Does the USD rally break the medium term trend?
The great USD bear market is on pause and even struggling for air as EURUSD 1.2000 falls and USDJPY zooms up toward its 200-day moving average (just above 105.50). Other pairs are not especially close to levels that suggest a reversal of the USD bear move, but if we take out 1.1890 in the EURUSD on a daily close, the technical bearish case for the broad dollar would begin to break down – stay tuned.
US data yesterday reminded of the resilience of much of the US economy despite some of the signs of momentum coming out late last year as the stimulus check effect faded and Oct-Dec retail sales were all negative. Of course, we have a new $600 dollar stimulus check issued in January and likely another one of probably greater size on the way very soon if Biden can fast track the stimulus spending as he hopes to do. After comments from the wily conservative Democrat Joe Manchin, it appears he will not stand in the way of the more generous end of Biden’s $1.9 trillion stimulus package, even if he and others may push back against some of the rest of the Biden agenda, including the $15 minimum wage.
Yesterday’s US Jan. ISM services Index was particularly strong, at 58.7 vs. 56.7 expected and 57.2 in December. The ack of comprehensive shutdowns in the US contrasts strongly with the situation in Europe, where the Services PMI’s for the month were below 50 for a second month. A well, the employment sub-index of that service survey hit 55.2, the highest reading since the outbreak of the pandemic, suggesting strong employment gains, a development that was partially corroborated by the US Jan. ADP private payroll survey showing a strong increase of +174k vs. +70k and the December number was revised +45k higher.
January was peak pandemic for the US, it is clear, and if vaccination roll-outs proceed apace (the , the UK numbers suggest the virus impact will disappear rapidly and most of the US is averse to locking down anyway. Stimulus compounding on a US economy that is opening up and already performing well in many areas could mean a spectacular rebound starting as soon as March, but especially following through in Q2. The question will be whether the market second guesses the ability to maintain strength beyond the next two quarters – again, once the stimulus impulse fades and as blitz of treasury issuance that the Fed is doing an insufficient job of absorbing, continues to turn the screws on liquidity as we are already seeing at the longest end of the US yield curve, where the US 30-year yield benchmark has poked to a new cycle high above 1.90%.