Note

XE Market Analysis: North America - Jan 06, 2021

· Views 28

The dollar has tumbled to fresh major-trend lows as markets discount a possible Democrat sweep, with one of its Senate candidates, Warnock, having been declared winner in one of the two Georgia runoff elections, and the other, Ossoff, showing a slim lead in the vote count so far in the other election. Democrats need to win both to level the Senate at 50-50. Control would then swing to the Democrats due to the tiebreaker vote of Vice President-elect Kamala Harris. The implication is much bigger fiscal spending than in the scenario that the Biden administration was constrained by a split House. This, in turn, is viewed as being more positive for U.S. and global economic growth, but negative for both bonds and the dollar. Both the U.S. budget and trade deficits would rise more sharply with the Democrats controlling the Presidency, House and Senate. Prospects for this has seen the 10-year Treasury yield has spiked above 1% for the first time in 10 months. While a rise in the budget deficit and the associated prospect for stronger growth could be chalked up as a dollar positive influence, this doesn't apply in the prevailing circumstance, with inflation set to rise further in the U.S. than under a split House scenario, which, given the Fed's inflation-tolerant lower-for-longer monetary policy strategy, will impart a greater downside force on real U.S. interest rates. Already the U.S. has discernibly lower real interest rates versus Japan and the Eurozone, among other peers. The DXY dollar index consequently posted a new 33-month low at 89.22. EUR-USD concurrently rallied to a 33-month high at 1.2349. The Australia, New Zealand and Canadian dollars all also posted new 33-month highs versus the U.S. dollar. USD-JPY tested yesterday's 10-month low at 102.60. Cable lifted but remained below the 32-month highs seen earlier in the week. Bitcoin, which seems to be increasingly accepted as an inflation hedge, surged to fresh record highs near 36,000. Oil prices rose to new 11-month highs, extending yesterday 5%-plus surge. European equity markets and U.S. index futures rallied. The pan-Europe Stoxx 600 printed a new 11-month high.

[EUR, USD]
EUR-USD rallied to a 33-month high at 1.2346 on dollar weakness, which came as markets discounted a possible Democrat sweep, with one of its Senate candidates, Warnock, having been declared winner in one of the two Georgia runoff elections, and the other, Ossoff, showing a slim lead in the vote count so far in the other election. The implication is much bigger fiscal spending than in the scenario that the Biden administration was constrained by a split House. This, in turn, is viewed as being more positive for U.S. and global economic growth, but negative for both bonds and the dollar. Both the U.S. budget and trade deficits would rise more sharply with the Democrats controlling the Presidency, House and Senate. Prospects for this has seen the 10-year Treasury yield has spiked above 1% for the first time in 10 months. While this, and a rise in the budget deficit and the associated prospect for stronger growth, could be chalked up as a dollar positive influence, this doesn't apply in the prevailing circumstance, with inflation set to rise further in the U.S. than under a split House scenario, which, given the Fed's inflation-tolerant lower-for-longer monetary policy strategy, will impart a greater downside force on real U.S. interest rates. Already the U.S. has discernibly lower real interest rates versus Japan and the Eurozone, among other peers. With regard to the euro, the common currency has recently been attracting demand as a consequence of the EU's historic EUR 1.8 tln budget-and-recovery package. This, it should be noted, was facilitated by the exit of the UK. Since late October, the EU's has issued several social bonds under the EU SURE instrument (Support to mitigate Unemployment Risks in an Emergency), all of which were massively over-subscribed, reflecting demand from long-term investors like life insurance companies, who have a prevailing need for long-term triple-A bonds to invest in to match their liabilities. While not the first time the European Commission has borrowed in capital markets on its own account, it marks a significant upscaling. In 2021, the European Commission will launch borrowing under the €750 bln NextGenerationEU instrument, which is a pandemic recovery investment finding vehicle aimed at investing in green and digital technologies.

[USD, JPY]
The yen's broader performance should continue to derive from the level of risk appetite in global markets. Japan's surplus economy, where yield-seeking domestic investors are apt to invest in foreign assets during times of confidence, but repatriate funds when times are uncertain, has established the yen as a low-beta haven currency.

[GBP, USD]
Cable is firmer today on dollar weakness but remained below the 32-month highs seen earlier in the week. We anticipate that the pair will remain underpinned on the back of a softening U.S. currency, though the pound may concurrently maintain a flat-to-weakening bias against the euro. The UK's terms of trade with the EU have eroded in the post-Brexit world, despite the deal, and the key financial services sector is in a strategically more precarious position than before, with participation in EU markets dependant on the latter's equivalency rules, although London's marked natural advantage in this area should protect the sector over the near- to-medium term. This said, there is potential for pent up business investment, with Brexit uncertainty having finally cleared, while the UK is ahead of the pack in rolling out a Covid vaccination program (although not in time to 'save winter', with the UK nations now under the most restrictive lockdowns since the first lockdown).

[USD, CHF]
EUR-CHF has lifted back above 1.0800, influenced by gains in EUR-USD. Risk-on positioning had been weighing on the Swiss franc with investors factoring in a sea change in optimism about a vaccine solution to the Covid-19 crisis. The recent weakening of the currency will have been pleasing to policymakers at the SNB, given their chronic disquietude about the franc's value. Unlike most central banks, the SNB explicitly incorporates the franc into monetary policy to ward off speculative purchases of the currency, which would impart deflationary forces (via cheaper imports) with the consequential impact of an unwelcome tightening in real interest rates. The central bank repeated at its latest quarterly monetary policy review that the franc remains "highly valued" and said it is ready to intervene directly in the foreign exchange market.

[USD, CAD]
USD-CAD fell to a new 33-month low at 1.2628. Oil prices have rallied by a further 1% after surging by over 5% yesterday to 11-month highs. This followed news that the OPEC+ group are planning to cap output quotas, which are currently subject to monthly review, in February. Prospects for a Democrat controlled Senate (at the time of writing, their candidates in one of the two runoff elections had been confirmed as victor, and the other was showing a slight lead in the vote count in the other election) have also added support to oil prices, and indirectly the Canadian dollar and other oil-correlating currencies, given the implication for much looser fiscal policy.

Disclaimer: The content above represents only the views of the author or guest. It does not represent any views or positions of FOLLOWME and does not mean that FOLLOWME agrees with its statement or description, nor does it constitute any investment advice. For all actions taken by visitors based on information provided by the FOLLOWME community, the community does not assume any form of liability unless otherwise expressly promised in writing.

FOLLOWME Trading Community Website: https://www.followme.com

If you like, reward to support.
avatar

Hot

No comment on record. Start new comment.