Morning Commentary: The Biden Administration Takes Shape
A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
The Biden Administration Takes Shape
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Andrew Kositkun Senior FX Advisor
Since taking office, President Joe Biden has signed a series of executive orders and memorandums addressing topics such as immigration, climate change, racial equality, government accountability and the COVID-19 response. The Biden administration has also taken steps to reverse some of the previous administration’s environmental and health policies, including revoking the permit for the Keystone XL pipeline, re-entering the Paris climate accords and reinstating ties with the World Health Organization. In reality, all of these actions were expected, as they are in line with Biden’s campaign proposals, but are still significant, as they signal a return to a more cooperative global environment, diminished risks to global trade, and more predictability to foreign relations and geopolitics. All else being equal, this backdrop should see the U.S. dollar weaken as demand for the dollar’s anti-cyclical qualities falls.
This past week also saw Treasury Secretary Janet Yellen confirming that the Biden administration will not seek to roll back the 2017 tax cuts while the U.S. economy continues to struggle. Furthermore, Yellen also signaled a return to a relatively neutral U.S. dollar policy by noting that “the value of the U.S. dollar and other currencies should be determined by markets.” As such, expect Biden’s expansionary fiscal policy measures and the Fed’s subsequent response to remain key near-term drivers for the currency. With the Fed pushing back on fiscally driven upward pressure on long-end U.S. rates and the dollar, markets should be more confident in focusing on the positive growth implications of a looser U.S. fiscal stance.
Speaking of the Fed, the central bank will announce its latest rate decision tomorrow. No change is expected, and Chair Powell should re-emphasize his recent comments that any change to the Fed’s policy stance remains well off in the future. As such, long-end rates are likely to stabilize around current levels. In light of this moderation in rise of U.S. yields and the U.S. fiscal stimulus proposal, equity-sensitive currencies have outperformed year to date, and any strong upside surprises on earnings this week should give these currencies another boost.
Nevertheless, risk sentiment remains fragile and vulnerable to virus developments. The medium-term outlook remains constructive, but the presence of a more contagious variant of the virus has prompted more new lockdowns and the extension of existing measures. A successful rollout of the vaccine should see these fears subside, but until then, the hope is that accommodative fiscal and monetary policy can keep risk assets supported.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
Senate Minority Leader Mitch McConnell has reached a power-sharing deal modeled after the 2001 structure after it became clear the Democrats didn’t have the votes needed to eliminate the filibuster. Under the 2001 model, both parties will have an equal number of committee seats and equal budgets for committees, and both parties can advance legislation out of committees that are deadlocked. The Democrats will hold the chairmanships, and Senate Majority Leader Chuck Schumer will set the agenda on the floor.
Janet Yellen was confirmed by the Senate and became the first female Treasury secretary.
Italian Prime Minister Giuseppe Conte will resign today and be given a chance to form another coalition government without the Italia Viva party. Conte will need to add at least 13 lawmaker to his coalition to hold a majority. Thus far, market reaction to these events has been limited, with interest differentials between equivalent Italian and German bonds narrowing.
The U.K. unemployment rate rose to 5.0% from 4.9% but beat expectations for a rise to 5.1%. Nevertheless, the 5.0% unemployment rate is the highest level since 2016 and risks are for the actual rate to be much higher. According to the timelier Business Impact of Coronavirus Survey, the proportion of furloughed employees rose from 9% to 16% or a level much higher than what official figures are showing. As such, the official labor numbers are likely understating the real labor market stress with the Bank of England Governor admitting that unemployment was “probably closer to 6.5%” earlier this month.
Rates in China spiked overnight after a significant amount of overnight capital was withdrawn by the People’s Bank of China (PBoC), and officials issued a warning on high asset valuations. The drop in liquidity is notable, as it comes ahead of the Lunar New Year holiday when liquidity naturally tightens anyway. Given the central bank’s recent actions, PBoC Governor Yi Gang stressed that the bank would not exit its accommodative stance “prematurely.”
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