• Joel

Huge USD rally as PMI data crushes expectations

The US dollar saw a stunning reversal of fortunes today. During the morning, it was under pressure amid a combination of vaccine optimism and solid European PMI data.

In terms of the vaccine the latest vaccine news, AstraZeneca released an update; their vaccine has an average efficacy of 70% (a fair bit lower than Pfizer and Moderna’s vaccine), although one regiment of vaccine candidates, those who received a half dose followed by a second full dose one month later, saw average efficacy of 90%.

Importantly, storage conditions are more favourable than Pfizer’s vaccine; this vaccine can be stored at normal refrigerator conditions for at least six months (vs Pfizer’s vaccine, which needs to be stored at -70 degrees Celsius and Moderna’s which can be stored at refrigerator temperature for only one month).

DXY slipped as low as just above 92.00 this morning, but saw a sudden, sharp turnaround following much stronger than anticipated US Markit PMI data, rallying to well north of the 92.50 mark and jumping from the bottom of the G10 performance table to the top;

Manufacturing PMI unexpectedly jumped to 56.7 from 53.4, versus expectations for a slightly drop to 53.0. Meanwhile, services PMI also unexpectedly jumped to 57.7 from 56.9, versus expectations for a drop to 55.0. That put manufacturing PMI at its highest level since September 2014 and services PMI at its highest level since April 2015. “The November PMI surveys provide the first post-election snapshot of the US economy, and makes for very encouraging reading”, said Chris Williamson, Chief Business Economist at IHS Markit.

Note that it is unusual for IHS Markit PMI’s to trigger such a large reaction, but this report might have triggered such a reaction as it contained evidence of a coming uptick in inflation; “the surge in demand and hiring has pushed prices and wages higher. Average selling prices for goods and services rose at the fastest rate yet recorded by the survey, with shortages of supplies also more widespread than at any time previously reported” commented IHS Markit’s Williamson.

Hints of coming inflation could be giving the USD bulls might hope that Monday’s data foreshadows a coming rise in inflation that might lead to the Fed raising interest rates sooner than currently expected by most market participants, hence the large positive USD reaction.

Elsewhere, other factors that might be working in USD’s favour are recent reports that the Trump administration is pushing for new hard-line measures against China to prevent them from employing economic coercion.

According to the Senior officials, they want to create an informal alliance of Western nations to jointly retaliate when China uses its trading power to coerce countries and were motivated by the economic pressure that China has been putting on Australia after the country called for an independent investigation into the origins of the Covid-19 pandemic.

This type of approach to tackling China is likely to be popular amongst the Biden administration, who have indicated they favour the US essentially teaming up with other Western democracies (like the EU, UK, Canada, Australia etc.), rather than the US trying to go it alone as it did for most of the Trump administration years. Hence, this new approach set to be taken by the Trump administration is likely to continue under the Biden administration.

Today’s news is unlikely to be a game-changer for US/Chinese relations, or more broadly West/China relations, but is likely to just highlight the continued economic/technological decoupling that is likely to continue under the still fairly anti-China Biden administration over the next four years, or so most analysts in the market assume. Still, USD typically does well from signs of increased global trade tension.


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