Markets Pleased With Prospect Of More Dollar Weakness To Start 2021

Propelled by a weaker dollar, risk assets looked to kick off the new year on a positive note, as global equities and commodities initially rose, while gold trekked nearly 2% higher.

Subsequently, fresh virus concerns and the pernicious overhang of political strife undercut US stocks.

Reasonably upbeat manufacturing data across Asia and Europe bolstered the mood ahead of a key week in the US, where the unfolding political soap opera took yet another dramatic turn on Sunday when an audio recording of Donald Trump asking Georgia officials to “find” votes was published by the Washington Post.

Prior to the US session, price action Monday again underscored the extent to which the world is a friendlier place when the greenback is on the back foot.

“Financial markets have been in a post-pandemic world since the end of March,” SocGen’s Kit Juckes wrote Monday, noting that 10-year nominal yields in the US hit their 2020 lows on March 9, European equities bottomed on March 16 along with gold, and the S&P found its lows on March 23, around the same time the euro hit its low against the dollar. All of those nadirs coincided with the Bloomberg dollar index’s 2020 peak (figure above).

Asian FX rallied along with regional equities on the first day of trading in 2021. Notably, the yuan breached 6.50 for the first time since 2018 (figure below).

Between China’s yield advantage versus Treasurys and the better prospects for the Chinese economy versus the rest of the world, there’s ample scope for more appreciation — or at least that’s the consensus narrative.

The Caixin manufacturing gauge slipped a bit in December, falling to 53 from 54.9. That was a miss versus consensus, but still squarely in expansion territory. November’s print, you’re reminded, was the highest in a decade. The official gauge also came off the recent peak last month.

In any case, the overarching theme was that between reasonably robust manufacturing data from around the world and the weaker greenback, risk assets were poised to extend gains logged in 2020 which, despite being the worst year in modern history in many respects, was extremely kind to investors thanks in no small part to dollar weakness, deeply negative real yields in the US, and, relatedly, monetary largesse.

Unfortunately, the good vibes faded as the first US session of 2021 unfolded.

“The year started very much the same as the previous year ended, so what could go wrong?,” AxiCorp’s Stephen Innes wondered. “Gold was the standout mover, hitting its highest level since November 9,” he added, noting that “the move looked more reflective of a ‘risk-on’ stimulus trade via a softer dollar than anything else.”


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