Marius Paun | London, UK | Senior dealer | Thursday, 30th July 2020
The US dollar has enjoyed a rally since the beginning of the year as containing a renewed spike in coronavirus infections seemed elusive. Indeed, more vaccines have been approved since Pfizer made the breakthrough announcement in November or are on the way to being approved by the Food and Drug Administration (FDA). However, distributing them and actually vaccinating people looked like no easy task, certainly not one that can be done fast enough.
Nonetheless, there are now growing hopes that more Covid-19 relief could soon be on its way, lately, virus cases fell, more cities came out of the lockdown and at the same time allowed businesses to reopen. As a result, a wave of pent-up demand is expected later in the year which should speed up growth.
Those feel-good factors have pushed the US dollar back down with dollar index retesting support at 90 (US dollar index- a measure of the US dollar against a basket of its major trading partners’ associated currencies the EU, Japan, the UK, Canada, Sweden and Switzerland).
Regardless of the current context, the greenback’s fate will remain closely linked to inflation and interest rates. Bond yields have been on a rise recently which fuelled concerns the US Fed could decide to raise rates sooner than markets anticipated.
Fed Chair Jerome Powell testified before Congress earlier in the week and eased concerns the Fed would tighten any time soon. He’s been saying, for more than a year now, that the rates will likely stay near zero through 2023. While he did not mention any date, he did say there’s no hike in the foreseeable future. Instead, Powell said, the central bank will be focused on getting ‘‘Americans back to work and it is likely to take some time for substantial further progress to be achieved’’.
He also reiterated the Fed would allow inflation to run hotter and longer than usual before doing anything on interest rates and there are no plans to taper asset purchases either. What is more interesting is the re-emphasized that there would be a clear communication of a change in policy before taking any sort of action.
It looks like President Joe Biden’s $1.9 trillion stimulus package could pass within weeks triggering the so-called reflation trade which has pushed the US dollar back down. Labor Department figures showed the $600 checks sent in December fed through the real economy. Retail sales surged 5.3% last month, a record 5 times bigger than expected.
The next round of individual stimulus will be more than twice as large as the last which is likely to speed up the recovery. That should bode well for the stock markets but the US dollar could remain under increased downside pressure.
The chart shows a trend that is clearly trending down, with bears appearing to retake control after a brief pullback. The moving averages are pointing downwards and the short-term MA (red) has crossed below the longer-term MA (blue) once again. In addition, the price is below both MA, all bearish signals.
The current price is just above 90.00 with the next support seen at 89.90, Tuesday’s low. If sellers manage to break through that, next they will undoubtedly target January 6th low at 89.2. On the upside, bulls will be hoping for a pullback to 90.50 followed by a 91.00 – 91.20 handle. It they manage do to break above, more buyers could get increasingly confident the high of 91.58 reached on February 5th is there for the taking. If that hurdle is overcome, the short to medium-term trend will turn bullish.
Marius Paun | London, UK | Senior dealer | Friday 19th February 2021
Bitcoin reaches $1 Trillion Market Cap
We had a mixed bag in terms of US economic data this week. On one hand the Retail Sales figures showed a better than anticipated 5.3% increase month on month vs expectations for 1.1%. But on the other hand we saw a disappointing weekly initial jobless claims report, a jump to 861,000 vs 765,000 expected. The 10-year US Treasuries yields also rose to 1.31%, the high for the year. As a consequence, the stocks markets were jittery, posting a sharp selloff on Thursday. The tech sector looked especially vulnerable to inflation pressures.
The FOMC meeting minutes revealed overall optimism that outlook for 2021 is now stronger than December forecast. The members also foresee further declines in the unemployment rate, although the general consensus is that labour market conditions deteriorated in December. The monetary policy is assumed to remain accommodative with inflation projected to moderately overshoot 2% in the next few years. In addition, the narrow victory for the Democrats in the Senate has boosted investors’ expectations for further fiscal stimulus.
Meanwhile the US Treasury Secretary Janet Yellen said in an interview with CNBC that she hopes to see progress on the stimulus bill in the next 2 weeks. She added that ‘inflation is a risk but the bigger risk is having the pandemic take a permanent toll on people’s lives’. She also said that tax increases will be used to pay for the future infrastructure projects. Interestingly she admitted that if the unemployment rate were to be measured ‘properly’, it would be close to 10%!
China has returned form Lunar New Year holiday with markets reopening on Wednesday. The Financial Times reported that even with Biden in charge, who is seen as a more composed talker, the relationship with the US is not likely to improve in the coming years. Beijing seems to have realised this point rather quickly and is now considering curbs on rare earth exports, thus hurting the US defence sector.
Elsewhere, the EU reported it has reached a new deal with Moderna for the supply of 300 million vaccine doses. After coming under scrutiny for the slow pace in arranging those vaccine supplies, Brussels also acquired an additional 200 million doses from Pfizer.
Back in the UK Prime Minister Boris Johnson has promised to ease lockdown in stages, with the steps to be outlined on February 22nd. He reiterated the approach will be cautious and prudent. In the meantime, Bank of England Ramsden said the central bank is ‘ready to implement simple negative rates and that they don’t expect to unwind bill purchases in the near future. Before tightening the current monetary policy BOE will need to see ‘strong evidence of inflation returning to target, progress to using spare capacity’.
Gold prices dropped below $1800 once more but found good support at $1760. The possibility of real interest rates going up does not bode well for the precious metal and some say the bitcoin explosion might also be a driver. The Oil Prices rose after OPEC+ promised to cut back output in the months ahead and the deep freeze in the US is threatening the supply in the next few days.
True to its form, Bitcoin crossed above $50,000 for the first time and has now passed beyond $1 trillion market capitalisation. No sign of stopping there and on Friday afternoon the cryptocurrency moved above $54,000 after earlier in the week Blackrock’s chief investment officer admitted the world’s largest asset manager had ‘started to dabble’ in bitcoin.