Morning Commentary: Inverse Exceptionalism

A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.

Inverse Exceptionalism Share this story: Andrew Kositkun Foreign Exchange Head Trader

A key market focus this week will be the US’s Phase 4 stimulus plan.  The base case remains for a deal to ultimately get done as it is a political necessity for both sides with the expiry of some CARES 1.0 programs and the election approaching.  Yet, last week’s negotiating difficulties illustrates challenges faced in getting a deal across the finish line.  Unfortunately, the differences extend beyond simply the size of the package—Republicans are targeting ~$1 trillion and Democrats are targeting ~$3.5 trillion.  The path of a compromise would be much more straightforward if it was just an issue of size.     Instead, the fundamental issues lie in the nature of the proposals as they fall far apart on the traditional left/right political ideology divide during an election year.  Adding another wrinkle to the process is the disagreement among Republicans that is somewhat similar to the failed attempt to repeal Obamacare in 2019.  This means markets will be forced to contend with the possibility that the US could fall off a fiscal cliff.  Case in point, the enhanced $600/week federal unemployment benefit and moratorium on evictions have expired.  For scope, the Federal Pandemic Unemployment Compensation (FPUC) program, which provides the additional $600/week unemployment benefit, has supported around 25 million workers or 15% of the labor force.  After accounting for income and aggregate demand multiplier effects, the FPUC program is shielding ~5% of GDP.   The longer that Washington remains gridlocked, the more attention this self-inflected fiscal drag should draw to the building narrative of US inverse exceptionalism and add momentum to the recent move lower in the USD.  Even if you assume this fiscal trip up is only temporary, it still raises the possibility that the US economy could underperform for a material period of time.  This concern is enhanced when compared to the EU’s recent ability to cross political barriers to deliver needed fiscal stimulus, negative US performance in managing infections amid the reopening relative to DM peers, and the ongoing optimistic market view for the global economic recovery.  HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: This will be a big week for US data with updated information on personal income, Q2 GDP, the FOMC decision and earnings from Apple, Amazon, Alphabet, Facebook, Chevron and Exxon among others.   Risk sentiment is modestly higher despite increasing concerns on rising US-China tensions and virus infection numbers.  Regarding the virus, the UK has imposed a quarantine on travelers from Spain with numbers continuing to rise in China, Hong Kong and India.  India has the fastest growing epidemic with cases increasing 20% to 1.4 million over the past week. In the US, the pace of infections has slowed and daily deaths has dropped below 1,000 for the first time in 5 days.    The USD continues to weaken, hitting its lowest levels since the middle of 2018.  Rising US-China tensions, a reduction in European risks, rising US infection numbers and an impending US election have kept the USD trading with a bearish bias.  There are also signs that market participants may be rebalancing into other G10 currencies.  Notably, a breakdown of the USD weakness since mid-May shows that USD weakness is not broad based but rather focused between a stronger EUR complex (EUR + Scandies) and commodity currency strength. Republican Senators are expected to unveil their $1 trillion stimulus proposal today which is expected to include a formula-based approach to extending the weekly jobless benefits and a $1,200 stimulus check.  Regardless of what ultimately makes it into the Republican proposal, expect a drawn out negotiating period between the two parties as the August recess rapidly approaches.  In Europe, Germany’s IFO survey came in better than expected with the headline number, and especially the expectations component, beating while the current assessment came in slightly below expectations.  Overall, this report adds to the narrative that the worst is behind Germany.  Regarding Brexit, informal talks kick off today but not much is expected. China took over the US consulate in Chengdu overnight and condemned the US’s “forced entry” into China’s consulate in Houston on Friday.

If we can help you with any Foreign Exchange needs, please email foreignexchange@cnb.com or call (800) 447‑4133. 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.

Unsubscribe from this list  |  Update email preferences This message has been sent to bank@banking.offers.report. Please do not reply to this email. To ensure the delivery of future emails, please add foreignexchange@emails.cnb.com to your email address book or safe sender list. Copyright ©2020 City National Bank – All Rights Reserved. 350 South Grand Avenue, 12th Floor, Los Angeles, CA 90071 City National Bank is a subsidiary of Royal Bank of Canada. TERMS & CONDITIONS  |  PRIVACY STATEMENT NMLSR ID# 536994 | City National Bank Member FDIC