Weekly Market Recap

Dollar declines

30/11/2020

Week in review

Eurozone PMI composite index falls to 45.1
U.S. PMI composite index rises to 57.9
Australia capital expenditure falls 3.0% q/q

Week ahead

RBA policy meeting
Australia 3Q real GDP growth
U.S. employment report and nonfarm payrolls

Thought of the week

Equity markets are trying to balance the tension between COVID risks and vaccine surprises. The implication is near term economic weakness with medium term economic strength in places like the Heading into 2021 countries will recover at different rates and this will be reflected in currency movements, especially as interest rate differentials around the world have collapsed. The lower valuation on assets outside of the U.S. should also fuel capital flows into other regions creating U.S. dollar depreciation. Structural forces from rising fiscal and current account deficit should add to the weight on the U.S. dollar. This week’s chart looks at the past two dollar declines from their peaks in 1985 and 2002. In these instances the unwinding of dollar strength lasted many years, but the majority of he decline happened early on. Compare this to the peak in the U.S. dollar index this year, and it appears we are only at the state of a period of prolonged weakness in the greenback.

U.S. Dollar cycles last many years
Trade weighted U.S. dollar index, rebased to 100 at peak

Source: FactSet, 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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