FX Update: Yellen as US Treasury Secretary? Yes please, say USD bears.
Head of FX Strategy, Saxo Bank Group
Summary: The US dollar is trading back lower, particularly against pro-cyclical currencies, on the news that Trump gave the order to allow the formal transition to proceed, and after sources indicate Biden will nominate former Fed Chair Janet Yellen today as his Secretary of Treasury. This move adds to the longer term bearish outlook for the US dollar.
Today’s FX Trading focus:
Yellen as US Treasury Secretary? Yes, please, say USD bears.
Markets were a bit choppy yesterday with crosscurrents that pushed and pulled on the US dollar. First, the flash November US Markit PMI surveys came in far stronger than expected, especially on the services side, given the incredible resurgence in Covid-19 cases in the US. That services PMI reading was a more than solid 57.7 vs. 55.0 expected and 56.9 in October – suggesting a services sector that is improving at a faster rate. And the Manufacturing PMI was a robust 56.7, a big jump from the 53.4 in October. This triggered an avalanche of gold sell orders as key support gave way there and boosted the US dollar briefly as well.
But then two stories emerged that had the USD back on the weak side, the first that Trump asked the key agency to begin formal transition procedures for the incoming Biden administration. But more significant for the longer run was the breaking story that Biden is set to nominate former Fed Chair Janet Yellen as the next Secretary of Treasury for his incoming administration. She was the odds-on favorite, but this news still carries considerable weight. Recall that the Yellen Fed was a very dovish continuation of the Bernanke Fed, as Yellen moved decisively against expectations for future Fed rate hike expectations when USD strength was becoming too pronounced in early 2016. (The USD strengthened viciously from very low levels in 2014 under her watch, yes, but that was merely because the Fed still harbored the fantasy that normalization was eventually possible as it tapered QE, while the market saw that the ECB was finally set to do QE after failing to do it properly for years – a once-in-a-lifetime policy divergence trade.)
In her four years, she nearly always defaulted to the dovish side. More importantly, her background is as a labor economist and she has addressed the dangers of inequality, suggesting as Treasury Secretary she will address employment and labor issues far more aggressively than her only Wall-Street focused predecessor. Most important of all, this is an era where we are witnessing the increasing irrelevance of monetary policy because central banks everywhere are at the effective lower bound on interest rates, and now fiscal authority is taking the reins. From here, the Fed will prove a mere auxiliary to maximize fiscal impact by ensuring cheap funding (printing the money spent by the fiscal side and keeping existing rates all along the curve as accommodative/capped as possible). On that note, it makes sense to have a former Fed chair helping to maximize that fiscal-monetary coordination under a Biden administration.
So the long term implications of the Yellen nomination are distinctly USD negative. Some key questions do remain about the ability of a Biden administration to ram through its agenda, given the “power of purse” resides with Congress, where the US Senate will remain in Republican control unless Democrats win both of the January 5 Georgia Senate runoff races. There are also Trump lame duck concerns as noted in the AUDUSD chart captions below, but this Yellen nomination is a loud signal on the new administration’s priorities – also on climate, as John Kerry will be nominated for a new “climate envoy” position, and Yellen has spoken forcefully on climate as well.
Regardless, Biden priorities will be no repeat of the Obama years. The first of the Obama terms were all about an attempt at fiscal normalization after the response to the 2008-09 financial crisis, and the US budget deficit went from an annualized 10% of GDP in late 2009 to under 4% by late 2013. And the new fiscal spending back then was peanuts relative to what the Covid-19 response has already brought. For example, only a bit more than half a trillion of real demand-side stimulus was there in the US American Recovery and Reinvestment Act of 2009, with only $100 billion of that in infrastructure. Expect more than an order of magnitude more spending under a Biden administration – with Republicans perhaps finding it tough to say no when heavy spending levels in various proposed bills would also spur the economy in their districts. And Yellen will be in close contact with the Powell Fed to ensure that nearly all of the funding – or even more than all in real terms - for the spending is printed in the computers at the Eccles Building, or on whatever cloud server is hosting the Fed’s accounts.
AUDUSD burst higher this morning, clearing the thrice-tested 0.7340 level of late as the market sold dollars on the news of Biden’s transition moving forward and possibly as well on the Yellen nomination to Treasury Secretary. Near term uncertainties remain on fiscal cliff-edge worries and whether Congress can piece anything together with a lame duck and very disgruntled Donald Trump. The next step for the bulls here is a clearing of the 0.7414 high for the cycle, which opens up considerable open terrain on the chart toward 0.8000+.
RBNZ gets a shot across the bow from the NZ government on house prices
An interesting diversion overnight after the New Zealand government proposed adding house prices to he RBNZ’s remit. With property prices overheating in New Zealand in the wake of the RBNZ chopping the interest rate to 0.25% and launching a QE program, the NZ finance minister Robertson said today that he had written a letter to RBNZ governor Adrian Orr that asked him to consider adding house price considerations to the RBNZ’s remit. Orr responded that house price stability is already a consideration in its monetary policy deliberations. Sources quoted in a Bloomberg article argue that no central bank has housing prices as a formal consideration in its remit. The NZD bounced some 0.5% against the AUD on the news before the price action settled back in yesterday’s range. This suggests the RBNZ is in a bit of a hot seat after moving so aggressively in its pandemic response. The subsequent rebound in AUDNZD after this item suggests to me that more downside for that pair may be hard to come by – certainly from a rate compression angle that drove us to the 1.0500 are to begin with.
EURGBP – poking at the cycle lows
We continue to watch EURGBP with interest - and perhaps GBPUSD even more so if the US dollar is set to push broadly lower here – as the cycle lows near 0.8860 have come into view and a breakthrough in negotiations could be forthcoming as soon as this week that could help unleash a move toward 0.85-0.86 here and see GBPUSD ripping above 1.3500 if the US dollar is on its back foot. Down the road, negative real rates are a real concern for the UK and the pound, but for now, the market is not likely to want to look that far ahead.
Upcoming Economic Calendar Highlights (all times GMT)
- 1400 – ECB President Lagarde to Speak
- 1400 – US S&P CoreLogic House Price Index
- 1500 – US Nov. Consumer Confidence
- 1600 – US Fed’s Bullard (Non-voter) to Speak
- 1700 – US Fed’s Williams (Voter) to Speak
- 1745 – ECB Chief Economist Lane to Speak
- 2000 – New Zealand RBNZ to publish Financial Stability Report
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