The dollar continues as king
Of currencies and that’s the thing
The Fed really loves
Especially those doves
Who want to cut rates before spring

It’s not really clear to me what else to discuss these days as everything runs through the following chain of thought: how long before the Covid-19 pandemic epidemic passes its peak; what will be the ultimate economic impact; and when will we see more aggressive monetary intervention by central banks, notably the Fed.

Since the Lunar New Year holiday (and coronavirus scare) began, back on January 24, the dollar has rallied vs. every other currency on the planet. I think it is worthwhile to consider just how big this move has been:

Source: Bloomberg

A look at this list of currencies reveals pretty much what you would expect; those with the highest beta to China’s economy, Australia and New Zealand, have fallen the furthest, along with the currency most closely linked to the price of oil, Norway. Of course, since that day, the price of WTI has tumbled nearly 15%, on significantly reduced demand, so it is no surprise NOK has suffered. Perhaps more interestingly is that both the Swiss franc and Japanese yen, considered the two safest currencies, have both given up solid ground vs. the greenback as well. Any idea that the dollar has lost its haven status is simply incorrect. Granted, one of the key reasons the dollar is a haven is due to US Treasuries, which nobody denies as the safest of havens, and which have seen yields tumble in this same time period amidst substantial demand. In fact, 10-year Treasury yields are down by 37bps in the past month.

The emerging market picture is no different, with even HKD, the pegged currency, lower by 0.25% since the Lunar New year began. While a chart here would be too long, the highlights are as follows: commodity producing countries have seen the worst performance with ZAR (-5.6%, RUB (-5.6%), BRL (-5.0%) and CLP (-4.7%) leading the way. After those come the currencies from those nations most closely linked to China’s economy; notably THB (-4.4%), KRW (-4.0%), MYR (-3.7%) and SGD (-3.3%). The renminbi itself is down 1.1%, which all things considered is a pretty good performance, but also one that is being strictly controlled by the PBOC. As to the rest of the EMG bloc, every one of them has weakened in this time frame, many despite local central bank intervention, and quite frankly, all of their prospects are directly dependent on how the Covid-19 epidemic plays out.

Yesterday’s halting efforts at a rebound were quashed when the CDC revealed the truth that Covid-19 was coming to a city near you at some point and would likely result in significant disruptions in daily life. And of course, the market reactions to comments like these are the reason that officials, especially central bank and FinMin types, routinely lie about conditions. The truth often results in unfavorable outcomes, especially for elected officials.

So a quick recap of the overnight news is that there were more cases highlighted in Italy, South Korea, and Iran, with Brazil finally getting its first confirmed infection. The death toll continues to climb, currently at 2,715 as the official count of infections is well over 80K. As well, in the past twenty-four hours we have heard from central bank officials around the world explaining that it is too soon to react, but they are carefully monitoring the situation and primed and ready to adjust policy if it is deemed necessary. FWIW my view is that if we see US equities fall another 5% this week, we are going to see an emergency rate cut, even before the March 18 meeting. Too, futures markets are now pricing in the first Fed cut in June with two cuts by September. When all this started back at the Lunar New Year, the probability of a June cut was just 19% and a full cut wasn’t priced in until December. One important thing to remember is that the Fed has never disappointed the market on a policy move when it was fully priced by the futures market. It will take a great deal of both positive news and serious discussion by Fed speakers to avoid a real mess come the middle of March if they really don’t want to cut rates.

There was virtually no economic news overnight and this morning brings only New Home Sales (exp 718K), which is the one part of the economy that should continue to benefit from the remarkably low interest rate structure. Currently we are seeing European equity markets continuing their sell-off although US futures have stopped hemorrhaging for the time being and are essentially flat as I type. But until we see some positive news, like a cure has been found, it is difficult to expect the current momentum will change. With that in mind, I expect that equities will remain under pressure, Treasuries will remain well bid and the dollar will continue to find adherents.

Good luck
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