The Fed And Earnings On Tap

The dollar is in about a 20-tick range against the yen below JPY103.80.  It has not been above JPY104 since last Tuesday and remains largely confined to last Friday's range (~JPY103.50-JPY103.90) (FXY).  The Australian dollar posted an outside up-day yesterday, trading on both sides on Monday's range and closing above its high.  Initial follow-through buying lifted it to nearly $0.7765, a new three-day high, where it was greeted with fresh sales.  Support was found in the European morning near $0.7720.  A break of the $0.7670 area, yesterday's low, to signal anything important (FXA).  The PBOC set the dollar's reference rate at CNY6.4665, which is a bit firmer than the median estimate from the bank models surveyed by Bloomberg (CNY6.4635). The PBOC money market operations have been exceptionally stingy as it drains liquidity.  The overnight repo rate rose 23 bp to bring this week's increase to 55 bp (now stands at 3%) (CYB).  The dollar (UUP) continues to consolidate within the range set in the first two sessions of the year (~CNY6.43-CNY6.5150)

Europe

Less than a week before Biden was sworn in, the EU launched an initiative to promote the euro's international use.  The US was not cited by name, but the meaning was clear.  As quoted in one media source: "The extraterritorial application of unilateral sanctions by third countries has seriously affected the EU’s and its member states’ ability to advance foreign policy objectives, to honor international agreements, and to manage bilateral relations with sanctioned countries.  It continued:  “At times, unilateral actions by third countries have compromised legitimate trade and investment of EU businesses with other countries.” 

Yesterday, a few hours after Yellen was confirmed as the US Treasury Secretary, it was leaked to the media that the ECB is looking into the euro's appreciation against the dollar since the pandemic with interest in whether it was the result of the different stimulus measures.  At last week's ECB meeting, it was noted that higher interest rates failed to lift the dollar. The euro may have slipped as the headline shot across screens, but the euro recovered as participants read the story.  Perhaps, others concluded as we did that it is a process-oriented inquiry into the reaction function of markets. We have sketched out our dollar view here at the end of last year, including our anticipation for a corrective bounce this month.  

Already some are claiming this is a shot in the forever currency war.   It does not seem likely.  However, as we have argued, what is clear is that the US proclivity to sanctions and weaponizing access to the dollar (not the price) encourages the search for alternatives.  Europe has experienced the sanction regime as an encroachment on sovereignty. This is not about exchange rates. It is about reducing its dependence on the numeraire and looking for ways to offer financial leadership, such as green and social bonds. There have been thousands of books and dissertations written about what drives the foreign exchange market, and another one may be in the making.  Moreover, the conclusions will have to be so tentative by definition that the policy impact cannot be significant.  The timing of the leak does not appear planned or part of a broader strategy.  However, one takeaway from the timing of both events is that Biden's election is not a return to 2016, or earlier, for that matter.  Europe is more assertive.  

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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