Morning Commentary: Cheap Doesn’t Mean Value

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

Cheap Doesn’t Mean Value Share this story: Andrew Kositkun Foreign Exchange Head Trader

The aggressive steepening of the U.S. yield curve following Democratic victories in the two Georgia Senate elections has started to stabilize. Looking forward, another large fiscal stimulus package in the U.S. should be approved in the first quarter. This additional fiscal help combined with progress on the global vaccination front should give markets confidence to continue buying risk-sensitive G10 and emerging-market assets. As such, U.S. yields are likely to move higher, but the scope and pace of these moves should be more contained.  Interestingly, there are signs that idiosyncratic factors are beginning to matter again. Back in 2020, the initial rally following the announcement of a highly efficacious vaccine and Biden’s victory took on a “rising tide lifts all boats” characteristic. In contrast, the rally in 2021 has seen greater variation. This raises the question as to whether cheap is the same thing as value.  The simple answer is no, a currency that is cheap relative to history does not necessarily have value. There are several currencies — such as those in Latin America — that are historically cheap. However, this weakness has been accompanied by greater domestic yield-curve steepening than has been seen in other countries, as yields are reacting to relatively higher fiscal indebtedness. Put another way, the discounts seen in several emerging markets are a reflection of the issues in those markets rather than a sign of value.  Currency valuation will also be a topic of interest in the U.S. today, as Janet Yellen, President-elect Joe Biden’s Treasury secretary nominee, is scheduled to testify on Capitol Hill. In her testimony, Yellen is expected to say that intentional targeting of exchange rates to gain an unfair advantage is unacceptable. Furthermore, Yellen is expected to underscore that the U.S. does not seek a weaker currency to gain a competitive advantage and should oppose attempts by other countries to do so. In essence, expect Yellen to confirm the U.S. returning to a hands-off approach for the U.S. dollar that had been the pre-Trump norm for decades under both Republican and Democratic administrations.  HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT: The U.S. Senate returns from recess today and will begin the process of confirming President-elect Biden’s cabinet choices.  Italian Prime Minister Giuseppe Conte won a vote of confidence in the lower House yesterday and faces another vote of confidence in the Senate today. Voting in the Senate is expected to be much closer, as the coalition only has a razor-thin majority, but ultimately, Conte is expected to survive. As such, market noise has been fairly muted despite.  News reports indicate that U.K. Chancellor Rishi Sunak is preparing to increase welfare payments by $27 per week, although no firm decision has been made, and other options are also being considered. In the end, additional fiscal and monetary stimulus, of some form, is very likely in the coming months.  China’s GDP rose 6.5%, beating expectations for a 6.2% year-over-year rise. Despite China’s strong economic performance, policymakers are still committed to maintaining their accommodative stance. To this end, Chinese officials injected additional liquidity in the markets ahead of next month’s Lunar New Year. Furthermore, National Development and Reform Commission official Yan said China’s macro policies will focus on economic development and stressed that a scale-back or exit from stimulus was unlikely this year.

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