Dollar Steadies Despite Fed-Treasury Spat

  • The dollar is stabilizing as the week winds down but weakness is likely to resume
  • President-elect Biden said he has chosen his Treasury Secretary; US Treasury Secretary Mnuchin requested that unspent funds allocated to the Fed be redirected to other areas of the economy; the Fed pushed back; there are several negative implications to this spat
  • Talks regarding the EU budget and recovery fund yesterday did not lead to any breakthroughs; Brexit talks have hit a little speed bump; UK reported October retail sales and public sector borrowing data
  • Japan reported very weak data; Australia reported strong preliminary October retail sales; China left its lending rates on hold; Taiwan reported firm October export orders; Thailand eased limits on capital outflows to take some pressure off the surging baht

The dollar is stabilizing as the week winds down but weakness is likely to resume.  DXY is up modestly today after six straight down days.  This limited dollar bounce is unlikely to last given the worsening US economic outlook, and so we still look for a break below the November 9  low near 92.13 when weakness resumes.  Likewise, the euro break above its recent high near $1.1920 and sterling should break above its recent high near $1.3310.  USD/JPY has been unable to get much traction above 104 and we look for a test if the November 6 low near 103.20.

 

AMERICAS

President-elect Biden said he has chosen his Treasury Secretary. He said that an official announcement will likely be made “either just before or just after Thanksgiving.” The three most likely names are Fed Governor Brainard, former Fed Governor Ferguson, and former Fed Chair Yellen. All three are eminently qualified but our top pick for Treasury would be Brainard, based largely on her past stint there as Undersecretary of International Affairs during the Obama administration. Yellen would make an excellent head of the National Economic Council, as would Ferguson.

US Treasury Secretary Mnuchin requested that unspent funds allocated to the Fed be redirected to other areas of the economy. In a letter to Fed Chair Powell, Mnuchin sought a 90-day extension for four of the Fed’s emergency lending programs: the e Commercial Paper Funding Facility, the Primary Dealer Credit Facility, the Money Market Liquidity Facility, and the Paycheck Protection Program Liquidity Facility. However, he asked that the Municipal Liquidity Facility, the Main Street Lending Program, the Primary Market Corporate Credit Facility, the Secondary Market Corporate Credit Facility and the Term Asset-Backed Securities Loan Facility be allowed to expire as planned on December 31. He acknowledged that legislative action was needed, saying “I hope that Congress will seriously consider reallocating $580 bln of funds that have already been appropriated that wouldn’t cost taxpayers an additional penny.”

The Fed pushed back. It said in a terse statement that it “would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy.” Kaplan, Barkin, and George all speak today and will likely be asked about this disagreement.

There are several negative implications to this spat. The first is that it suggests Mnuchin does not see any compromise ahead for another large stimulus package. The second is that it suggests Treasury and the Fed are not quite on the same page of the crisis playbook. Mnuchin said that the facilities “have clearly achieved their objective,” while the Fed has been clear in its intent to maintain all of these emergency programs until the crisis has passed. We are nowhere near that point. Lastly, we are concerned that this matter was taken public. These matters are best left to be discussed and the differences hammered out behind closed doors. All in all, the matter is likely to rattle market confidence in US policymaking, at least for the remainder of the Trump administration. This is another reason why we favor Brainard for Treasury Secretary, as she would very likely foster a much higher degree of communication and cooperation between the two most powerful economic policymaking institutions in the world.

Canada reports September retail sales. Headline sales are expected to rise 0.1% m/m vs. 0.4% in August, while sales ex-autos are expected flat m/m vs. 0.5% in August.

 

EUROPE/MIDDLE EAST/AFRICA

Talks regarding the EU budget and recovery fund yesterday did not lead to any breakthroughs. Both Hungary and Poland sticking to the veto threat. A spokesperson for Hungary stressed that the country could resort to external funding to shore up its government spending, and that the extra cost compared to the recovery fund would be worth it to avoid accepting the EU’s conditions. Again, we expect a compromise. Hungary and Poland could agree to some cosmetic changes to fulfil the EU’s rule of law objections. Still, reports suggest the launch of the recovery fund will likely be delayed beyond the start of next year.

Brexit talks have hit a little speed bump. One of the members of Barnier’s EU negotiating team tested positive for the virus, requiring Barnier to quarantine. This prevents face to face talks at a most crucial time. A UK official said that “The UK and EU teams have agreed to continue to negotiate remotely for the time being. The talks will resume in person when it is judged safe to do so.”   EU sources claimed that a deal is 90% done but warned that crucial agreements in the key issues of fishing, level playing field, and enforcement remain elusive .  France and Belgium are calling for the bloc to step up its hard Brexit preparations. Reports suggest an agreement could be announced as early as Monday if the necessary compromises are made, but that is a very big if. Other reports suggest talks could extend into December. It’s hard to separate the truth from all the conflicting noise, but our base case remains a skinny deal that pushed most of the hard decisions out into 2021.

UK reported October retail sales and public sector borrowing data. Headline sales including auto fuel were expected to fall -0.3% m/m but instead rose 1.2% vs. a revised 1.4% (was 1.5%) in September. With lockdowns widening, we are likely to see some payback in the November data. Elsewhere, October public sector net borrowing (ex-banking) came in at GBP22.3 bln vs. GBP30 bln expected. Still, the total for the first seven months of the fiscal year rose to a GBP214.9 bln and it’s only going to get worse. Next Wednesday, Chancellor Sunak will lay out his fiscal plans for next year based on new forecasts from the Office for Budget Responsibility.

 

ASIA

Japan reported very weak data. Headline CPI fell -0.4% y/y and core (ex-fresh food) fell -0.7% y/y, both as expected but significantly down from September. Headline deflation is the worst since September 2016 and core deflation is the worst since March 2011. This month is unlikely to show much relief as Tokyo CPI will be reported next Friday. Its headline CPI is expected to fall two ticks to -0.5% y/y and core (ex-fresh food) is expected to fall a tick to -0.6% y/y. Elsewhere, preliminary November PMI readings came in weak. Manufacturing fell to 48.3 from 48.7 in October, services, fell a full point to 46.7, and the composite also fell a full point to 47.0. Lastly, October convenience store sales contracted -4.3% y/y vs. -3.0% in September.

Australia reported strong preliminary October retail sales. Headline sales rose 1.6% m/m, with ABS official noting that “The reopening of retail stores in Victoria at the end of October led to a boost to all industries, with the exception of food retailing.”  Victoria sales rose 5.2% m/m but was still down -5.7% y/y.   This comes after stronger than expected jobs data earlier this week, and yet policymakers cannot let down their guard anytime soon. AUD has been trading in the .70-.74 range since July and we look for an upside breakout if broad dollar weakness continues as we expect.

China left its lending rates on hold as widely expected. The 1-year Loan Prime Rate (LPR) was kept at 3.85% and the 5-year LPR at 4.65%, and this is unlikely to change in the near term. Despite a very uncertain global growth outlook, the domestic recovery is strong enough not to require any further easing. inflation remains very subdued (0.5% y/y), giving policymakers leeway to add more stimulus in the future if needed.

Taiwan reported firm October export orders.  Orders rose 9.1% y/y, a tick higher than expected and down slightly from 9.9% in September.  Export orders have risen y/y for eight straight months.  Exports have been robust and orders suggest they will remain so going into Q2 2021.  Q3 current account surplus widened to a record $28.65 bln, reflecting its strong external position. This along with strong overall fundamentals have made TWD the third best EM currency at +4.8% YTD, behind only CNY at +6.0% YTD and PHP at 5.0% YTD.

Thailand eased limits on capital outflows to take some pressure off the surging baht. The changes will make it easier for domestics to move money offshore and invest in foreign assets. They will also be allowed to maintain foreign currency accounts at Thai banks. The Bank of Thailand noted that investors have boosted investment in EM countries such as Thailand and that the flows have “resulted in strengthening the baht quickly and can impact economic recovery.” Ominously, the BOT will also require the registration of local and overseas bond investors, which it said “will allow close monitoring of investor’s behaviors and thereby enable the implementation of targeted measures in a timely manner.”