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Analysts at Rabobank point out that the US dollar has proved to be the safe haven of choice for many investors. According to them, stocks markets may have bounced off their lows but economic data has only provided a glimpse of the economic disaster that is unfolding. They expect further bouts of USD strength on a three-month view.

Key Quotes: 

“The market events in March made it very clear to the many doubters that the USD is the safe haven of choice for many investors. It is unsurprising then that the greenback has this week been subsequently moving in a reverse direction to major stock market indices. As was the case during the global financial crisis investors have a tendency to view assets as either risky or safe during the height of an emergency. This can result in a higher level of correlation between certain asset classes than is usually the case. Many of these correlations can be expected to loosen as calmer conditions reassert themselves. That said, as yet we have only had a glimpse of the disastrous economic conditions which can be expected to present themselves in the weeks and months ahead and have had very little time to process the various tentacles of the crisis. As such, we expect to see further bouts of USD strength over the coming quarter.”

“We expect the global economy to contract by 2.6% this year. This forecasts includes a 6.4% contraction in the US in 2020. For the Eurozone, we see a 5.2% y/y plunge in growth in 2020. While we expect a solid bounces in activity in 2021, it will be sometime before the level of output matches its pre-crisis levels.”

“For many emerging markets the economic crisis threatens to be even more painful. The nemesis of many developing counties is USD strength or weakness in commodity prices. Bloomberg has reported that according to IIF, outflows from EM funds totalled USD83 bln in March. For some countries the IMF will likely be called upon for support during the crisis. There are many aspect of the unfolding economic crisis which will keep investors nervous and demand for USDs high. In our view is may not be until there are signs of solid recovery in emerging markets that investors start to consistently and significantly reduce USD positions. While the biggest FX moves may be in EM, on a 3 month view we see risk that the USD can dip to EUR/USD1.05, GBP/USD1.19 and AUD/USD0.55 as the extent of the economic unfolds.”