By Barani Krishnan
Investing.com - Is currency debasement good for the dollar? It’s a question really worth asking after the greenback spiked for a second straight week on President-elect Joe Biden’s $2 trillion coronavirus stimulus plan. Gold, the proven hedge for inflation, meanwhile, took another dive for its worst two-week outing since November.
The dollar’s rally on Friday was particularly mind-boggling given the retreat in yields on the U.S. Treasury’s -year note - which had been the catalyst for the greenback’s strength since the start of the year.
Supposedly a haven in its own right, the Dollar Index, pitted against a basket of six other major currencies, rose 0.6% on the day to show a reading of 90.78. The greenback had started the year at below 90 but could head above 91 by next week, some forex dealers said.
Sir John Templeton, the late guru of contrarian investing, said the act of buying when conventional wisdom called for selling indicates that the issues short-term investors are worried about are transitory in nature, and fixable. But Sir John was speaking of individual traders going against the grain - not the entire herd, as the dollar saw the past two weeks.
To be sure, there’s nothing conceivably “fixable” about the dollar, with the U.S. deficit already rising 61% in the first three months of fiscal 2021 after a record $3.13 trillion in 2020.
Biden has made clear that he has several - if not multiple - stimulus plans in mind, suggesting the deficit could be double-digits before his term is through. It’s hardly the sort of stuff that would inspire forex traders to run up the greenback, as witnessed since the start of the year.
That said, there’s probably a “transitory” element - or two - in the dollar’s rally and gold’s slump. First is that the dollar was oversold, with a 4.5% drop combined for October and November. It wasn’t the same for gold though, with November’s 5.6% loss preempting December’s 6.4% rally.
The second factor is more compelling though - that Biden’s stimulus plans might still meet resistance in the Senate despite the simple majority that his Democratic Party commanded.
This is because stimulus measures are still part of the budget, and without a super-majority of 67 out of the 100 seats in Senate, they run into a process called “reconciliation” that can only be overridden by a minimum of 60 votes (Democrats and Republicans both have 50 seats in the Senate now, with Vice President-elect Kamala Harrris having an additional vote to break the tie).
This reconciliation bit is what has led to the assumption that large stimulus efforts by Biden won’t easily pass muster with the Senate, especially with Republican fiscal hawk Mitch McConnell returning as Minority Leader to make legislation in the upper chamber of Congress as much a living hell for the Democrats as it was when he presided as Majority Leader.
Yet, top Senate Democrat Chuck Schumer might still get a string of mid-sized stimulus packages through with bipartisan outreach and achieve Biden’s targets. In that case, the dollar’s debasement is still certain. That’s what forex traders and gold bears seem to be missing.
The short gold-long dollar trade also ignored Federal Reserve officials, including Chair Jay Powell, who spent all of last week denying speculation that the Fed will resort to a tapering soon in its easy monetary policy. “Taper tantrum”, as it’s called, is top most on traders’ minds as many wonder when exactly the central bank would be likely to hike interest rates, which had been near-zero since the pandemic broke out in March.
But Powell also did not help matters. He sent out mixed messages to traders, saying "there are a lot of reasons to be optimistic about the US economy" and that we "could be back to the old economic peak fairly soon."
That triggered another problem for markets: Figuring out how quickly the economy could rebound with the help of Covid-19 vaccines. Speaking of vaccination, it’s like a tale of two cities in some instances: New York Mayor Bill de Blasio says his city will run out of doses by next week, while Florida’s Tallahassee is pacing out its shots on Governor Ron de Santis’ order. In the meantime, the new U.K. variant of the virus, called B.1.1.7., could be dominant by March, says the U.S. Centers for Disease Control and Prevention.
Notwithstanding its rebound in the third quarter, the US economy remains dire with Covid-19 hospitalizations and deaths hitting new highs in recent weeks. The United States remains the country worst hit by the pandemic with more than 23 million cases logged since January 2020 and over 385,000 deaths from those.
On the employment front, the United States lost more than 21 million jobs between March and April 2020, at the height of business lockdowns forced by the coronavirus. A rebound of 2.5 million jobs was logged in May and 4.8 million in June, before the recovery began slowing. For both September and October, less than 700,000 jobs were added each month. In November, there were just 245,000 additions while December saw a loss of 140,000 jobs - the first such decline since April.
The weak trend in the labor market has continued into 2021, with 965,000 Americans filing for jobless benefits in the week to Jan. 9, up 23% from the previous week, and the highest in nearly five months.
Powell admits as much that there’s “plenty of slack” in the labor market and that it’s unlikely wage pressures alone will soon reach levels that could create or support higher inflation.
“Also, the other factor to look at is the world shortage of demand,” he said. “In lots of large advanced economies, in countries around the world which began this crisis, there are deeply negative interest rates and little policy space for interest rate hikes. All that is going to hang around for a while, and you know, the US economy is strongly integrated with the rest of the world. That's going to matter."
Will all that in the mix, one has to ask again: Where is the basis for a strong dollar and weak gold?
On the oil front, crude prices rightly fell their most in a month on Friday, tumbling more than 2%, after concerns over Covid-19 lockdowns in top crude destination China hit a market that resisted for weeks worries about piling fuel stockpiles at home.
The spike in the dollar, the currency on which oil trades, also made buying of the commodity less competitive for holders of the euro and other change - indirectly hitting demand for crude.
Gold Price&Market Roundup
U.S. markets swirled in a sea of red toward Friday’s close from woeful December numbers for everything from retail sales to producer price index, manufacturing and consumer sentiment. Joining the doleful party was gold, which was supposed to be the “safe-haven” - or hedge or panacea, whatever you call it - from all this.
Gold for February delivery on New York’s Comex did a final trade of $1,827.85 on Friday, after officially settling the session at $1,829.90 an ounce - down $21.50, or 1.2% on the day.
For the week, February gold lost $5.50, or 0.3.
But when added to the previous week’s loss of $59.70, or 3.1%, it gave gold futures their worst two-week showing since November.
Oil Price&Market Roundup
New York-traded West Texas Intermediate, the key indicator for U.S. crude, did a final trade of $52.06 per barrel, after settling Friday’s official session down $1.21, or 2.2.%, at $52.36 per barrel. It was WTI’s biggest one-day slide since Dec. 18.
Still WTI rounded out the week with a 13 cent, or 0.5%, gain.
London-traded Brent, the global benchmark for crude, did a final trade of $54.84 per barrel. It settled Friday’s official trade at $55.10, down $1.32, or 2.3%, on the day.
For the week, Brent lost 89 cents, or 1.6%.
China ramped up lockdowns on Friday after reporting the highest number of daily Covid-19 cases in more than 10 months. The world’s No. 2 economy capped a week that has resulted in more than 28 million people under lockdown as it suffered its first coronavirus death on the mainland since May.
“The Covid-19 pandemic’s spread is taking centre stage again and traders are getting increasingly worried about the long duration of European lockdown and about the new restrictions (in) China,” Bjornar Tonnage from Rystad Energy was quoted saying by Reuters. “The market is structurally bullish, but it may be getting too ahead of forward-looking fundamentals.”
In the United States, fuel products had been the oil complex’s weakest link for months.
Gasoline stockpiles rose 4.395 million barrels during the first week of January, compared with expectations for a 2.69 million-barrel build, data from the U.S. Energy Information Administration said.
Stockpiles of distillates, which include diesel and heating oil, rose by a more-than-expected 4.786 million barrels against expectations for a 2.67 million-barrel increase, the EIA data showed.
Energy Calendar Ahead
Monday, Jan 18
U.S. Markets’ Martin Luther King Holiday
Tuesday, Jan 19
Private Cushing stockpile estimates
American Petroleum Institute weekly report on oil stockpiles.
Friday, Jan 22
EIA weekly report on crude stockpiles
EIA weekly report on gasoline stockpiles
EIA weekly report on distillates inventories
EIA weekly report on natural gas storage
Baker Hughes weekly survey on U.S. oil rigs
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. He does not own or hold a position in the commodities or securities he writes about.