Timing is everything
Trevor Charsley, Senior Market Advisor at AFEX, November 2020
For me, wonderful Thanksgiving dinners are those with all the traditional ingredients, roast turkey, mashed potatoes, gravy, stuffing and all the trimmings. Most importantly, it must be served hot! For that to happen the wonderful chef has to get all their timings correct. How many hours for the turkey, don’t boil the gravy: you know the drill.
That is very much what a senior market advisor does on a daily basis. The ingredients consist of the global capital markets. How are equities trading today? Are they focused on the huge amount of stimulus that the Fed has recently provided, or are they worried that because the White House has stepped out of talks for a new stimulus package, one won’t be forthcoming until March 2021 or later? If the S&P 500 is moving higher is that good for the dollar or bad for the dollar? At the moment a rising S&P suggests that the market sees the World with rose tinted glasses and a ‘risk-on’ theme. The ultimate safe haven currency is the US dollar. So, if the US equity markets are in a positive mood, there is no need to buy dollars for protection and we could see a stronger euro and weaker dollar.
The markets are also obsessed with predicting what will happen. In this case, much like the chef, timing is everything. In the short-term, analysts and investors are waiting for news on whether there will be a trade deal between the UK and EU before the end of the year. (This post is being written on November 17th.) So many deadlines for the trade talks have been and gone, but the market has decided already what will happen. It has bought sterling, as it calculates that UK Prime Minister Johnson, who said he had an ‘oven ready’ trade deal to agree with the EU, has too much to lose by not agreeing a deal. The EU wants a deal; President elect Joe Biden has reminded him in no uncertain terms to agree a deal to protect the Good Friday agreement; and the UK electorate mostly voted from him to get a deal. So, as the market has bought sterling in anticipation of a deal, the pound could easily fall after the agreement has been announced.
In the short-term the dollar has slipped against the euro, as the market bets on a Democratic presidency working to produce a $2 trillion stimulus package. However, it doesn’t know who will have a majority in the Senate, until after the Georgia runoff elections in January 5. If the Republicans hold their majority, this could mean a much smaller stimulus package being passed. But the question is, when that would be passed? If it is passed quickly and for a smaller amount than currently suggested would that be seen as positive for the dollar? Possibly.
The other side of the equation is the euro. It is performing well against the dollar at the moment, but there is news that Hungary and Poland have vetoed the EU’s 1.8 trillion-euro COVID support package. This is due to the support package being linked to rules regarding the rule of law in those countries. The news broke on November 16th but was ignored by the markets as they expect Germany’s Angela Merkel to broker a compromise. This could take months and if so would halt the distribution of much needed funding to the EU member nations. Something to remember for the medium-term then.
In the long-term, at the back of markets’ minds we have those ‘unfunded liabilities’ – otherwise known as the medical and pension crises in the US and the pension crisis in China. Make no mistake, these are important matters. Who is going to pay for the future pensions and medicines in the US when the country has over $27 trillion worth of National debt? At the moment though, the World is happy to lend the US money at very low interest rates, with China holding some $1 trillion or 4% of US National debt. China is facing possibly a worse situation than the US after its one child policy has changed its demographics so much that its pension pot is predicted to be empty by 2035.
So, as you imminently sit down to eat your delicious, hot Thanksgiving dinner I know that you will thank the cook heartily for their time, dedication and skill. Personally, I will offer a prayer of thanks that I am not cooking. It is too much like my day job!
About the author
Trevor Charsley, Senior Market Advisor at AFEX.
Bringing 25 years of FX sales and trading experience to bear on his market study, analysis and commentary. Trevor provides incisive market analysis and perspective, leavened by his wry humour and ever-present optimism, to AFEX clients and to the broader market through his weekly blog and videos. A sought-after speaker and successful currency forecaster on Bloomberg, Trevor is often quoted in the UK business press.