Rising Brexit and Stimulus Concerns Give Dollar a Brief Respite

Due to the upcoming holidays, this will be our last CurrencyView daily for 2021. We will provide our usual week ahead pieces on Sundays and will write MarketView pieces as developments warrant. We wish our readers safe and healthy holidays and a happy new year.

  • Stimulus talks have hit a snag; it’s not clear that the Republican argument for ending the Fed programs is sustainable; another stopgap bill is likely; weekly jobless claims are worth discussing
  • The latest Brexit headlines have taken a decidedly pessimistic tone; UK reported November retail sales and December CBI industrial trends survey; Germany’s last IFO survey for the year is ending on a relatively positive note
  • BOJ kept policy unchanged but unexpectedly announced a policy framework review; Japan reported November national CPI

Rising concerns about Brexit and stimulus talks are weighing on market sentiment. This is giving the dollar a little bit of a bid ahead of the weekend.  DXY is up modestly today after a four-day streak of losses. This rally is likely to prove temporary and we continue to target the February 2018 low near 88.253 for DXY.  The euro is trading just below yesterday’s new cycle high near $1.2275, while sterling has given up nearly a cent from its new cycle high yesterday near $1.3625 due to a return of Brexit pessimism (see below).  USD/JPY has recovered to trade back above 103 but remains heavy. The break yesterday of the November low near 103.20 sets up a test of the March low near 101.20.

 

AMERICAS

Stimulus talks have hit a snag. Two senior Senate Republicans are now calling for language terminating the Fed’s emergency programs to be included in the economic relief bill. Senators Toomey and Crapo said this is becoming a red-line issue for Republicans. On the other hand, Democrats want these emergency programs to remain operational until 2026. Toomey believes that the programs were always intended to be short-lived and that the law requires them to be terminated by year-end, which is the same reasoning given by Treasury Secretary Mnuchin in ending some of programs already. There is no reason beyond pure politics to push for ending the Fed’s lending facilities now as the pandemic continues to rage. We hope saner heads prevail in order to get stimulus passed.

It’s not clear that the Republican argument for ending the Fed programs is sustainable. The Congressional Research Service, a non-partisan arm of the Library of Congress, said in a memo released yesterday that Treasury Secretary Mnuchin has the authority to extend the lending programs if he so chooses so that the facilities can continue extending loans beyond year-end. The letter was in response to a request by Representatives Clyburn and Waters (chair of the House Financial Services Committee) for the CRS to determine whether the Treasury Secretary can extend the programs beyond December 31, 2020 and whether some loans can continue to be made after that.

As a result of ongoing disagreements, another stopgap bill is likely. There are growing signs that the talks will drag into the weekend. Negotiators from both parties had hoped to resolve these differences and pass matching bills in the House and Senate by midnight tonight in order to attach the stimulus bill to the government funding bill. However, reports suggest this will not be done in time and so lawmakers are likely to pass another short stopgap spending bill today in order to avoid a government shutdown and allow stimulus talks to continue over the weekend.

Weekly jobless claims are worth discussing. Regular initial jobless claims rose to 885k vs. 823k and 853k the previous week, the highest since the first week of September. PUA initial claims also rose to 455k, the highest since late September. Together, initial claims total 1.34 mln, also the highest since late September. Of note, this data was for the BLS survey week containing the 12th of the month and so this sets us up for a very weak NFP. Meanwhile, regular continuing claims for the prior week ending December 5 fell to 5.5 mln vs. vs. 5.7 mln expected and 5.757 mln the previous week. Both PUA and PEUC continuing claims rose for the week prior to that and so the signs all point to a weakening labor market. There’s no consensus yet for December NFP but we suspect it will be well below the 245k in November and perhaps even negative.

With the media embargo over, Fed speakers will pick up in the coming days. Today, Governor Brainard speaks. Q3 current account and October leading index (0.4% m/m expected) will be reported. Elsewhere, Canada reports October retail sales. Headline sales are expected to rise 0.1% m/m vs. 1.1% in September, while ex-auto sales are expected to rise 0.1% m/m vs. 1.0% in September. The Bank of Canada is taking a wait and see approach even as the Trudeau government pursues aggressively expansive fiscal policy.

 

EUROPE/MIDDLE EAST/AFRICA

The latest Brexit headlines have taken a decidedly pessimistic tone. If taken at face value, talks are still stuck on fisheries, but also on the EU’s pandemic stimulus packaged seems to be causing some trouble. As always, it’s hard to distinguish posturing from content here, but we try to keep away from the noise and still believe a deal is imminent. Indeed, EU officials expressed confidence that a deal could still be struck by next week. Sterling is underperforming today but the moves have been modest.

UK reported November retail sales and December CBI industrial trends survey. Headline sales fell -3.8% m/m vs. -4.2% expected and +1.2% in October. The renewed lockdowns clearly had an impact, just not as bad as feared. Elsewhere, CBI total orders index improved to -25 vs. -40 expected and actual in November. Of note, the CBI has asked the EU to delay introducing new customs checks after Brexit because UK firms haven’t had enough time to prepare amid the coronavirus pandemic. CBI also asked that UK companies be given a grace period to comply with new paperwork that will be required at the end of the year, regardless of what form Brexit ultimately takes. With time running out, there really is no way for firms to prepare properly for such a potentially disruptive event.

Germany’s last IFO survey for the year is ending on a relatively positive note. Unfortunately, some of the bad news is not yet accounted for. The December headline business climate reading came in at 92.1 vs. 90.0 expected, with the expectations component at 92.8 vs. 92.5 expected and the current assessment at 91.3 vs. 89.0 expected. However, the survey was conducted between December 1-17 and so was mostly before the recent lockdown measures were imposed. Still, the preliminary PMI readings suggest greater than expected resilience of the German economy during this second wave of infections and lockdowns.

 

ASIA

Bank of Japan kept policy unchanged but unexpectedly announced a policy framework review. It extended its emergency lending and liquidity programs for six months whilst keeping rates and asset purchases unchanged. However, it pledged to review the sustainability of its policy framework. The bank stressed that there was no need to scrap its yield curve control as part of the review, but the announcement does suggest there will be tweaks coming that will seek maintain its accommodative stance for even longer . Indeed, it said it would likely announce the findings in March. Governor Kuroda said that “Our intent is to keep short and long term policy interest rates at their present or lower levels, and we won’t be reviewing negative interest rates.”

Before the decision, Japan reported November national CPI. Headline inflation fell a tick more than expected to -0.9% y/y vs. -0.4% in October, while core (ex-fresh food) came in as expected at -0.9% y/y vs. -0.7% in October. The core reading is the worst since September 2010. No wonder the BOJ is reviewing its policy framework, as it’s clear from recent CPI readings that it will take much longer than anticipated to reach the 2% inflation target. All in all, the recent data support our view that the economy continues to underperform even as deflation risks intensify.

 

YEAR-END REVIEW

In the FX space, the DXY index is down nearly 7% on the year, less than 2% away from the 2018 lows. The Swedish krona was the top G10 performer (+13% YTD), but euro and Aussie weren’t far behind, gaining some 9% on the year. The pound and the Canadian dollar have been by far the underperformers amongst majors, gaining about 2%. Elsewhere, the dollar has posted significant gains against the broad EM FX index as the appreciation of the yuan (6.5%) and other EM Asian currencies has been offset by losses in high-beta currencies such as Brazil (-20%) and the lira (-22%), along with smaller declines in other LatAm currencies.

The week is closing on a positive note for global equity markets. US tech stocks have outperformed despite increasing regulatory and antitrust risks against some of the major components (such as Google and Facebook). On the year, the Nasdaq continues to lead the charge higher. European and UK indices remain in negative territory year-to-date, fueling calls by several markets participants for catch up trades on the back of a growth to value rotation (and helped by the weaker dollar trend). The MSCI EM index is also posting a solid performance this year, though largely led by Asia indices.

On the fixed income side, Chinese yields have widened their advantage over the last few months, while the US 10-year has yet to make a decisive break above 1.0%. For the most part, yields in developed markets have been range bound since March. Of course, this is largely due to central bank policy direction. However, we think the marginal variable now in the US will be fiscal stimulus that likely hinges on a Democratic sweep of the January 5 Senate run-offs in Georgia. The return of the Blue Wave could trigger a move in 10-year yields above 1.0%. On top of this, we also think the dual rotation engines (from bonds to equities, and from US assets to rest of world) will also play a role in supporting a gradual increase in yields.

It has been big year for commodities, with strong performances and divergences across different assets. Metals have shined for most of the year. Precious metals have outperformed (+24% YTD) but base metals have also done very well (+20% YTD). Agricultural prices have also increased steadily in price (+9% YTD), due in part to weather condition and major supply disruptions in key producing countries. Energy has lagged by far. The price increase in crude oil since early November has been partially offset by a sharp decline in natural gas prices in expectations of warmer weather.