Head of FX Strategy
Summary: The US dollar was broadly lower as risk appetite surged on Inauguration Day for US President Joe Biden, but the narrative fails to fit with the action seen across markets, even if a single odd day should not . Biden set to work immediately unwinding a raft of Trump move. Elsewhere, Bank of Canada optimism sent USDCAD to a new cycle low.
FX Trading focus: difficult to square the action with background market narrative
Joe Biden’s Inauguration Day came and went with as much pomp and circumstance as possible, given the Covid restrictions, and equity markets perhaps celebrated the lack of public unrest, while the USD wilted as one would expect, given the surge of risk sentiment. Still, the narrative is tough to sustain when looking around the rest of the shop, as US treasuries were rangebound on the day despite the anticipation of tremendous stimulus in the pipeline, and generally unresponsive to the ebullience elsewhere.
And while the US dollar has responded as one would expect to the swell of enthusiasm in risky assets by weakening, momentum is flagging somewhat. Still, that is the “Goldilocks” rout for further USD weakness – too rapid an ascent in US long yields and that becomes a destabilizing factor, while a plunge in yields would suggest some collapse in confidence in the inflationary narrative. Given that the US treasury net issuance in 2021 will far exceed the current pace of the Fed’s declared QE purchase pace, US long yields deserve close watching on the theory that some price discovery remains in this market. For now, the only interpretation of a shoulder-shrug from bond markets in a context of a strong risk appetite is that the market sees liquidity and support without end, but no serious inflation threat. A bold bet!
Yesterday, the team and I posted a piece on the top ten priorities under a Biden presidency – five domestic and five foreign. On the domestic front, the chief immediate task is ensuring a massive vaccine roll-out effort and providing a safety net for the most vulnerable in the meantime. It’s a concern to see headlines on the struggle for vaccine distribution and whether new variants will prove resistance to vaccines (no ability to assess that risk, simply tracking it and crossing fingers on that front – the world will get post Covid lockdowns with or without a successful vaccine by this autumn.) I see today that Biden has activated the Defense Production Act to raise vaccine-, PPE-and other production efforts. This act allows the government to command any private production capacity it can identify along the lines of a war effort.
The US-China rivalry is already off to a hot start for the Biden administration after China sanctioned individuals in the Trump administration for their actions, a move that the Biden administration called “unproductive”. Already, China is asking for reinstatement of the listing of Chinese telecom companies on US exchanges, a first test of the Biden administration attitude toward China.
Chart: USDCAD
USDCAD was smacked lower by an optimistic Bank of Canada that sees a surge in activity resumption once the economy gets to the other side oof lockdowns. The actual affect on forward rate anticipation was virtually nil, but it novel to hear a central bank wax this optimistic and it took USDCAD to new cycle lows. The price action is not particularly pretty for the bears here, but barring another back-up, the formation of note. Two things the market glossed over in bidding up CAD yesterday were Joe Biden’s revoking of the permit for the Keystone XL pipeline (key for Canadian tar sands production) and the Bank of Canada’s Governor Macklem bringing up some cautious wording on the strength of the loonie in the press conference. The next major zone lower is perhaps the 1.2500 psychological level, followed by the multi-year low below 1.2100.
The G-10 and CNH rundown
USD – the US dollar weak, but somewhat cautious on going full bore bearish again, as the conditions were about as perfect as they could be yesterday for a more pronounced move. Watching how we close the week.
CNH – not a leader in FX against the US dollar and as long as China drags its heels on CNY strengthening. China will have to limit travel during the New Year holiday (the week before and after February 12) due to Covid outbreaks.
EUR – the euro lagging just about everything else besides JPY and USD as EU growth is set for perma-sluggishness outside of potential for rising export demand because of EU’s aging demographics and besides, negative rates are just no fun. Zero expectations that the ECB moves the needle today.
JPY – the Bank of Japan’s Kuroda out with an oddly timed exhortation that the entire yield curve must be kept low – was he referring to the US? The weaker USD without a rise in US rates allows the USDJPY to trickle back lower and encourages the view that USDJPY to stay in the descending trend channel for now.
GBP – sterling making new gains against the Euro in breaking lower as BoE’s Bailey pushes back against negative rates talk. GBPUSD has also managed a new top – let’s see if these moves stick for another pull higher.
CHF – EURCHF avoided a break to a multi-month low by staying above 1.0735 – but not exactly on the edge of my seat here for anything – volatility only likely to pick up on yield volatility in long fixed income.
AUD – solid employment figures overnight, though full time positions lagging a bit. Still,the participation rate is impressive with it rise back to pre-Covid levels.
CAD – the Bank of Canada outlined the complacent view on inflation – yes, inflation will surge on the basing effects of the year-ago Covid wipeout in March and April, but then quickly fade back lower, in line with the “significant excess supply” in the economy. What if assumptions about that supply are misplaced, however?
NZD – steep consolidation in AUDNZD – profit taking ahead of Q4 NZ CPI tonight? The first support is the area around the 200-day moving average near 1.0720.
SEK – fairly straightforward strength given the backdrop of better risk sentiment with no spike in yields – can we finally have a go at the critical 10.00 levelin EURSEK?
NOK – EURNOK making a bid lower and NOKSEK for parity, the latter probably requiring a new high for the cycle – or at least threat thereof – for Brent crude as NOK longs are a great expression of eventual economic normalization.
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As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
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