Morning Commentary: The More Things Change, The More They Stay the Same

Foreign Exchange - Morning Commentary
The More Things Change, The More They Stay the Same
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
One of the key market themes early in the COVID-19 crisis has been the panic-like demand for US dollars, leading to USD strength and a significant USD funding premium. 

Subsequently, central banks around the world have taken extraordinary steps to ease these funding pressures to fund the largest USD liquidity demand since the Great Financial Crisis.  The easing of funding stress can be seen in the recovery of safe haven assets (USD, JPY, CHF, US Treasuries and gold) that we affected by indiscriminate USD liquidity demands.  However, while there has been a noticeable pull back in these safe haven assets, we caution against extrapolating recent moves into long term USD weakness. 

Near term, month end/quarter end should bring strong USD buying.  Longer term, the easing of funding stress should shift market focus back to economic fundamentals that support USD strength.  Heading into the COVID-19 outbreak, the US economy was relatively stronger than the rest of the world and will receive support from the large fiscal and monetary stimulus unleashed by Congress and the Fed. 

Conversely, Europe is likely to struggle due to widespread lockdowns and limited fiscal and monetary space to provide support.  In Asia, the postponement of the Olympic Games just adds to the headwinds facing Japan.  More broadly, the impact on emerging markets will likely be differentiated by factors such as each country’s relative dependence on global trade, tourism, oil and the quality of the healthcare system as well as other economic fragilities and policy space to deliver support. 

While it is possible to see further USD weakness, in the near term, as indiscriminate USD liquidity abates, I ultimately expect the USD to remain strong against most currencies due to the USD safe haven reserve status and the US economy’s growth outperformance.   
  • The White House and congressional Democrats appear to be moving closer to further stimulus.  House Speaker Pelosi and her party are currently assessing what might be needed in the next package of stimulus.  Republicans have also expressed support for additional measures but with both sides differing of what these measures should be. 
  • Crude oil has recovered from the 18-year low it hit yesterday as signs of an end to China’s economic contraction emerged yesterday through PMI figures that easily beat consensus and spiked up sharply from the prior reading.  These reports support the view that China’s economy has moved past its lows.  With lockdowns gradually being lifted, economic activity should continue to recover but much uncertainty still remains.  Additionally, Trump and Putin had a call yesterday on oil production.  It is possible that a rollback in US sanctions could be the catalyst to get Russia back to the OPEC negotiating table.        
  • Virus data remains mixed.  Overnight, Italy reported its lowest number of cases in nearly 2 weeks and the WHO has indicated that is sees signs of stabilization and that the peak could be approaching.  However, the virus is now hitting Spain hard.   
  • Germany reported better-than-expected unemployment data with unemployment rising only 1K against expectations for a 25K increase. 
  • The Japanese government has proposed a stimulus package worth around 60 trillion yen (~$555 billion).  While there is still some uncertainty around the ultimate amount, if passed, this will be the largest stimulus package in Japanese history.
  • Canada’s January GDP missed estimates, rising 0.1% against expectations for a 0.2% increase.  However, this data point has been ignored as much has changed since January.  Tomorrow’s manufacturing PMI print should be much more important.  
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