US jobless claims top 20 million; why did the dollar rally?

The US dollar traded higher against pretty much every major currency on Thursday, despite another batch of troublesome data out of the world’s largest economy.

Weekly initial jobless claims remained sky-high for a fourth week, although have eased from their peak. Another 5.2 million Americans filed for new unemployment benefits in the week to 11th April, taking that number of those claiming such benefits since the start of the crisis up to an eye-watering 22 million - around 13% of the total labour force. While this was slightly less than economists’ median expectation, the damage being done to the US jobs market is catastrophic. The number of jobs lost in the last four weeks is now roughly equivalent to the number of jobs gained in the decade since the 08/09 crisis, a whole ten years of new jobs effectively wiped out.

Figure 1: US Initial Jobless Claims (2007 - 2020)

Source: Refinitiv Datastream Date: 17/04/2020

To put the above data into some perspective, the number of new claims in the past month is approximately equivalent to the population of the eight largest cities in America combined. Using a few rudimentary calculations, this would put the actual unemployment rate to around 15% or so, which would be its highest level since World War II. More bad news came in the form of US housing starts data yesterday, which fell by the largest amount in three decades, and the Philly Fed manufacturing index, which hit a 45-year low -56.6.

While yesterday’s data was mostly better-than-expected, this is not the reason why the dollar rallied. In fact, the confirmation that things are as bad as they are was met with another wave of risk-aversion, sending the safe-havens higher and allowing the dollar to end London trading stronger against both the euro and the pound.

Chinese economy contracts by most on record

Another indication of just how severe the downturn is set to be came in the form of the overnight GDP figures out of China, which made for grim reading. The Chinese economy contracted by 9.8% quarter-on-quarter and 6.8% year-on-year in the first quarter of 2020, the largest contraction since the official figures were first introduced in 1992. While comparable data for the rest of the developed world will, of course, not be as bad for the same period given the lag between the spread of the virus in China and everywhere else, it is an indication of how the global economy may be set to fare not too far down the road.

Elsewhere in the markets, sterling remained on the back foot yesterday, briefly falling to its lowest level in a little over a week amid the UK government’s announcement that it would be extending the lockdown period for at least another three weeks. While the number of deaths caused by the virus increased to a five-day high yesterday, the containment measures do appear to be having at least some impact, with new daily cases plateauing in a similar fashion to that witnessed in the likes of Italy a couple of weeks ago. With various lockdown measures beginning to be eased in Europe, there is a faint light at the end of the tunnel for the UK - a light that could help spark a recovery in the pound in the immediate-term should new domestic cases continue to fall and the trend of increased deaths caused by the virus in the US continue.