- November 11, 2020
- Posted by: Amit Pabari
- Category: Currency
The new week has begun with robust risk appetites, driving stocks higher and sending the dollar broadly lower. Nearly all the equity markets in the Asia Pacific region gained more than 1 percent. The dollar hit a 10-week low as investors dumped dollar by buying major currencies on expectations that Biden’s win would lead to a calmer White House and boost world commerce along with the monetary policy remaining easy. In our preceding report, we had mentioned the sustenance of dollar weakness post-election.
With Joe Biden called the 46th US President, markets are expecting the uncertainty around the election to ease while predicting additional stimulus, both of which are boding poorly for the safe-haven US dollar. Despite the pullback in the dollar from 94.50 to 92.20 levels, the spot remains above the September low of 91.75 levels.
Hereon, let’s understand the possibility of the dollar weakening further on an immediate basis or rebound and remaining within its 92.00-94.50 range.
Why could the dollar break below 92 levels or be on the downside of the range?
• More QE coming in: Powell said that the central bank was committed to keeping its bond purchases steady at $120 billion a month, but he also said lawmakers will likely need to provide more fiscal stimulus to help the economy recover from the contraction. This standby also means that expectations for a massive US fiscal stimulus package have been lowered and more QE from the Federal Reserve is expected. If the Fed continues money printing, the dollar index shall remain on a declining trend caused by an oversupply of currency.
• Divided US Government: A potentially divided US government with the White house going to Democrats and Republicans in control of the Senate may mean a smaller fiscal stimulus package from lawmakers, increasing pressure on the US central bank to ramp up its bond-buying and other economically supportive policies that might weigh on the dollar
• Rock bottom interest rates: As the Fed has remained muted on the interest rates and has hinted at no change in the rates for the next few years; these fresh concerns come on top of issues that have dragged the dollar lower for most of 2020. It also led investors anxious about its status as the world’s dominant reserve currency and massive US government spending for years to come.
• Third wave of Covid-19: Investors are also cautious of fresh lockdowns as coronavirus cases surge, with the global number of infections topping 50 million as cases in the US surpassed 10 million. This cited the possibility of fresh lockdowns in the US which can be a major risk to the dollar.
• Investors eying bigger stimulus in Biden rule: Biden’s campaign had called for a bigger stimulus package that promised $1,200 stimulus checks (plus an additional $500 per child) and extending unemployment benefits $600 a week. In all, Biden has published a subsequent stimulus package that could cost another $3 trillion. Even if the US comes out with a bigger stimulus despite lower expectations in a divided government, it can turn out to be as dollar-negative.
• Renewed Vaccine hopes: Pharmaceutical giant Pfizer announced that a vaccine jointly developed by Pfizer and BioNTech was 90 percent effective in preventing Covid-19 infections in on-going Phase 3 trials and that no serious safety concerns have been identified as of first interim analysis. This will lead to reduced safe-haven demand.
Why could Dollar Rebound?
The dollar could take a breather amid Euro’s Weakness lead by below reasons:
• New lockdowns in parts of Euro-Zone: ECB President Christine Lagarde will be speaking amid rising COVID-19 cases and their economic impact. The second lockdowns are set to have an impact but with a smaller effect in comparison to the initial ones as conveyed by German and France officials. However, on and off lockdowns shall halt the smooth functioning of the business activity thereby hampering the anticipated economic recovery. This can lead to a decline in Euro or at least prevent the currency to rise past the 1.200 psychological mark.
• The tariff war continues: The EU approaches the November 10th target date for imposing $4 billion retaliatory tariffs against the US over local aid to Boeing Co. This is part of a 16-year old dispute which Trump has threatened to strike back if imposed. If the EU imposes tariffs, which may dent sentiment, sinking Euro lower. But, with Joe Biden on course to take the White House, shifting the nation’s foreign policy approach, the road ahead seems a bit unclear for now, thereby capping gains in Euro.
• ECB’s discomfort with stronger Euro: A couple of weeks back, the ECB had hinted at its discomfort with the rising Euro as a stronger Euro reduces the export competitiveness thereby hampering the businesses. ECB, at the Governing Council meeting, had said to have monitored the exchange rate carefully implying the sharp rise in Euro past 1.20 could be prevented.
Ideally, there doesn’t seem any inherent strength for the dollar which should drive the currency up and the above-mentioned fundamentals suggest there are more reasons for the dollar to decline past 92.00 levels in the medium to long run. However, on an immediate basis, unsupportive fundamentals for the Euro-Zone could keep Euro under pressure disallowing it to rise above 1.2000 levels and possibly bringing the pair downwards.
Therefore, in the near term, pullback seen in dollar close to 93.50 levels would majorly be driven by foreseeable Euro weakness. Also, technically, there is support for the dollar around 91.73 levels and as the pair sustained above 92.00 levels, it reassures that a pullback close to 93.50 can be seen. As the broader trend for the dollar is on the downside, the overall view for the dollar remains to sell on upticks until it breaks past 94.50 levels. Hence, it seems like the dollar will make in the near term before it breaks in the medium to the long term.
-Amit Pabari is managing director of CR Forex Advisors. The views expressed are personal.