November 14, 2020 6:22 AM PST
Trump's Weaker Dollar Arrives on Cue to Help Biden
John Authers
is a senior editor for markets. Before Bloomberg, he spent 29 years
with the Financial Times, where he was head of the Lex Column and chief
markets commentator. He is the author of “The Fearful Rise of Markets”
and other books.To get more news about [url=https://www.wikifx.com/]WikiFX[/url], you can visit wikifx official website.
To get John Authers' newsletter delivered directly to your inbox, sign up here.
Counting Votes, and Selling Dollars
Like many people, I have Georgia on my mind at the time of writing.
The big set piece that we could see coming years ago, the November
Federal Open Market Committee meeting, came and went with almost no
market reaction. Instead, the U.S. election, and the growing probability
that Georgia of all places will deliver the presidency to Joe Biden,
has dominated discussion throughout the day. Just like the last
election, it has prompted a surge in risk assets, as there is relief
that the election is over — even though, just as in 2016, the policy
that will likely result is very different from what had been expected.
The moves across markets are unambiguously “risk on.” Risk assets are
doing well across the board. However, in both bonds and equity markets,
the reaction remains within the recent ranges. So lets focus on the
exceptions, which are in the zero-sum world of foreign exchange.
According to Bloombergs broad dollar index, the action of this week
has brought the U.S. currency to its weakest in 30 months:
Donald
Trump consistently wanted a weaker dollar, and was aggrieved by the
currencys upswing from the summer of 2018 onward. It looks as though a
weaker dollar, bringing with it help for exporters, is arriving just on
cue to help a possible President Biden. A stronger currency did boost
the performance of U.S. equities compared to the rest of the world. For
the last two years, however, that outperformance has been mostly due to
the remarkable U.S. tech industry. With a weakening dollar, as last seen
in 2017, non-U.S. stocks have a chance to outperform:
The Trump
era was particularly tough for emerging market currencies. JPMorgans
emerging market FX index had at one point dropped more than 20% against
the dollar since election day in 2016. On Thursday, it surpassed its
200-day moving average for the first time in more than a year. For now,
markets are operating on the belief that a Biden administration hemmed
in by congressional gridlock is just what emerging market currencies
need:
This could be positive, as devaluations on this scale
usually leave strong GDP growth in their wake. They are also very
unusual. Research from the Institute of International Finance suggests
that Argentina and Brazil in particular should be well placed:
Meanwhile, the strategy team at Citigroup Inc. ran the
cross-correlations between emerging market equities and a weak dollar.
This exercise also reveals that Brazil should do particularly well.
Japan, still treated by markets as though it is totally reliant on
exporters, does badly from a weak dollar:
The most important factor
boosting emerging markets is simply that the event risk of the U.S.
election is now behind us, and so particularly risky assets can now
rally. Dirk Willer of Citi commented in a note that this behavior is
reminiscent of an emerging market election: “The underlying reason is
that risk had been reduced before the event, leading to a (minor) market
pull-back. And, as we had stated prior to the election, after the event
goes away, risk markets go up, irrespective of the actual outcome.” To
underline this, some of the worlds best performing assets since
Wednesday night have included short-dated bonds from Brazil and Egypt,
which at least in theory should barely be affected by American politics.
As Willer put it: “This illustrates that investors just wanted to make
sure that VIX is not exploding higher on Election Day, only to then put
on their favorite trades that they always wanted to have on the books in
the first place.”
Some of the market action can be dismissed much
this way; it is selling the rumor and buying the news. If the argument
that gridlock will mean more protracted easy money from the Fed is
valid, however, and other countries become more fiscally aggressive,
that should mean a weaker dollar. And that should buoy the emerging
markets.
Trump's Weaker Dollar Arrives on Cue to Help Biden
John Authers
is a senior editor for markets. Before Bloomberg, he spent 29 years
with the Financial Times, where he was head of the Lex Column and chief
markets commentator. He is the author of “The Fearful Rise of Markets”
and other books.To get more news about [b][url=https://www.wikifx.com/]WikiFX[/url][/b], you can visit wikifx official website.
To get John Authers' newsletter delivered directly to your inbox, sign up here.
Counting Votes, and Selling Dollars
Like many people, I have Georgia on my mind at the time of writing.
The big set piece that we could see coming years ago, the November
Federal Open Market Committee meeting, came and went with almost no
market reaction. Instead, the U.S. election, and the growing probability
that Georgia of all places will deliver the presidency to Joe Biden,
has dominated discussion throughout the day. Just like the last
election, it has prompted a surge in risk assets, as there is relief
that the election is over — even though, just as in 2016, the policy
that will likely result is very different from what had been expected.
The moves across markets are unambiguously “risk on.” Risk assets are
doing well across the board. However, in both bonds and equity markets,
the reaction remains within the recent ranges. So lets focus on the
exceptions, which are in the zero-sum world of foreign exchange.
According to Bloombergs broad dollar index, the action of this week
has brought the U.S. currency to its weakest in 30 months:
Donald
Trump consistently wanted a weaker dollar, and was aggrieved by the
currencys upswing from the summer of 2018 onward. It looks as though a
weaker dollar, bringing with it help for exporters, is arriving just on
cue to help a possible President Biden. A stronger currency did boost
the performance of U.S. equities compared to the rest of the world. For
the last two years, however, that outperformance has been mostly due to
the remarkable U.S. tech industry. With a weakening dollar, as last seen
in 2017, non-U.S. stocks have a chance to outperform:
The Trump
era was particularly tough for emerging market currencies. JPMorgans
emerging market FX index had at one point dropped more than 20% against
the dollar since election day in 2016. On Thursday, it surpassed its
200-day moving average for the first time in more than a year. For now,
markets are operating on the belief that a Biden administration hemmed
in by congressional gridlock is just what emerging market currencies
need:
This could be positive, as devaluations on this scale
usually leave strong GDP growth in their wake. They are also very
unusual. Research from the Institute of International Finance suggests
that Argentina and Brazil in particular should be well placed:
Meanwhile, the strategy team at Citigroup Inc. ran the
cross-correlations between emerging market equities and a weak dollar.
This exercise also reveals that Brazil should do particularly well.
Japan, still treated by markets as though it is totally reliant on
exporters, does badly from a weak dollar:
The most important factor
boosting emerging markets is simply that the event risk of the U.S.
election is now behind us, and so particularly risky assets can now
rally. Dirk Willer of Citi commented in a note that this behavior is
reminiscent of an emerging market election: “The underlying reason is
that risk had been reduced before the event, leading to a (minor) market
pull-back. And, as we had stated prior to the election, after the event
goes away, risk markets go up, irrespective of the actual outcome.” To
underline this, some of the worlds best performing assets since
Wednesday night have included short-dated bonds from Brazil and Egypt,
which at least in theory should barely be affected by American politics.
As Willer put it: “This illustrates that investors just wanted to make
sure that VIX is not exploding higher on Election Day, only to then put
on their favorite trades that they always wanted to have on the books in
the first place.”
Some of the market action can be dismissed much
this way; it is selling the rumor and buying the news. If the argument
that gridlock will mean more protracted easy money from the Fed is
valid, however, and other countries become more fiscally aggressive,
that should mean a weaker dollar. And that should buoy the emerging
markets.