Morning Commentary: A Round-tripper

Foreign Exchange - Morning Commentary
A Round-tripper 
Share this story:
Facebook
Twitter
LinkedIn
Email
Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
This past week, the USD continued its decline and completely gave back all of its gains from the market’s March safe haven panic buying.  While it is tempting to attribute this to a simple crisis buying/recovery trade, an analysis that breaks down USD performance by currency bloc paints a different picture.  Specifically, non-USD reserve currencies and Latam currencies find themselves on different sides of the spectrum with non-USD reserve currencies exhibiting strength and Latam currencies exhibiting weakness.  Further, the cross USD correlations have fallen which supports the idea that multiple factors, rather than a single factor, are pushing USD weakness. 

The factors that have weakened the USD, to varying degrees, include the following:
  • A global V-shaped growth recovery from shutdowns that has sapped safe-haven demand.
  • European outperformance on virus control and the fiscal optimism.
  • Negative idiosyncratic USD factors including political and fiscal risk that underscore the possibility for inverse US exceptionalism.

With all these factors occurring simultaneously, each factor’s USD negative impact gets reinforced.  However, all these factors do not need to exist in unison.  To this point, there is growing evidence that some of these factors are weakening.

For starters, the growth rebound is starting to soften.  Heading into the summer months, market risk sentiment stayed positive despite rising infections in the US and some EM countries.  This resilience to infection spikes may be weakening as infections spread in parts of Europe and Asia right as high frequency mobility data is starting to stall. 

Additionally, recent stimulus negotiation headlines out of Washington reinforces concerns that US political and fiscal risks could be more protracted than transitory.  Further, messaging out of the White House also supports the assumption that the impending election will be a contentious one.  While all of this does weigh on the US economy, it also makes it more likely that negativity can spill over into the global economy, which would limit broad USD weakness. 
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • US-China tension remain heightened.  Possible US action against TikTok has garnered most of the headlines, but Mike Pompeo indicated that the administration would announce measures against an array of Chinese apps deemed to pose-national security threats, indicating that actions will likely extend beyond TikTok. 
  • Republicans and Democrats remain at an impasse over stimulus talks.  Nancy Pelosi, Chuck Schumer, Mark Meadows and Steve Mnuchin are meeting again today, but the issue of extending extra jobless aid remains a key issue.  Studies out of the University of Chicago and Yale represent both sides of the argument.  Research out of the University of Chicago found ~68% of eligible recipients received more benefits than they earned when working while a Yale study found no evidence that this discouraged people from returning to work.  While there is confidence that a bill will eventually be passed, expect Phase 4 stimulus talks to be a drawn out process. 
  • US ISM manufacturing PMI beat expectations at 54.1 against expectation for a 53.6 print. 
  • Fitch dropped its AAA rating on the US from stable to negative.  The agency cited a deteriorating public finance picture.  US yields continue to fall despite this downgrade, a result similar to 2011 when US yields also shrugged off Standard and Poor’s downgrade of US debt. 
  • Reports out of the UK indicate that the government is ready to lock down London should infections worsen.  These headlines have grabbed a lot of attention, but lockdowns as a response to rising infections shouldn’t come as a surprise to anyone.  As long as government responses remain targeted and not nationwide, risk sentiment should remain supported.
  • The Eurozone’s final manufacturing PMI came in at 51.8.  Spain, Italy, France and Germany all saw improvements. 
  • China’s manufacturing PMI came in at 52.8 which beat expectations.  The components also looked good and continues to support the narrative of an improving post-lockdown economy. 
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:
Facebook Twitter LinkedIn Google Plus YouTube
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
Equal Housing Lender
NMLSR ID# 536994 | City National Bank Member FDIC
                                                           

Comments

Popular posts from this blog

Are tax hikes coming?