factors have been behind the dollar’s fall; reversal of safe haven buying, growth differentials between the U.S. and the rest of the world as well as interest rate differentials. The chart shows the precipitous drop in the two year real yield and its impact on the direction of the greenback, but the relationship is not steady over time. Given that nearly all developed market central banks have signalled that interest rates are to stay at record lows for sometime, the influence of rate differentials with weaken. The growth outlook will become the dominant factor, but more importantly confidence in growth will hinge on ongoing fiscal policy support and signs of improving health of the labour market in most economies.

Real rates bring dollar down
U.S. dollar index and U.S. 2 year real yield

Source: U.S. Federal Reserve, Tullet Prebon, J.P. Morgan Asset Management, all returns in local currency unless otherwise stated.
Equity price levels and returns: Levels are prices and returns represent total returns for stated period.
Bond yields and returns: Yields are yield to maturity for government bonds and yield to worst for corporate bonds. All returns represent total returns. AusBond Comp is the AusBond Composite 0+ Yr, AusBond IG is the AusBond Credit 0+ Yr both provided by Bloomberg.
Currencies: All cross rates are against the Australian dollar. An appreciation of the foreign currency against the Australian dollar would be positive and a depreciation of the foreign currency against the Australian dollar would be negative.

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