• Joel

USD slide continues on dovish sounding FOMC speak

USD has been out of favour this week, slipping from highs above 92.80 to trade lows this morning close to 92.20.

USD continues to trade well below its US Presidential election night highs of above 94.00, with the notion that a Biden administration will foster better global trading conditions that ought to help foster global growth still being cited as an important negative for USD in the long run.

Though Trump continues to contest the outcome of the election and the final result has yet to be declared in Biden’s favour, markets remain certain that he is heading for the White House in January.

Moreover, global equity market have continued to perform strongly in recent days given increased vaccine optimism on the back of the completion of successful final trails from Pfizer/BioNtech and Moderna, something which would typically be a USD negative.

In fairness, USD seems to have somewhat lost its safe haven status in recent days; vaccine news seems to have actually helped USD in the short-run given higher US treasury yields (and an even stronger US interest rate environment). But many participants likely agree that the vaccine news and associated faster than previously expected end to the pandemic (which will be a huge positive for EM and risk sensitive FX) will in the end be a USD negative.

Some argue that the market is under-pricing near-term risks presented by the continued spread of the virus in the US over the last few weeks, which has resulted in states one by one going back into some form of lockdown. Shouldn’t this be bullish for safe haven USD?

Perhaps not, given that the Eurozone (which has already gone back into lockdown) is seeing its virus numbers stabilising and major Asian economies such as China and Japan both look to have kept the virus relatively well under wraps. The Chinese economy has already been one of the world’s best performing in 2020 and this looks set to continue into 2021, while the Eurozone, though suffering right now, might be setting itself up for a stronger Q1 2021 if it can get virus numbers under control by Christmas – all while US Covid-19 deaths continue to rise in the US - this might undermine USD vs the likes of JPY, CNY and EUR going forward.

But crucially, you also have to factor in the increasingly dovish sounding FOMC; a number of heavy hitters have warmed the microphone so far this week. FOMC Chairman Powell yesterday expressed his growing concern that the US economic recovery is screeching to a halt amid rising virus numbers and states going back into lockdown, and played down vaccine optimism by saying that mass immunisation is still months away.

Moreover, he reiterated that now is not the time pull emergency programmes, while FOMC member Bostic went even further saying the Fed could look at making changes to asset purchases and its emergency financing programmes (though this is something both Powell and Clarida did not hint at). Clarida, meanwhile, seemingly increased the bar for rate hikes down the line, saying that the Fed would be looking at the participation rate as well as the unemployment rate when assessing whether the economy is back to full employment.

All of these factors continue to weigh on the outlook for USD, and a test of November lows at just above 92.00.


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