Looking toward the recovery: currency drivers and what to watch out for

Markets are looking beyond the current economic misery and into the recovery. How will currencies and react? What should be look out for? Valeria Bednarik, Joseph Trevisani, and Yohay Elam dive into recent figures, look at which currencies can benefit, and also throw politics into the mix.

Joseph Trevisani: Today's continuing unemployment claims showed a surprising drop of 3.86 million in the May 15 week and that was despite an increase of 2.446 million new claims that week.  In general, unemployment lasts for 6 months. on November 15 last year 1.642 million were collecting unemployment

Joseph Trevisani: If all of those people lasted until last week and then lost eligibility, it means 4.664 million people left the rolls for other reasons. Is this the sign markets have been waiting for on recovery?

Yohay Elam: That is undoubtedly the figure that stands out in the big data bulk

Yohay Elam: And potentially more significant than GDP and durable goods orders

Joseph Trevisani: Equities aren't particularly impressed, Dow futures up 185, but stocks have had a tremendous week

Joseph Trevisani: Yes, much more significant

Joseph Trevisani: GDP is truly old news, especially with 2nd quarter pending

Valeria Bednarik: I do agree that the unemployment figures are the most significant one, but I also think it's too early to consider those numbers are suggesting a bottom has been reached. It's also interesting what you mentioned about stocks. Speculative interest is willing to bet on a recovery, despite really shy signs on that coming in

Valeria Bednarik: Is pure hope and closing eyes to negative numbers and other factors that usually shake the market

Joseph Trevisani: True, besides what else can stocks bet on but a recovery?

Yohay Elam: Encouraging undoubtedly, but there are holes to poke into the figures

Yohay Elam: California (-40%), Florida (-76%) and Washington (-40%)

Yohay Elam: The NFP uses separate surveys

Yohay Elam: So there's room for caution

Valeria Bednarik: Yups, but the market doesn't want to be cautious

Yohay Elam: I think the market left caution behind a long time ago

Yohay Elam: But that's not new

Joseph Trevisani: Undoubtedly, but traders are paid to take risks

Yohay Elam: The S&P jumped by double digits in 2019, while earnings were stuck

Valeria Bednarik: Yeah

Joseph Trevisani: The phrase is 'analysis paralysis'  If you wait until the move is sure, you have missed it

Valeria Bednarik: The FX board is still on paralysis. We see interesting moves in equities, action around commodities.. but currencies have been unable to find a direction

Yohay Elam: It isn't the volatility we are looking for, but currencies have had a bit of their independent trading

Yohay Elam: The euro is rising amid EU fund hopes

Yohay Elam: The pound has a few issues downing it

Joseph Trevisani: True, even the USD/CAD which finally cracked its support at 1.3850 had but modest follow-through

Yohay Elam: The yen is where the biggest volatility issues are...

Valeria Bednarik: Yeah, there is some action but is too shy.. the EUR/USD pair has spent two months within a 300 pips' range

Joseph Trevisani: The dollar has given up most but not all of its pandemic risk premium, but if the US economy has turned the corner, it will, at least given historical precedents, recover faster than Europe or Japan and that will tend to support the dollar. The reluctance  to sell the USD hard has a rational basis

Yohay Elam: I think Australia and New Zealand will recover faster than other developed economies

Yohay Elam: They depend on China, which has bounced back

Joseph Trevisani: Perhaps depending on China resource demand

Yohay Elam: They tackled coronavirus with huge success

Yohay Elam: And they do not have huge political issues like in the US and Europe

Joseph Trevisani: If you take their numbers at face value, which is risky

Valeria Bednarik: Yeah, but the recovery of those countries won't have an impact on the greenback. Instead, I do agree with Joseph that the US economy will likely move faster than the European once, ending up on dollar's strengthening

Joseph Trevisani: True, China is a dictatorship, they do not have domestic political dissent and they are busy taking over Hong Kong, betting that the world is distracted. Unfortunately, they are probably right

Yohay Elam: Historically, US growth is stronger than sluggish European growth

Yohay Elam: The only hope for Europe to surpass the US is if the bold fund plans turn into reality

Yohay Elam: But given the past, it will take longer and be smaller than the promising headlines suggest

Yohay Elam: A euro fudge rather than a Hamiltonian moment

Valeria Bednarik: And in the middle, US elections

Yohay Elam: Perhaps Singapore's status will rise, supporting the local dollar

Joseph Trevisani: The US economy is more dynamic, partially because its population is younger and accepts more immigrants and partially because its business regulation is lighter. That will not change no matter how much or little liquidity the respective governments pour into their economies

Yohay Elam: For EUR/USD, the eurozone has a trade surplus and the US a trade deficit

Yohay Elam: Perhaps that will push the currency pair higher once the dust settles?

Joseph Trevisani: As this point, it will be a relief to return to comparative economics

Yohay Elam: Yeah, a huge relief

Yohay Elam: Unfortunately we may see second waves everywhere

Joseph Trevisani: I think we are still seeing the erosion of the USD-risk premium, the EUR/USD was trading 1.1000-1.1200 in the months before the virus...

Valeria Bednarik: The only thing that I can think of right now is that back in March, we were talking about recoveries in the third quarter of the year. As the second one comes to an end, it seems we were too optimistic. I don't expect much better growth figures in Q3

Joseph Trevisani: Unless the second waves are truly devastating, and so far at least in the US they have been negligible if at all, I don't think they will matter. It's the financial crisis principle. the bar for market reactions is now set very high

Yohay Elam: The risk of a financial crisis has diminished

Yohay Elam: The Fed is all out with massive money printing

Yohay Elam: I don´t think we´ll see a devastating second wave in the US, just a high plateau

Joseph Trevisani: There is a story making the rounds in the US, Jason Furman, a former Obama economic advisor and current Harvard professor, has said that he expects the economy to recover fast and strong in the third quarter, the idea being the usual recession one, the sharper the drop, the quicker the recovery

Yohay Elam: Q2 will be horrible, Q3 amazing, there´s no doubt

Joseph Trevisani: He made the comments in a political context to a Democratic gathering

Yohay Elam: My question is: when will the economy return to pre-crisis levels, and I think it will be only in late 2021

Joseph Trevisani: In which case the US election in November will be, shall we say, interesting.

Joseph Trevisani: Yes, I agree pre-crisis levels are different question and that is a much longer project. I think you are being optimistic with 2021

Joseph Trevisani: If the economy really does contract 40% Q/Q in the second, it almost guarantees a huge surge in Q3

Valeria Bednarik: It would depend on how the "new normal" turns out. If somehow we get rid of the pandemic, returning to pre-crisis levels would be much easier than if we have to keep on living with the virus among us. End of 2021 is possible if there's no "new normal," but just plain "normal"

Joseph Trevisani: A vaccine would trump economic worries, no pun, please

Yohay Elam: A vaccine could bring us back to pre-crisis levels, without it, indeed, late 2021 may be optimistic

Yohay Elam: Pandemic puns are the best...

Valeria Bednarik: A vaccine is not the answer. It could be for markets, as risk appetite will take over the financial world. However, and with a vaccine, it will take what? one year minimum to produce and vaccinate a significant number of people

Yohay Elam: Hopefully, it will be produced quickly all over the world. Unfortunately, it will take longer to discover

Valeria Bednarik: Let's say that the US get's the vaccine in advance and manage to distribute it among local people. If the rest of the world does not get it, to whom will the US sell its products?

Joseph Trevisani: I think the world has probably changed in ways we do not realize yet. That will be both a penalty and an opportunity for the economy

Yohay Elam: Yeah, agree with Val, vaccine nationalism could be a problem

Yohay Elam: And if China announces a vaccine, will the world believe it?

Yohay Elam: I heard that companies in India are ready to ramp up vaccine production, supplying it to the whole world, so there's also optimism...

Valeria Bednarik: I surely won't like to get a Chinese vaccine

Joseph Trevisani: And would the world use it?  China will suffer the most from this pandemic. It may be able to force compliance domestically but it cannot order foreign investors to build and invest in China

Valeria Bednarik: Well, part of the world may have no other chance but to use it

Joseph Trevisani: The pandemic has made the danger of supply chain dependence on China very obvious

Valeria Bednarik: That's a good point

Joseph Trevisani: True, on this we will have to wait and see

Valeria Bednarik: And a great question.. would that supply chain change?

Valeria Bednarik: Companies would keep choosing "cheap" over "national"?

Joseph Trevisani: I think so. And prophetically, it is one of the issues that elected Trump in the US. The hollowing out of the US manufacturing base

Joseph Trevisani: Consumer may also exert influence here

Yohay Elam: The American consumer is critical to China and also to the recovery

Yohay Elam: I think retail sales figures will be even more important going forward

Joseph Trevisani: Agreed, for May but especially June

Yohay Elam: Will next week's Non-Farm Payrolls have a significant impact?

Yohay Elam: Market reactions have been disappointing

Joseph Trevisani: I don't think so. Almost all pandemic economic statistics are old news

Joseph Trevisani: On a political note, the Senate is going to hold a hearing on the origin of the Mueller investigation. Without commenting on the facts, Congressional hearing has a tendency to dominate the media

Valeria Bednarik: But hardly have an effect on financial markets

Joseph Trevisani: Markets are focused on the size and shape of the recovery.  In this, the equities are in the lead, currencies following surprisingly bonds far in the rear

Joseph Trevisani: But the credit markets are under the thumb of the Fed's  new improved QE program

Yohay Elam: I think markets are fueled by the Fed more than hopes for a recovery

 

Yohay Elam: The Fed has the greatest impact on equities

Yohay Elam: The crash in December 2018 came after a rate hike

Yohay Elam: And the Fed´s flooding in March and early April turned markets around

Yohay Elam: But yeah, also hopes for a recovery are in the mix

Yohay Elam: Fed cuts in 2019 can be attributed to the rise in stocks while earnings were flat

Joseph Trevisani: The Fed has long been accused of supporting equities, remember the Bernanke put?

Yohay Elam: Since Greenspan and until eternity

Yohay Elam: Accused or praised... depends on one´s point of view

Joseph Trevisani: It as always hard to disentangle the Fed from the economy. Do stocks rise because the Fed increases liquidity or because increased liquidity promotes growth?  The answer is both, as you say

Yohay Elam: Yep, agreed, it´s both, somewhat growth-related, but not related to earnings growth