The US dollar has risen against all major global currencies except safe havens like the Swiss franc and Japanese yen this month to date. This is a testament to the blowout 225,000 US non-farm payroll growth data coupled with the shocking fall in German industrial production/factory orders, the coronavirus catastrophe in China, a shadow banking systemic credit crunch in India and economic contraction in Japan despite spending for the Tokyo Olympics. It is now sixty years since an eighteen-year-old from Louisville, Kentucky named Cassius Clay won the world heavyweight boxing gold medal at the Rome Olympics and later found world fame as Mohammed Ali, who floated as a butterfly and stung like a bee – Ali was the greatest.
I find it ironic that the US dollar has appreciated even though Fed Funds futures predict at least a 25-basis rate cut by the July FOMC and a cumulative 40 basis point monetary easing by the December FOMC. The conclusion is unmistakable. The financial markets have concluded that the $21 trillion US economic supertanker is relatively immune from the China/coronavirus bust, given its consumer driven economy and its geopolitical dominance over a humbled, frighteningly vulnerable Middle Kingdom.
I will not be surprised to see the US Dollar Index scale the October 1st high at 99.65 as the economic data momentum has diverged from global growth/sentiment metrics/ What can I say? The trend is your friend until the trend comes to an end and the King Dollar trend has not come to an end.
I have no problem with the Euro having its largest decline since November as I plan a business trip to Lisbon. The OCED estimates that the Euro is 28% undervalued against the US Dollar on a purchasing power parity basis, making it the most undervalued major currency in the world. The Euro’s performance on the charts this week was beyond dismal and I expect the single currency to retest autumn 2019 lows at 1.0860 and trade as low as my next target at 1.0780.
The strong rise in the Dow, NASDAQ and S&P500 index last night and the mini-spike in the yield on the US 10-year Treasury note to 1.62 is obviously yen bearish in the short run. I expect dollar/yen to trade between the 107-110 range in the next four weeks with sessions of yen strength entirely correlated with Wall Street’s periodic spasms of risk aversion and a fall in the US Treasury – Japanese government bond (JGB) interest rate spreads.
The appointment of Rishi Sunak to replace Sajid Javid (there goes the Yorkshiristan vote!) as the Tory Chancellor of the Exchequer led to a rise in both sterling to 1.3050 and the 10 year gilt yield to 0.65% Obviously the currency gnomes of Londonium expect major fiscal stimulus in next month’s Budget. Javid’s idea of balancing the budget by 2023 has been abandoned by Downing Street in favour of a public spending spree to goose economic growth. This now rules out any possibility of an imminent Bank of England interest rate cut. Sunak will facilitate Boris Johnson’s political agenda to boost spending in the North of England. Issuance of more government debt by HM Treasy and high gilt yields are thus inevitable.
While tough talk on a EU trade deal by Downing Street’s Brexit luminaries may lead to periodic scares, I believe sterling remains a classic “buy on dip” asset for another move higher to 1.34.
The rise of the Swiss franc against the Euro above the June 2016 UK Brexit referendum levels is a testament to the weakness of the Euro as the export//factory orders in Germany, France and Benelux crumble as well as higher demand for traditional safe haven currencies like the Swissie. I expect SNB “hold your horses” intervention in the Zurich foreign exchange market now that the Swiss franc is trading at late 2015 level highs against the Euro. The OECD econometric model now judges the Swiss franc to be 18% overvalued on a PPP basis.
I called for the Chinese yuan to depreciate below the psychologically critical 7 level three weeks ago and this has now come to pass as the Chinese Lunar New Year ended with the Year of the Rat, that began with 1.4 billion Chinese isolated and quarantined from the rest of the world, after the cancellation of 50,000 plus international flights to the People’s Republic of China. The trade de jour is to sell the Chinese yuan at 6.96 when it rises on some “reassuring” Beijing policy doublespeak (the Chinese invented fake news and psychological warfare centuries ago – just read Sun Tzu) or a PBOC monetary easing move for a 7.05 target. I believe the offshore yuan (CNH) will continue to depreciate against the US dollar in February and March because the Politburo desperately wants to offset the multiple macro shocks to China’s exports.
As China’s LNG, crude oil and copper importers claim force majeure, China has no choice but to opt for the path of easy money, rate cuts, local government debt issuance, fiscal stimulus and a weaker yuan in the assurance that Washington will no longer hurl an accusatory “currency manipulator’s” salvo at the CCP. I expect my US dollar to range trade between 6.96 and 7.08 in February and March for the offshore yuan.
An undervalued currency in a time of coronavirus, now at 60,000+ cases? The Singapore dollar has fallen from 1.35 to 1.39 on justified growth /China tourism worries. Singapore is Southeast Asia’s world trade entrepôt and is a proxy for the economic shocks/supply chain devastation that has gripped China.
Can the Sing dollar fall to 1.42? Sure. Hong Kong schools will remain closed for another month and Foxconn factories did not open immediately after the end of the Chinese New Year. The World Mobile Congress in Barcelona was nixed after companies like Nokia, Ericsson and AT&T canceled their participation. This has far more ominous significance to me than press releases from Beijing or any other government let alone new highs in the liquidity crazed US stock market.
Spasms of risk aversion on Wall Street, a West Texas crude oil bear market, the collapse in world trade with China and iffy macro data mean the Canadian dollar will depreciate against the greenback, possibly to as low as 1.36. In Brazil, central bank intervention has not prevented the real falling to all time lows on growth/politics disappointment. In contrast, the Mexico peso has replaced the Egyptian pound as the world’s top hedge fund favorite high yield currency that is financed in a carry trade by shorting the Euro or the Swiss franc. This means long Mexican peso/short Brazil real remains a compelling macro trade idea.
The macro angst and consistent bouts of selling Indian equities by foreign institutional investors makes me nervous about the Indian rupee. The fall in crude oil prices is bullish for the Indian current account deficit but the lack of rational economic policymaking by the BJP has led to a plunge in growth and rise in inflation. India now faces a period of net foreign liquidation of Indian equities/debt on Dalal Street, a dovish RBI and coronavirus related risk aversion in Asian currencies. This means a lower Indian rupee to the US dollar in the 73-74 range.