MORNING BID-Sultans of stimulus
A look at the day ahead from Senior FX Correspondent, Saikat Chatterjee. The views expressed are his own.
The beleaguered U.S. dollar got some respite on Thursday as Wednesday’s ADP jobs survey showed 2.8 million jobs being lost, far short of forecasts of 9 million lost, and the ISM non-manufacturing PMI also beat estimates, though it continues to show a contraction. Neither data set would be considered decent under normal circumstances, but market moves show how starved investors are for any evidence of a turnaround that would justify the current elevated market valuations.
U.S. weekly jobless claims are also expected to recede on Friday, but an analysis of 44 countries by economists at Deutsche Bank put the U.S. economy the second worst in unemployment relative to its 10-year average, behind only Colombia. For currency markets that is a long-term negative for the dollar. But even in the short term, the prospects don’t look good. The latest Reuters poll of over 60 analysts predicts the dollar will weaken over the next six months.
Hopes of more stimulus has widened the chasm between market valuations and the real economy, despite expectations for a slow economic recovery, growing concern over U.S.-China tensions, U.S. civil unrest and rising coronavirus infections. On Wednesday, the Federal Reserve widened its municipal liquidity program to include more businesses and Australia offered a stimulus package for construction. Major U.S. stocks ended higher on Wednesday, with the S&P 500 and the Nasdaq near their record closing highs in February and 10-year U.S. treasury yields approached a two-month high of 0.75%. At a price-to-earnings multiple of 22, valuations for the S&P 500 are at their highest level in more than two decades. Although investors remain surprised at the stock market’s resilience, a case can be made for stretched valuations — the risk-free rate for valuing future streams of corporate cash flows is essentially zero as central banks support virtually every corner of the bond market.
And then there is the European Central Bank. Pressure is growing on policymakers to deliver more stimulus in the face of a record rate of economic contraction in the first quarter. Interest rates are widely expected to remain unchanged at its deposit rate of minus 0.5%, but many economists expect the 750 billion-euro Pandemic Emergency Purchase Programme to rise by 500 billion euros. The German coalition government agreed overnight on a 130 billion-euro fiscal stimulus program for its economy after a recovery fund proposal last week by Europe gave the struggling euro a shot in the arm.
The latest policy actions have resulted in a seven-day winning streak for the euro against the U.S. dollar, a move last seen only in December 2013. The euro’s rise to near 1.08 against the Swiss franc has also eased pressure on the Swiss central bank, whose rate of weekly interventions dropped to its lowest since February.
The dollar’s gains have pushed emerging-market currencies lower with the wider index snapping a four-day winning streak to slip 0.25%. The biggest declines came in South Africa’s rand and Mexico’s peso, both down 0.7%, but both still on track for healthy weekly gains. (Editing by Larry King)
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