The USD’s resilience to the recent rally in equities has rejuvenated the “US exceptionalism” theme. With the consensus forecast for 2021 GDP growth moving to 4.1% from 3.8% back in December, thank in part to vaccine optimism. And data suggesting upside risks for tonight’s US payrolls report will be a test of the US exceptionalism thesis.
The best explanation for the rotation out of Asian and European currencies and into the US dollar this year is a global pass-the-growth-baton cycle. Asia got hit first, took swift and draconian measures, rebounded early, and those currencies rallied the most.
The USA, which got hit hard, has room to rebound due to high vaccination rates but with herd immunity on the horizon, the US is now wrestling the global growth baton from China and looking to become the global growth leaders.
And with China clamping down on “bubbles”, the US could grow faster than China in 2021. While not a base case, if the US starts wearing the yellow jersey in the synchronised global growth race, you don’t want to be short dollars when the US exceptionalism trade kicks in.
US Treasury yields have been pushing higher on the US stimulus talk and may prompt the US Federal Reserve into removing some easing sooner than the market expects, as an outcome US Treasury yields remain too low and the curve too flat.
A UST 10-year bond yield of 1.50% should quite easily be possible. And while the gradual rate rise shouldn’t be a big problem for equities as policy mix and vaccine rollouts remain exceptionally supportive, but the one asset that’s still least clear is the US dollar.
Bank of England keeps rates unchanged
As expected, the Bank of England (BOE) kept interest rate policy was unchanged at 0.10%.
While it is not precisely one-way traffic, it certainly seems to be a more bullish story than the market has been expecting with all the speculation in recent weeks about negative rates. As such the Pound is reactively bullish.
Depending on which market you are trading, the BOE either helps or is a hindrance. Rates were not looking for negative policy today, but the tail trade was for at least a softer message from the central bank. As it turns out, the surprise here is how upbeat the BoE sounds.
Asia currencies are struggling mired the early stages of a growth paradigm shift that could see investment flow exit Asia and enter the US supporting the US dollar. Not only is the US economy turning the pandemic corner, but China appears to be on policy throttle down mode as a change of heart is starting to form against a backdrop of concern that asset bubbles are forming.
Ultimately higher Chinese interest rates will dampen credit impulses and slow growth much to the detriment of local trading partners like the ringgit. There are also building concerns about hawkish trade comments for White House administration which continues to rattle stock market and a possible PBoC hawkish pivot.
I suspect the MYR could be relatively insulated to higher yields and China policy walk back as oil prices look set to outperform most markets estimates in Q1.
Precious metals lose some shine
Gold and silver lost some shine on the back of higher US yields and stronger US dollar-dominated flows over the past 24 hours. Yields could rise further and quicker on an NFP beat, where that thought is leaving gold investors both uneasy and queasy.
There remains substantial retail position risk in Silver due to the unusual inflows last Friday and early this week. If gold moves below $1775 with Silver in tow, it could trigger a larger precious metal meltdown where then gold momentum might feed off Silver’s sell-off.
Equity and Oil market analysis and insights from Stephen Innes, Chief Global Market Strategist at Axi