• Joel

USD caught between conflicting themes of vaccine, lockdowns and FOMC

USD saw a sharp recovery last night as US stock markets sold off on the news that New York had opted to close public school as the states test positivity rate hit the 3% threshold.

The latest news, though not particularly consequential in itself (the negative economic impact of keeping kids at home will be a big negative for the New York economy but will not have much impact on a national level), served as a reminder that all is not well on the pandemic front just because we now have a couple of promising vaccines.

Indeed, the state of the global pandemic continues to worsen, with the US going back into lockdown state by state and the EU not seeing virus numbers drop fast enough for current lockdowns to be as fast as initially hoped. Looking Eastwards; Japan is also seeing record numbers and has implemented tighter lockdown restrictions this week while the state of South Australia will immediately enter a six-day lockdown to curb the spread of an outbreak discovered just days ago.

But despite these recent negative developments regarding the spread of Covid-19 (and prior to last night’s price action), safe havens like USD have not been performing particularly well as off late.

Indeed, USD looks to snap a run of five days of losses today. USD has been caught between conflicting themes over the last few days. Here’s what you should know…

VACCINE NEWS - USD has seen minor strength in wake of recent vaccine updates from Pfizer, Moderna and, this morning, AstraZeneca. However, these bouts of strength (seemingly driven by higher US yields at the time) have proven short-lived. Perhaps that is reflective of markets focusing more on the long-term economic impact of a faster global immunisation programme (sooner end to pandemic, faster recovery in 2021). If that implies stronger global growth relative to US growth in 2021, then vaccine news is actually more likely to end up a USD negative, some participants may argue.

US LOCKDOWN - The major economy seeing the worst deterioration in its economic outlook right now due to Covid-19 is the US, given that Asia is doing comparatively well in containing the virus and Europe is already in lockdown and seeing Covid-19 numbers stabilise. Some thus argue that the recent worsening in the global state of the pandemic, which has chiefly been focused on the US, ought not be a USD positive (though price action last night/today says otherwise).

DOVISH FOMC - The BoE and RBA have already just eased monetary policy, the BoC, BoJ, PBoC and RBNZ are all on hold and, given very clear guidance that more easing is coming in December, markets largely now already price in the coming ECB “bazooka”. Meanwhile, no one is quiet yet sure what the Fed are going to do in their December meeting; FOMC speakers (including Fed Chair Powell and Vice Chair Clarida) have all signalled increasing concern for the US economy over the coming months give the worsening virus situation. All have reiterated that emergency liquidity and financing facilities, as well as easy policy, are not going anywhere, but clear signals of what further measures might be on the horizon are yet to come. Thus, if the FOMC are to enact further economic supportive measures over the coming months, USD might yet need to see some further downside in order to price this in.

Moving forward, the near-term direction of the USD looks unclear as these competing themes battle it out. Going into 2021 though, things are seemingly set to crystalise against USD; hopefully by the end of Q2 2021, enough of the global population will have been vaccinated to end lockdowns and return to relative normality. Meanwhile, it is also hoped that US President-elect Biden will oversea a return to a rules-based international order, which ought to support global growth by fostering better global trading conditions. All of this is USD negative, and the Fed have signalled that even if the economy comes roaring back, they are unlikely to hike until 2023.


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