What is driving strong USD demand? 

Investors bought USD against all of the major currencies on Tuesday.  With stocks extending recovery and Treasury yields ticking up, we saw broad based demand for US assets. No US economic reports were released but the unwinding of GME like short bets by international funds could be one of the reasons for recent dollar demand.

For the first time since November 2020, USD/JPY rose above 105, but even after a 5-day rally, the pair has been slow in extending beyond this psychologically and technically important level.

How the US economy is faring will come into focus on Wednesday with non-manufacturing ISM and ADP scheduled for release. Friday’s US non-farm payrolls report is the most important piece of US data on this week’s calendar and Wednesday’s releases will help gage the extent of labor market recovery last month.  Although, the service sector is expected to slow alongside manufacturing, improvements in the employment component and ADP could sustain USD rally.

EUR dropped to a 2 month low against the USD despite better than expected Eurozone GDP data. After growing 12.4% in the third quarter, the Eurozone economy contracted 0.7% in fourth quarter. Ongoing lockdowns mean this contraction will persist into first quarter of 2021, putting the region into recession.

One of the Eurozone’s greatest challenges is their slow vaccine rollout. The UK vaccinated more than 10% of its population, while Germany and France have less than 3% of their population vaccinated. The percentage is even lower in the US, but export controls and greater supply issues mean longer term problems for the Eurozone.

GBP also followed EUR lower with no data on the calendar.

The worst performing currency was AUD which was hit hard by the combination of US dollar strength and a dovish central bank. AUD/USD fell to its lowest level this year, breaking below 76 cents in the process. Although the Reserve Bank left interest rates on hold, they said rates could remain unchanged until 2024. They also increased bond purchases by USD$100 billion which is a big move because it represents their concerns about the economy.

The economy is performing better than they expect and GDP should return to their pre-pandemic levels by the middle of this year but the currency is at the upper end of the range and further accommodation was needed given the lack of inflation or wage growth.  We should hear more about tonight from RBA Governor.



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