The Covid-19 pandemic is out of control in the US; new reported infections surpassed 160k for the first time yesterday. On November the 11th, hospitalisations were up to over 65k, a 37% increase on two weeks earlier, while the daily death toll is around 1.5k and has also risen at a pace of nearly 40% over the last two weeks.
The Mid West is currently the region being the hardest hit, given that up until two months ago it had largely avoided the March spike in cases that hit the East Coast and the summer spike in cases that hit the South and the West Coast.
According to the NYT’s US Covid-19 epidemic tracker, new cases are higher and staying high in 46 states, with the most concerning spikes in cases being seen in North and South Dakota, Iowa, Wisconsin, Wyoming, Illinois and Minesota (a number of states that helped President-elect Joe Biden defeat US President Trump in last week’s election).
Amid a distinct lack of national leadership on the problem coming from the top (President Trump seems more concerned with protesting the election result on Twitter than on fighting the pandemic), State leaders have begun to act; New York City is reportedly gearing up to close schools if the test-positivity rate continues to rise, while Chicago yesterday issued a stay-at-home advisory which will be effective from the 16th of November for 30 days.
However, most analysts agree that a state by state approach is likely to be much less effective than the sort of national approach being taken by countries in Europe in containing the pandemic.
So what does the worsening state of the pandemic mean for the US dollar?
1) Will USD weaken as Q4 2020 and Q1 2021 economic growth expectations drop?
Typically when growth expectations in a country drop, its currency depreciates. With the worsening of the pandemic, US growth expectations over the coming months are dropping. However, unlike the week before the US Presidential election, when focus was on Europe going back into lockdown (and so European growth expectations, EUR and European stock markets dropped), we have not seen USD and US stock markets drop this week.
Concerns over the worsening short-term state of the pandemic in the US have been allayed by vaccine optimism following Monday’s announcement from Pfizer and BioNtech, which brought forward expectations as to how soon the US will be able to start mass vaccinations and go back to normal. In other words, though the short-term picture regarding the pandemic is worsening in the US, the long-term picture has improved. Thus, US equity markets have remained well supported this week (and saw a rotation from stay-at-home names growth tech names into traditional, more industrial value names), as has USD.
The question is whether optimism over the long-term direction of the pandemic continues to prevail over pessimism over the short-term direction. If it no longer can, we could see stocks fall. But then would USD strengthen on a safe haven bid? Or would it weaken?
2) Will USD be pressured by a more dovish Fed?
Another factor to consider is the Fed. Powell sounded dovish yesterday, citing concern over the worsening state of the pandemic and saying that both Congress and the Fed need to do more. Basically, when fiscal stimulus comes (whenever it does), the Fed are ready to print as much money via QE purchases to completely soak up all that new debt issuance via the secondary debt market and keep interest rates nice and low.
Will this end up weakening the USD? Floods of USD liquidity from the Fed have so far this year brought the Dollar Index (DXY) back from high at nearly 103.00 all the way to current levels below 93.00, and 1000-point turnaround. But with the Fed looking to be out of ammo, can the Fed continue to pressure USD lower?
3) Will the pandemic put pressure on Congress for bigger stimulus package, and how will this affect USD?
Fiscal stimulus talks are back on the agenda, now that the lame duck Congress has returned to session. Though the Senate race is not over yet, the Republicans look set to maintain their majority, and Senate Majority Leader Mitch McConnell has recently been spouting his lack of appetite for another large fiscal stimulus package. He would much prefer a smaller, targeted one (closer to $500bln than $2-3trln).
He has shown no signs of feeling the pressure to go bigger given the worsening state of the pandemic, and as long as Republicans maintain their majority, if the Democrats want to get more stimulus done, they are going to have to engage in serious negotiations (unlike what they did prior to the election).
So a smaller fiscal package seems likely. Typically fiscal stimulus is seen as a benefit to a country’s currency, but with the USD also acting as a safe haven, it is unclear to predict how USD might react. US equity markets will likely receive a boost, however, with another fiscal stimulus package, even a small one, likely to give a boost to US economic growth in 2021.
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