Consensus remains that the buck
This year is just sh*t out of luck
Though lately it’s jumped
It soon will be dumped
Or so say the bears run amok

This will be a holiday-shortened note to match our holiday shortened session today.  The broad theme in markets this morning is one of risk avoidance, with most European equity markets lower (CAC -0.4%, FTSE 100 -0.3%, DAX 0.0%), following the Nikkei (-1.0%) although we did see strength in China with both the Hang Seng (+1.0%) and Shanghai (+0.8%) putting in solid sessions.  The Chinese market activity comes on the heels of their latest data which showed that GDP in 2020 grew 2.3%, slightly better than forecast and certainly the only major economy that will show positive growth for the year.  Interestingly, the other data released was not quite as robust with Retail Sales rising a less than forecast 4.6%, down from November and investment activity rising more slowly than anticipated, both Fixed Asset (2.9%) and Property (7.0%).  However, no matter how you slice it, the Chinese economy seems to have weathered the pandemic better than most.

One of the interesting things we have seen of late is the seeming breakdown in the correlation between stocks and bonds.  Whereas the risk meme had generally been stocks falling led to haven asset buying, so Treasuries and the big 3 European government bonds would rally, that is not today’s story.  While the Treasury market is closed today, looking across Europe, despite the weakness in stocks, we are seeing weakness in bonds, with Bund (+1.2bps), OAT (+1.8bps) and Gilt (+0.8bps) prices all sliding a bit on the day.  The news from the PIGS is worse, with yields rising between 1.9 and 2.8 basis points, although given those assets are more risk than haven, this is no real surprise.

There have been three main stories out of Europe this morning, the election of a new CDU party leader in Germany, Armin Laschet, who will replace the retiring Angela Merkel.  However, there is concern that he is a weak candidate for Chancellor and may face a challenge amid slumping popularity ratings.  A weak German Chancellor is not a Eurozone positive, keep that in mind.  The second story is the French dismissal of the unsolicited bid for Carrefour, the largest grocery chain in the country.  Once again, they have proven they have little interest in a free market and will name any company critical to the national interest to prevent the loss of control.  And finally, in Italy, it appears PM Giuseppe Conte is losing his grip on power after a key ally, Matteo Renzi, took his party out of the ruling coalition.  The broader concern there is that if an election is called, Matteo Salvini, the head of the League, a right-wing party with nationalist tendencies could win the election outright, and wreak significant havoc on the Continent with respect to issues like monetary and fiscal policy, immigration and even addressing Covid.

However, at this point, the bulk of that news is fairly noncommittal and almost certainly not having a real impact on the FX markets…yet.  Rather, the story that caught my eye was that Janet Yellen, whose vetting by the Senate for her role as Treasury Secretary takes place tomorrow, will reputedly say she believes the dollar’s value should be determined by the market and that the Treasury will neither speak to it, nor attempt to weaken it directly in any manner.  Of course, the disingenuous part of that statement is that her other policies, which when combined with the Fed’s activity, will almost certainly drive real yields to greater and greater depths of negativity, will undermine the dollar without her having to ever mention the currency once.

Ironically, for now, the dollar continues its rebound from its nadir on January 6th, just three days into the year.  In fact, in the G10, it is stronger against the entire bloc except JPY (+0.1%), with the commodity bloc leading the way lower (NO -0.45%, AUD -0.45%, CAD -0.4%).  You won’t be surprised to know commodities are pulling back a bit as well today (WTI -0.3%).  In the EMG space, the screen is largely red as well, led by RUB (-0.85%) and ZAR (-0.65%) with only BRL (+0.15%) showing any support on the day.  That support seems to be emanating from a survey of Brazilian economists who are calling for a return to growth in 2021 alongside rising interest rates, with the Selic rate (their overnight rate) forecast to rise 125 basis points this year and a further 150 basis points next year to get back to 4.75%.  If that is the case, BRL will certainly find significant support as expectations remain that dollar rates are not going to rise at all.

On the data front, it is a pretty light week, and remember, there are no Fed speakers either.

Source: Bloomberg

While the Fed doesn’t meet until next week, we do hear from the Bank of Canada (exp no change), BOJ (no change) and the ECB (no change) this week, although as you can tell from the forecasts, there is no anticipated movement on policy at this time.  So, adding it all up, it feels to me like the dollar’s short-term momentum remains modestly firmer, although this has not changed my longer-term view that the Fed will be forced to cap nominal yields and as real yields decline, so will the dollar.  But that is more of a summer phenomenon I believe, late Spring at the earliest.

Good luck and stay safe
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