Dollar Firm as Senate Stimulus Bill Stalls

  • Sovereign debt yields continue to moderate while funding markets continue to stabilize
  • Underlying risks remain elevated and we expect the dollar to continue strengthening this week
  • The Senate-led aid bill has stalled; Chicago Fed National Activity Index for February will be reported
  • Germany could borrow as much as €350 bln; Bank of France Governor Villeroy said he is in favor of activating OMT
  • SNB appears to have intensified its FX intervention; RBNZ initiated its first bond purchase program; MAS will bring forward its policy meeting to March 30

The dollar is broadly firmer against the majors as the Senate stimulus bill stalls.  Yen and Swissie are outperforming, while Kiwi and Loonie are underperforming.  EM currencies are broadly weaker.  RON and CNY are outperforming, while MXN and IDR are underperforming.  MSCI Asia Pacific was down 3.1% on the day, with the Nikkei up 2.0% after returning from holiday.  MSCI EM is down 5.0% so far today, with the Shanghai Composite falling 3.1%.  Euro Stoxx 600 is down 4.3% near midday, while US futures are pointing to a lower open.  10-year UST yields are down 4 bp at 0.81%, while the 3-month to 10-year spread is down 3 bp to stand at +85 bp.  Commodity prices are mostly lower, with Brent oil down 5.0%, copper flat, and gold down 0.3%.

Global confirmed coronavirus cases now stand at 340K, with nearly 15K deaths. Total confirmed coronavirus cases in the US jumped sharply over the weekend to 35K, especially in New York (near 17K), as states increase testing. Italy has now close to 60K cases and leads the death count (5.5K) worldwide by a wide margin. Spain is catching up fast with nearly 30K confirmed cases and near 1.8K deaths. UK has about 5.5K confirmed cases and nearly 300 deaths.

Sovereign debt yields continue to moderate after the sharp increases over the last few weeks. This is a good sign that suggests official action is starting to alleviate the pressure in this part of the market. As we noted in our Risk Map, we have a high conviction that the latter force will prevail and yields will remain low for the foreseeable future, even if we get more bumps along the way. That said, it is possible that the Fed will eventually have to move to more radical measures such as yield curve control.

Funding markets continue to stabilize, in line with our view. Short-dated cross currency basis swaps are back to pre-crisis levels for the euro and sterling, while the yen’s reading is narrowing fast. FRA-OIS, a measure of interbank risk in the US, seems to be stabilizing, albeit at comparatively distressed levels. On Friday, the FED announced a that it will increase the frequency of its swap lines with other central banks from weekly to daily.

Underlying risks remain elevated and we expect the dollar to continue strengthening this week.  DXY is on track to test the January 2017 high near 103.82. After that, we have to go back to 2002 to find the next target.  The euro traded today at a new low for this move near $1.0635 and the next target is the April 2017 low near $1.0570.  Sterling remains heavy and a break below last week’s low near $1.1410 would signal greater losses to levels not seen since early 1985.  USD/JPY remains near the top of its recent trading range despite risk-off sentiment and appears likely to test the February high near 112.25.



The Senate-led aid bill has stalled.  The major sticking point for Democrats is a discretionary $500 bln chunk that they fear would be ear-marked for corporations instead of workers.  Even some Republican Senators are not on board, as the 47-47 vote shows; 60 votes are needed for passage.  House Speaker Pelosi said there was no deal and that the House would now craft its own package.  The situation is fluid and an eleventh hour compromise is still possible.  Several states have imposed California-style lockdowns including New York, New Jersey, Illinois, Delaware, Louisiana, and Ohio.

It’s worth noting that one senior Fed official is more bearish than Wall Street.  St. Louis Fed President Bullard warned that the US economy could contract -50% SAAR in Q2 and lead to an unemployment rate near 30%.  This is by far the most bearish call we’ve seen, as the worst private sector call that’s out as of this writing is a -30% SAAR contraction with a resulting surge in unemployment to around 13%.  Bullard called for aggressive fiscal stimulus and added that Q3 would most likely be a “transitional” quarter before “quite robust” growth is seen in Q4 and Q1 2021.

The Chicago Fed National Activity Index for February will be reported today.  It is expected at -29 vs. -0.25 in January.  If so, the 3-month average would fall to -0.35 from -0.09 and is the worst (high recession risk) since May.  There is little doubt that March and beyond will show more significant weakness.  The March 3-month average very likely will move much closer to the -0.7 recession threshold.



Germany could borrow as much as €350 bln in the next stage of stimulus. Reports suggest €150 bln would be borrowed outright this year to finance stimulus measures, while a €200 bln rescue fund would be set up to take stakes in companies and fund corporate loans.  The Finance Ministry estimates the economy will shrink some 5% this year, but this is a moving target.

Bank of France Governor Villeroy said he is in favor of activating the ECB’s rescue fund to improve aid to the most affected countries. The Outright Monetary Transactions (OMT) program would allow for a further expansion of ECB bond buying in the secondary market.  This is different than QE, which is meant to provide general stimulus.  OMT was introduced by Draghi during his “whatever it takes” moment and is meant to support a specific country that is in need.  It has never been used to date.

The Swiss National Bank appears to have intensified its FX intervention.  The amount of cash commercial banks hold with the central bank, so-called sight deposits, rose CHF5.8 bln ($5.9 bln) last week.  Most observers consider sight deposit statistics to be a good proxy indicator for the bank’s FX interventions.  Despite the intervention, EUR/CHF continued to drift lower and is poised to slip below 1.05 as it moves towards the April 2015 low near 1.0234.

Oil prices took another leg lower after a possible agreement between OPEC and US oil firms led nowhere.  Both Brent and WTI futures have fallen below their 2016 lows and are on track to test the 2001 lows near 16.65 and 16.70, respectively.  Over-supply continues to distort the crude futures curve into a deep contango (steepening). Our base case is for a “U” shape for oil, staying depressed for several months until we get a combination of (1) supply destruction via closure in the US energy industry, (2) demand pick-up as the economy begins to normalize, and/or (3) change of OPEC+ tactics that decreases production.



The RBNZ initiated its first bond purchase program, leading to sharp declines in yields and the kiwi. The bank will buy the equivalent of $17 bln of government securities over the next 12 months at a pace of roughly KWD150 mln per week. Yields are down 8 to 70 bps across the curve and NZD has depreciated 0.7% today and 16% year to date against the dollar. The NZX 50 tumbled 7.6% on the day. Elsewhere, the government will begin enforcing a national lockdown starting in two days, with emergency measures expected to remain in place for at least four weeks.

The Monetary Authority of Singapore will bring forward its policy meeting to March 30.  The policy meetings are usually held twice a year in April and October. February CPI rose 0.3% y/y vs. 0.4% expected and 0.8% in January.  It does not have an explicit inflation target but rising risks to growth suggests the MAS will loosen policy next week by adjusting its S$NEER trading band.