Morning Commentary: Cautious Optimism vs. Cautious Pessimism
A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
Cautious Optimism vs. Cautious Pessimism
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Andrew Kositkun Foreign Exchange Head Trader
Currency markets remain a balance of optimism on the ongoing cyclical lift and concern on rising infection rates in the US and parts of the emerging markets.
Thus far risk markets have mostly held up well and the broad USD has traded in a ~1.5% band over the past month. While the recovery trade has formed a relative base, the overall momentum in FX reflation trades, including a now consensus USD short, has slowed. Further gauges of global mobility have stalled and higher frequency data is not as encouraging as in early May.
It should be acknowledged that an argument could be made for the impact of a second wave of infections to be less pronounced than the first. This is due to a better understanding of the virus and lower mortality rates. Nevertheless, rising infection rates should still dampen the recovery as it could lead to a more long lasting impact on consumer and business behavior that impacts both the US and global growth.
Focusing on the US, one of the key themes in the FX markets has been a bias for USD weakness but it is important to note that rising US infections does not automatically imply USD weakness. While it’s true that rising US infections will have a growth impact that is larger in the US than the rest of the world, the read-through isn’t that simple. If US infections risk high enough, it could dent risk sentiment and be bullish for the USD due to its anti-cyclical/defensive characteristics as economic headwinds becomes a global rather than local phenomena.
What this nets out to is an intensifying tug of war between improving data and infection rates that still lacks a decisive USD resolution. Notably, the USD index was down ~0.7% last week but was up or flat against nearly half of the G10 currencies. This likely leaves us in for more choppy USD consolidation with erratic week to week fluctuations.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
Congress returns from its recess today and picks up on stimulus talks. The prospects for another round of stimulus is uncertain with lawmakers facing small window to strike a deal before the August recess as both sides remain far apart. Democrats have floated a $3.5 trillion plan while the Republican plan is around $1 trillion. Further, President Trump insists that a payroll tax cut must be included, a redline issue for Democrats and some Republicans. Notably, the extra $600 per week in jobless benefits expires at the end of this month. Thus far there hasn’t been any agreement on an extension but there has been some discussion around an extension at a reduced $200 per week.
US virus cases rose 2.2%, which is more than the 1.9% daily average over the past week. Florida had its fifth consecutive day of more than 10,000 cases while Los Angeles Mayor Eric Garcetti issued a warning that the city could be near another stay-at-home order.
The EU reached a last minute deal on its rescue package. Talks ended Saturday without a deal but EC President Michel introduced another compromise that cut the grant portion of the plan by EUR100 billion to EUR400 billion. The surplus nations wanted grants capped at EUR350 billion and both sides settles on EUR390 billion. The balance of the EUR750 billion program will be made through low interest loans.
Brexit talks have reportedly hit another dead-end as accelerated talks have yet to result in any significant breakthrough. Talks re-open again this week with a final round of negotiations is scheduled for August 17th.
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