A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
On the Other Hand
Share this story:
Andrew Kositkun Foreign Exchange Head Trader
In yesterday’s The Week Ahead publication, we built a case for USD strength given the US’s relative outperformance against a still weak global outlook. Today, it is only appropriate that we discuss the other side of the coin and highlight the factors that could weaken the USD.
While economic factors argue for USD strength, the factors for a USD discount predominately stem from political factors, the first of which is the impeachment inquiry. Over the past week, the process has picked up momentum in the House of Representatives. The odds of impeachment (passing the House) now stand at 75% after holding steady around 70% for the past 3 weeks. While the prospect of President Trump being removed from office (House and Senate) remains a tail-risk, the political risk certainly warrants a small USD discount.
A second factor concerns the prospect of another government shutdown. Escalating partisan politics over impeachment throws renewed concern around the current continuing spending resolution that will expire November 21. In the past year, the USD weakened roughly 2% during the historically long government shutdown. While the risk of a government shutdown should pressure the USD, the macro situation this time around should make the USD impact relatively more modest.
The final political factor can be attributed to the rise in Democratic presidential candidates that champion policies that could widen the US deficit and/or increase taxes. As with the risk of a government shutdown, there are also mitigating factors here. It is still relatively early and the field remains crowded. Currently, there are 5 candidates polling in the range where the past two presidential incumbent challenges were at the same point in time.
Ultimately, the feeling is that the factors for USD strength should prevail over those for USD weakness. For this week, the focus should remain on the Fed. Markets are currently pricing in a ~90% chance of a rate cut. As such, the main focus will be on forward guidance. With Brexit and US-China trade taking a positive turn and US economic data broadly firm, the case for another cut in December has become less compelling.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
The EU has agreed to grant the UK a 3 month “flextension” after France dropped its opposition. The UK now has until January 31, 2020 to leave the EU but can leave on either November 30 or December 31 should both sides ratify a deal. The extension excludes renegotiation of the deal.
The UK Parliament will vote today on Johnson’s request for early election on December 12. This will require a 2/3rd majority, a threshold the PM is not expected to be able to meet. Additionally, the SNP and LibDems have put forward their own plan for early elections on December 9. This proposal also appears to lack the necessary support.
Positive trade headlines continue to support the markets. The US and China have completed the regulatory standards for agricultural products and are nearly finished on the phase 1 trade deal. However, the two sides are now working on the enforcement mechanism portion where earlier talks broke down.
Alberto Fernandez won Argentina’s election over the weekend with 48% of the vote. The new government will now be tasked with dealing with private debt holders as well as with the IMF.
Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!
Follow City National Bank on social media:
Non-deposit investment products:
Are not FDIC insured,
Are not deposits or other obligations of City National Bank and are not guaranteed by City National Bank, and
Are subject to investment risks, including possible loss of the principal invested.
This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.
Now accepting scholarship apps Celebrating 40 years of service -- A loan to an innovative company -- Affording your dream home -- Mergers and a new branch in Raleigh View this email in your browser Forward to a friend
Here's what this indicator is saying about US stocks right now. ACTIVE INVESTOR WEEKLY EDITION: January 21, 2022 View in a browser FIDELITY VIEWPOINTS ® WEEKLY EDITION: January 21, 2022 Bollinger band stock signal Here's what this indicator is saying about US stocks right now. Read more CHART OF THE WEEK Inflation and corporate consolidation US industries have become