Currency point: Questions go towards the State-side ‘recovery’

The US’ record-breaking expansion seen the final quarters of 2020 is starting to be questioned across the FX space as there are signs the economic recovery has started to stall due to the second wave that hit most of the State.

As we look towards another trading week the ramifications from Friday week’s non-farm payrolls is still the leading economic factor in the shelling of the USD.

Why the NFP is still flowing through trade is likely to the revisionism of November and December. Seeing a 159,000 revision across the 8 weeks to December 31 is a massive decline and when you pair this with the January figures of only 49,000 compared to 105,000 expected. That is a clear ‘stalling’ in recovery and has led economists to revise down future expectations.

The USD is been smashed by the G10 since the NFP report. EUR/USD has rise from $1.1960 to over $1.2150 on the NFP number. GBP/USD was 1.3690 at the announcement now it’s up over $1.3820. Even the AUD/USD is back with a vengeance after last week’s slip moving from $0.7600 to be over $0.7740 that a hell of a move considering it looked as if the pair had finally broken to the downside.

Even safe havens have charged ahead with USD/JPY down to ¥104.55 off 0.8% and USD/CHF down 0.7% to 0.8925.

This sell off is probably based on the premise that newly installed Treasury Secretary Janet Yellen will be writing cheques for at least the next 12 months and probably longer. It is also theorised that the size of said cheque will also grow.

There is also a growing theory that a TRED (Treasury/Federal Reserve) policy setting could emerge. That is complete unison of fiscal and monetary policy. That idea was again enhanced Dallas Fed president Robert Kaplan suggesting that even with the potential for asset price volatility as inflation rises the Fed should remain accommodative while the pandemic persists.

He went further stating that he saw no evidence of any systemic risks in financial markets, the same line the RBA the BoE and the ECB have been peddling and thus the battle of the central banks will continue.

The conclusion from all of this is – don’t fight the Fed, even if you are a central bank.

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