USD Underpinned by Positive Data, Fiscal Stimulus Talk
US and European equity bourses are on the front foot and European government bonds largely on the defensive amid a broadly positive market risk tone today.
Gains come despite growing concerns regarding a Second Covid-19 wave (with focus on Southern US States and Beijing) and growing geopolitical tensions in Asia, as markets take a glass half full view of things.
The positive fundamentals pushing equity markets higher/bond markets lower are 1) the Fed starting its corporate bond-buying programme (on Monday), 2) the discovery that a widely used & available steroid (dexamethasone) significantly reduces Covid-19 deaths in severe cases (yesterday), 3) reports that the White House is mulling a $1trln fiscal stimulus package (overnight) and 4) yesterday’s strong US retail sales data (which raises hopes for a V-shaped recovery).
Risk on markets are typically a negative for safe haven USD.
However, USD seems to be trading off of US-specific positive fundamentals this morning, by focusing on strong US data and overnight reports of more US fiscal stimulus, rather than trading as a function of the market’s wider risk appetite.
DXY this morning shot back above the 97.00 level, a decent turn around from last Wednesday's lows of beneath 96.00.
Analysts/traders are, however, skeptical as to how much further this recent correction higher in USD has to run.
Firstly, how long will USD trade as a function of positive US fundamentals as opposed to as a safe haven asset?
If USD reverts back to trading like a safe haven (as many expect that it will), risks most certainly point to the downside for USD.
Economic data in the US and Europe have been coming in much better than expected in recent weeks, while reopenings across key markets have generally continued. Moreover, there is a growing sense in the US and Europe (as indicated by officials) that further harsh lockdowns are impossible given the economic cost. This, combined with ongoing fiscal and monetary support should keep equities supported.
Secondly, if USD does continue to trade as a function of US-specific fundamentals rather than broader risk appetite, how long until Fed dovishness starts to weigh again?
The Fed demonstrated on Monday that they remain ready to act on an inter-meeting basis in making changes to policy. The Fed continues to pump more money into financial markets than any other global central bank.
Many traders might look at recent USD strength as an opportunity to get short.
However, as risks to the economic outlook mount, such as a second Covid-19 wave scuppering the V-shaped recovery, the risk of further tensions on the US/China front, or between geopolitical rivals (such as what we have seen with China/India and South/North Korea), this bearish USD view could easily prove wrong.
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