The dollar slipped and stimulus talks remained in focus Friday as US investors hoped to escape the week without further turbulence and with more clarity on a broad virus relief package that everyone besides a handful of GOP senators claims to want, but no one seems willing to deliver.
The greenback is poised for a second weekly decline. Larger deficits tied to more spending and the notion that the Fed is locked into “lower forever” (not just “lower for longer”) are keeping the world’s reserve currency under pressure. Most strategists see a Democratic sweep as almost unequivocally dollar negative, although I would suggest that if a recasting of fiscal policy in fact leads to higher growth outcomes and pushes up on moribund inflation, the Fed could bring forward liftoff. Yields are widely expected to rise if Democrats prevail, and there’s some cognitive dissonance between that view and the almost universally bearish dollar narrative.
“We would expect USD to weaken the most [if Biden wins and Democrats flip the Senate] and we would expect the largest rise in yields in this scenario”, Nomura’s FX strategy team said this week. Goldman sees a corporate tax hike under Biden making US equities less attractive, while the Fed’s accommodation of more fiscal spending and a friendlier foreign policy add to downward pressure on the dollar.
Jefferies has a different take. “Regardless of the damage both parties are likely to inflict upon the deficit, the Fed is still the ultimate back stop and therefore a funding crisis is very unlikely”, the bank says. I’d quibble with that for one reason: The US government cannot suffer a “funding crisis”. That is a literal impossibility — it’s a nonsense statement. That aside, I do generally agree with what the bank said next. “If the US recovery continues, it will be very hard for the USD to weaken significantly from here, regardless of which candidate wins and their likely impact on the USD given the extent of the budget stress every other country around the world is feeling”, Brad Bechtel writes.
As far as pre-election stimulus goes, this is a situation where that tired, old adage about “your guess is as good as anyone’s” can be taken 100% literally. A deal could be done by the end of the day, or it could never materialize. You can consult the Delphic oracle that is @realDonaldTrump, but I don’t generally recommend it to anyone who wants to keep hold of their sanity.
“Divining the odds of the passage of a stimulus package this close to the election is a game of political roulette”, SocGen’s Subadra Rajappa wrote Friday. “Yet, additional US stimulus is only a matter of time. The path forward for yields is sideways or higher”, she added, noting that “over the longer term, EUR rates and the curve will have no choice but follow their USD counterparts upwards, with long-maturity US Treasurys becoming increasingly attractive to foreign investors”. Here again we see different interpretations of what stimulus may mean for USDs, both in their inert and interest-bearing incarnations (remember, US bills and bonds are nothing more than interest-bearing dollars).
Meanwhile, in Europe, the virus is spreading rapidly. The UK logged more than 17,500 new cases Thursday, up 3,000 from the previous day. Public health officials are concerned, calling the rise “definite and sustained”. Restaurants and bars could soon be closed again in some regions. Daily cases in France are up to 18,000 and Spain may declare a state of emergency for the Madrid region. As Bloomberg notes,”the region recorded about 40% of Spain’s new infections on Thursday, while 40% of local intensive-care beds are occupied with COVID-19 patients — far ahead of the national average of 18%”.
Oh, and just as quick, humorous aside: William Barr has apparently informed top Republicans that the “Durham report” (Barr’s “investigation of the investigators”, if you will) won’t be ready in time for the election. That’s likely to frustrate Donald Trump who, for the past several days, has openly called for the indictment of US officials and various “deep state” actors he claims were involved in an illegal scheme to subvert his successful run for the presidency.
According to Axios, no such indictments are coming before November 3. “This is the nightmare scenario. Essentially, the year and a half of arguably the number one issue for the Republican base is virtually meaningless if this doesn’t happen before the election”, a GOP congressional aide said.
The president is now down by nearly 10 points nationally according to the RealClearPolitics average of polling.