As of writing, the DXY (USD index) is trading at 93.35, down by 0.50% on Thursday trading.
GDP growth in the US may be contributing to this 4-week low in the dollar index. GDP growth missed expectations for Q3 2021, reporting in at 2.0% rather than the expected 2.7%. Q3’s GDP growth represents the lowest value reported for this data point since the US began to recover from the worst of the pandemic.
Supply constraints have been pointed out as one of the major causes for the GDP growth miss, as reported by Fannie Mae earlier in the month. Fannie Mae expects the constraints to continue for another 12 months, although weakening in intensity as time passes.
The USD has lost the most ground against the EUR in the past 24 hours. EURUSD is trading at 1.16831 at the time of writing, up by 0.72% and a one month high for the pair. The cause of the EUR's strength: The public address by the Christine Lagarde, head of the European Central Bank (ECB), playing down any fears of inflation.
While Inflation in the Eurozone is at a 13-year high (3.4%), Lagarde and her ECB associates are not ready to drop the notion that inflation is transitory. The ECB want to see inflation above 2% over the medium term before considering rate hikes or taking a more hawkish tone.
The ECB believes that inflation in the Eurozone has been driven chiefly by supply bottlenecks and energy prices. It could be some time before investors see any change in the dovish stance of the ECB.
Supply constraints are expected to last for a great deal of time, as noted above, while energy prices are yet to show any sign of abatement. The Biden administration has asked energy producers to lift production to help drop the cost of energy. But the request is falling on deaf ears.
At the time of writing, WTI is trading at US $83.04 per barrel, while Brent is trading at US $84.39 per barrel. Both Oil instruments are trading at multi-year highs. The price of Natural Gas does swing widely day-to-day. A 7% swing either way over a day’s trading is not uncommon. Yet, Natural Gas is still trading at US $5.732/MMBtu, more than double the price at the beginning of 2021.
Amongst U.S. Dollar strength across the board coming into 2021, the Euro has come roaring back on further optimism on the vaccine, alongside asset markets strength.
There has been a clear downtrend from February's start, following a clean channel downwards towards 1.195. However, around the 6th of Feb, the pair broke out of the downwards channel on the news that former ECB President, Mario Draghi, was tapped to form a party to lead Italy out of the two crises they faced themselves in – financial recession and the Coronavirus.
Mario Draghi was known for convincing European leaders to take extraordinary measures to save the European Union by implementing controversial monetary policy at negative rates. He emphasized that "for rates to be positive later, they need to be negative today."
But the Coronavirus situation has placed a wrench in that thesis, requiring monetary policy that the ECB doesn't have to give. Nevertheless, he left the ECB in 2019 with a glowing reputation, attaining the nickname "Super Mario." Analysts are cautiously optimistic that Draghi can pull Italy out of their predicament as he did with the Euro.
ECB's Current President, Christine Lagarde, predicted that the recovery in Europe would pick up in the summer, as vaccines roll out across the continent. However, the vaccine rollout in Europe has not come to a good start, with only 3.6% of the continent receiving their first shot. This is in comparison to around 17% of citizens in the U.K. receiving their first shot. Lagarde stated that "We remain convinced that 2021 will be a recovery year" and that "the economic recovery has been delayed, but not derailed. People are obviously waiting impatiently for it."
Currently, optimism on Mario Draghi's appointment has fueled the rise in the Euro, alongside a slight weakness in the U.S. Dollar. However, Europe needs to curb the virus faster than the U.S. does for the Euro to go past 1.23.
If there is a time for a currency to be relatively weak, it's during recessionary periods. A stronger currency entails a rougher time for goods and services to be exported out of the country as those exports are more expensive due to the stronger currency.
This is currently the case for the Euro. From August last year to the latter part of 2020, the EUR/USD fluctuated between 1.16 and 1.19 before shooting past 1.20 at the end of November due to vaccine positivity.
It sits comfortably above 1.20, consolidating between 1.205 and 1.233. Christine Lagarde, President of the European Central Bank (ECB), has a dilemma on her hands: how to contain the strength of the Euro due to positive sentiment while fighting deflation concerns?
Theoretically, it could be argued that the ECB has used up all their ammunition when it comes to monetary policy.
With Interest Rates at 0% for the past four years, alongside the Coronavirus pulling on both sides, with lockdowns forcing businesses to close and consumers to save, a liquidity trap may be underway. The strength of the Euro also gives the ECB limited room to move rates lower. This harks back to the Bank of Japan's issue during the financial crisis, with analysts predicting disinflation, therefore boosting the Yen, thus boosting fears of inflation - a never-ending cycle.
The ECB has purchased over 1.85 Trillion Euros worth of assets during the wake of the Pandemic. However, we may see a situation unfold similar to that of the Fed and US Equities – where the Fed's unwavering support for the US economy has had the side effect of boosting US equities. Further purchases may see an influx of capital in European Equities, increasing the demand for the Euro.
Since the strength of a currency is relative, some analysts predict the only way for the ECB to escape the cycle of a strengthening currency and deflationary concerns is through outperforming the Fed when it comes to asset purchases. Salman Ahmed, global head of Macro at Fidelity International, stated that "In currencies it's the relative game that matters," and that "You can argue that the ECB has been very aggressive in its policy, but has it been more aggressive than others? If the ECB wants to get the Euro down, they will have to outgun the Fed – there is no other way."
Is this the beginning of the end? The UK announced yesterday that they have provisionally approved Pfizer’s Coronavirus vaccine. This makes the UK the first country to approve a vaccine, which they state will be available to individual members of the public by next week.
Simon Steve, Chief Executive of the NHS, stated that the bulk of the vaccinations would occur between January and April next year. The Medicines and Healthcare Regulatory Agency (MHRA), the governing body for the UK which is responsible for ensuring medicines and vaccines are acceptably safe, stated that they volowed “an extremely thorough and scientifically rigorous review of all the evidence” and that “the public can be absolutely confident that the standards we have worked to, are equivalent to those around the world.”
The UK framework allows vaccines to be approved while reviewing the data given to them on a rolling basis, which is why it was approved earlier in the UK. This is compared to the United States, which requires a public review and full scrutinization of all the data available. The British Government has secured 357 Million allocations of seven separate vaccines.
The S&P 500 and the NASDAQ were able to squeeze their way to new all-time highs. However, the real winner was oil – reaching $48.40c for a barrel of Brent Crude. It’s edging to break the strong psychological barrier of $50.
The Vaccine has provided a needed boost to the Black Gold. With OPEC+ coming close to a deal, we may see oil breach that $50 mark if OPEC decides to continue the supply cuts.
John Kilduff, a partner at Again Capital LLC, stated that “it looks like there is headway being made, which the [oil] market is looking for.” With the said, US Oil Inventories this week fell lower than what analysts were expecting, with a drop of 754,000, well shy of market estimates of 2.3 Million.
GBP/USD was surprisingly stable, maintaining that 1.337 level. However, EUR/USD blew past that 1.20 mark, currently sitting at 1.21.
Are you going to take the Vaccine when it's available?
EUR/USD hit 1.20 on the last trading day before bouncing off the strong psychological resistance level. This is due to further dollar weakness alongside investors pricing in aggressive quantitative easing from the Fed outpacing the European Central bank. The EUR/USD is up around 2.3% this month.
Moderna is reported to seek expedited vaccine clearance for its Coronavirus vaccine in the United States and Europe after it was shown that its Vaccine was highly effective in preventing covid-19 with no serious safety problems. It is stated that Moderna will apply for an emergency use authorization in the United States and Conditional marketing authorization in Europe. However, the US FDA still needs to scrutinize the data in a public meeting on December 17th, making a vaccine available to the public before the end of the year unlikely.
As stated above, investors are pricing in that the Federal Reserve will outperform the European Central Bank regarding stimulus in the long term. So far, the ECB’s 1.8 Trillion Euros support for the European economy is slightly less than the Federal Reserve’s 3.2 Trillion Dollar support for the American Economy.
There are hints that the Federal Reserve will ease up on the quantitative easing, with Fed officials stating that they are planning to provide more guidance on their bond-buying strategy “fairly soon” and that “Many participants judged that the committee might want to enhance its guidance for asset purchases fairly soon,” according to the meeting minutes published by the Fed earlier in November.
In a rare occurrence, current Treasury Secretary Steven Mnuchin’s announcement that he would allow certain central bank emergency lending facilities to expire at the end of the year and that the Funds backing the program to be returned to the Treasury was met with criticism by Jerome Powell, which did not agree.
However, the ECB is not done yet. With most of Europe still under lockdown, many analysts predict their bond purchase program to be extended in December, with some analysts predicting that they will push for more stimulus.
Macro Valli, head of macro research at UniCredit, stated that “A boost and extension of the Pandemic Emergency Purchase Program (PEPP) is now a done deal, and we also see a high likelihood that the current favorable terms of the Targeted longer-term-financing operations (TLTRO)… will be extended.”
The last factor, Brexit, is slowly chugging along, taking into account the state the UK and Europe are currently in regarding the Coronavirus. Brexit officials stated that Fishing rights are the last Brexit obstacle that is yet to be figured out.
Angela Markel noted that time was running very short of reaching a deal, and some EU member states are growing impatient. “Some member states are now becoming unsettled. There’s not much time left. We hope that these talks will come to a happy ending. We don’t need an agreement at any price. We want one but otherwise, we’ll take measures that are necessary. In any. Case a deal is in the interest of all.”
Tick all the boxes regarding Brexit, the Vaccine, and the Quantitative easing, and we should see the EUR/USD blast past 1.20.
The Euro against the US Dollar is approaching 1.165 – a historically busy support/resistance area.
Traders and investors in the past couple of months have seen an 11% appreciation in the Euro. From a country's viewpoint, an appreciating currency is seen as bad as it makes the countries (in the case, the continents') exports more expensive for other countries. This is incredibly tough on German and French car automakers, as it means their cars would be more costly to sell overseas. On the contrary, this makes importing goods from other places cheaper.
Christine Lagard has tried to talk down the Euro's appreciation, stating that she was "very attentive to the appreciation of the Euro." Furthermore, Philip Lane, the ECB's chief economists, noted that the "euro-dollar rate does matter
Historically, the Euro has been higher. Before the Global Financial Crisis in 2008, it was at around the 1.50 level. However, the pair is twofold – we have to figure out what will happen to the US dollar – primarily hinging on the market's expectation of the election and general economic trends.
The US dollar is up 1.4% this week, reducing its 2020 decline to around 2.2%. The dollar has slowly rallied on the selloff of US equities from their all-time high. With a historically inverse correlation with Gold, the yellow metal has been suffering as investors and traders weigh up the possibility of the Fed actually reaching that 2% inflation target.
Furthermore, with interest rates at a record low, negative yields for long term bonds make it more appealing to hold the US dollar instead of bonds.
And if Biden wins the presidency? Considering he wants to enact tax hikes and expensive green policies, the US dollar should depreciate against its peers. However, if Trump is re-elected, we may see the opposite due to his pro-business, low tax policies. However, this may be totally incorrect, depending on market sentiment regarding the Coronavirus at the time.
What's your thoughts on the US dollar?
We've recently talked about the potential demise of the U.S. Dollar. What currency is poised to benefit the most from the devaluation of the dollar? Euro is the first thing that comes to mind.
Shortly after the safe-haven trade that pushed the dollar up against major currencies, the Euro started to rally over the U.S. dollar. After strongly piercing through 1.10, a relatively strong downtrend alongside piercing 1.15 with relative strength, It is eyeing up a similar push up on these factors.
Pointed above, we can see that the push past 1.10 – 1.11 broke a 2-year downtrend for the Euro. Furthermore, we can see a similar pattern where the Euro against the US Dollar consolidates for about two weeks before making a push upwards, usually on the back of positive data coming from Europe alongside harmful data coming from the United States. It shows that bulls are most likely just looking for any excuse to push the pair higher.
This is quite unlikely ever to happen, as many commodities such as Gold and Oil are settled using the U.S. dollar. Nevertheless, the current headwinds pushing the U.S. Dollar downwards have been giving the world's second reserve currency a time to shine.
The United States has consistently been posting 200,000+ new daily recorded Coronavirus cases, with the government doing little to nothing to prevent the further spread of the Coronavirus. Meanwhile, Europe has attempted to restrict the virus's spread by imposing mandatory lockdowns in many countries. However, their reopening may be too early as we can see a resurgence in many countries in Europe. However, there is still a stark difference in how the governments have come together to fight the virus, and this may prove to be a game-changer in the long term for the Euro.
The U.S. Dollar is suffering strong headwinds due to inflation concerns, quantitative easing, and general risk-on sentiment in the markets. This may also signal a slow shift in European bonds and equities, with U.S. investors looking elsewhere for yield.
Considering the U.S. dollar's headwinds alongside recent strength in the Euro, it is likely we may see the Euro blow past 1.20 against the U.S. dollar on any positive news regarding Europe.
Everyone has been loving the Euro recently.
The Euro currently sits at a 26 month high at around 1.19 against the U.S. Dollar. Now, it is up almost 12% from its March lows. Everything recently has been compared to how well the Coronavirus response has been in respect of said asset, and the Euro is no exception. The appreciation in the Euro against the U.S. dollar is in a combination of an increase in investor/trader interest in the Euro, alongside the broad weakening of the U.S. dollar.
The U.S. Dollar has weakened from its “safe haven” all-time high earlier in March. This is due to investors and traders looking for markets elsewhere in the world, alongside being wary of the conditions in the United States. They recorded just under 38,000 new Coronaviruses cases today, with over 5.47 million previously registered Coronavirus cases. Therefore, comparatively, the consensus is that Europe has had a better response to the Coronavirus than the United States. With both continents pushing out trillion-dollar stimulus packages, the difference is the cohesion between the politicians that run the government. The United States government have seen a divide across the aisle on how to proceed with the Coronavirus, while the members of the European state has been relatively United.
Regarded as the second world currency, the Euro has taken the front foot on the decline of the U.S. Dollar. Figures from the CTFC collated by the Financial Times show that optimism in the Euro stands at a record high, with net non-commercial positions standing at the highest it has ever been. Furthermore, JP Morgan raised their year-end target forecast for the Euro at 1.20, from a previous estimate of 1.13 against the dollar.
Jane Foley, head of currency strategy at Rabobank in London, suggested that “the CFTC positioning data suggests that the move in the Euro is overstretched,” suggesting a correction may be in place to move higher.
The currency market has been in contrast to how the equity markets have been playing out today. With a further pullback in the U.S. dollar index, down 1.35% over the past five days, the S&P 500 and the NASDAQ closed at all-time highs.
The Euro has been on a tear recently, up 8.55% against the US Dollar over the past three months as investors become increasingly more confident in the continent.
The European Union recently has had many tailwinds as of late: Containment of Covid-19, general alignment in how to combat the Coronavirus, and their 75 Billion euro recovery package lead investors to believe that Europe is where outperformance is.
Given the recent expansion in the valuation of US equities, specifically tech stocks in the NASDAQ, the premium for owning non-cyclical internet businesses have been quite expensive. The NASDAQ trades at a 29.88 multiple, making value stocks such as banks in Europe look dirt cheap. For example, UBS and Deutsche Bank have a price/earnings ratio at 9.69, and Deutsche Bank has a negative P/E ratio with both trading at price/book value of less than 1. Therefore, the Euro may be getting a boost from US investors pulling their money out of the local market and investing in companies in Europe.
There has been an increase in technical factors pushing the Euro higher. Recently, we have seen the EUR/USD push above its 200-day moving average during its recent push past 1.17. The last time the Euro pushed past the 200-day moving average was in 2018. We may see Euro gap 1.18 on worsening US macro conditions and a more pessimistic view from the Fed than was expected this coming week.
However, the Euro’s strength may be partially due to the weakening in the US Dollar. The Dollar index is down 6.58% in the past three months. With the US still pumping cases across the states with no official Coronavirus plan, investors have lost interest in the US Dollar safe-haven trade as value pops up across Europe. With that said, the US reported 65,809 daily cases, a 1.6% decrease from the previous weeks’ 7-day moving average. This is a positive sign for US strength; however, this is still miles away from flattening the curve, as many other countries have done.
Anish Lal, an analyst here at BlackBull Markets did an excellent overview on the 200 day average for the Euro/US Dollar. You can watch it here.
Markets have been moving today on the back of positive vaccine news amongst concrete stimulus hopes.
Silver rallied to a peak of $21.319 as investors and traders bet that a push to green energy will provide a silver lining to the metal. It is interesting to note that Silver has outperformed its counterpart Gold, with a 70% rise since its March lows. Analysts at Citibank expect Silver to hit $25 an ounce by the middle of 2021. Citi expects a clean energy push if Joe Biden, Democrats Presidential Nominee, gets elected. Biden has placed importance on clean energy in his $2 Trillion plan to push the US out of the Coronavirus's recession. Furthermore, the latest stimulus 750 Billion Euro stimulus plan from the EU has allocated a third of that recovery fund into fighting climate change. Silver is extensively used in the production of solar panels.
However, Silver's rise does not mean its Gold counterpart is doing too bad either. Gold reached a new time high, with the spot price rallying to 1,483.45 an ounce before pulling back slightly. Over $40 Billion has flowed into gold-backed ETFs in the first year, breaking last year's record. Downwards pressure on the US dollar due to quantitative easing and fiscal stimulus has forced investors to look towards these metals for yield.
Brent Crude Oil broke past $44 in the New York session as fiscal stimulus and backwardation finally broke past the resistance of $43.929. The black gold reached a peak of $44.998, before pulling back slightly. However, oil still has a little bit more to fill that gap to $45.228. This is in the midst of Chevron acquiring Noble energy in an all-stock deal for $13 Billion, a 7.5% premium from its current value. An industry filled with bankruptcies due to the Coronavirus, Chevron stands out with a strong balance sheet enabling it to take advantage of the crisis alongside keeping their dividend payout.
The Euro rallied against the US Dollar, peaking at 1.15289 as the European Union clinches on an agreement on stimulus funding. The recovery fund worth 750 Billion euros hopes to pull the bloc out of the recession. With a myriad of bond sales and taxes to finance the stimulus, the fund expects to give out 390 Billion Euros of Grants to harder-hit countries such as Greece and Italy, and over 360 Billion Euros in loans. "We are 27 around the table, and we managed together to produce a budget," Macron said at a press conference alongside Merkel. "In which other political sphere in the world is that possible, is that done? None."
Finally, in the Equity markets, we saw the SP500 and Dow Jones clinching a gain in the New York session, finishing higher than the NASDAQ. This is on the back on hopes that Congress can pass a second stimulus deal. However, agreement on the size of the stimulus cannot be agreed upon. Nancy Pelosi believes that $1t is "not close to enough" for the next stimulus. NASDAQ pulls back slightly of their all-time as investors await on tech earnings this week. However, they still lead in earnings relative to other equities.
Anish Lal has some excellent technical analysis on the rise of Silver today. You can watch it on our YouTube account here.