By Michael Every of Rabobank
"American Exceptionalism is Back", except...
“Oh say, can you see! By Dawn’s early light; a pro-dollar trade; that puts the bears to flight?” Bloomberg Daybreak this morning boldly states “American exceptionalism is back” (baby). Apparently better-than-expected data and corporate earnings and the prospects of fiscal stimulus show the USA is still the global standout after all. As a result, bearish USD trades touted for the first month of the year need to suddenly be unwound: EUR is now back below 1.20, AUD is clinging to 0.76, and JPY is past 105.50, while as an EM proxy, MXN is back to 20.38 at time of writing vs. 19.55 on January 21.
Oh say, can you see that the data are still objectively poor in the labor market, or at least show a bifurcated economy where, as far as the market is concerned, tens of millions don’t matter?
... That positive (mega-)corporate earnings are the antithesis of a better wage and small-business outlook needed to give this recovery real legs?
... And the fiscal stimulus is a fraction of what other developed markets are already offering (e.g., another stimulus cheque vs. 75-80% of Covid-impacted workers’ earnings).
This USD buying is also despite a slew of Fed speakers reiterating that tapering isn’t going to happen soon, which might well be interpreted as mild verbal yield curve control to try to slow the ascent of 10s, which now stand around 1.14%.
However, the star-spangled point from the often-mangled Daybreak holds true: the market seemed to think the US was exceptionally bad when many other economies still look objectively worse, or are prepared to be even more dovish than the Fed. For example, the ECB and BOE are both toying with (more) negative rates (see here); and the RBA Governor --who hilariously just testified that the Bank has never and should never target house prices – I would add “just land, bricks, mortar, windows and plumbing”-- has just made even clearer that rates are on hold until 2024. Hence this USD move could have some legs for some crosses. But let’s see how the key US payrolls number trades today first. Last month we got a shockingly bad number, and yet US yields actually spiked. It will be interesting to see what happens to both USD and US yields if we get a better number for January. Could be spikey for sure.
Meanwhile, some crosses look at other fundamentals: CNH is stronger than 6.50, for example. Here we get to the geopolitical side of American exceptionalism, and how that impacts on FX in ways Econ 101 doesn’t address. President Biden projects the image of returning the US to its position of global leadership, on which USD power nestles; and, yes, USD is top dog because billions of individuals make the rational choice to use it, but take away US global military supremacy and that choice can rapidly change, as history makes abundantly clear. In turn, that supremacy rests on economic, technological, and political foundations which are rapidly changing. Indeed, the president may rapidly find that rather than returning to head the pack, the US may instead be trying to herd cats.
President Biden has called on the military in Myanmar to relinquish power after their recent coup. What happens when they refuse? A signature criticism of the Obama foreign policy team was its refusal to match US rhetoric (e.g., “pivot to Asia”) with any substantive action (e.g., in the South China Sea or Syria). The new team gave interviews before assuming office saying they had learned these lessons. So what options with teeth does the US have for the generals in Naypidaw to back their demand? Sanctions are meaningless for a group who rarely travel abroad and whom can look to China for support if needed, despite their coolness towards Beijing to date.
This underlines the need for any top dog (or cat) to build up a pack (or clowder). Here again we see problems. Many articles have been written about the new US administration’s call for the EU to stand alongside it to create new global frameworks favourable to the West (and by extension for USD) and not China (and CNY); and about how the EU is not willing to step up to that plate because of French exceptionalism and German Merkel-cantilism. Macron now says the EU should not gang up on China with the US: “This kind of common front against China risks pushing Beijing to lower its cooperation on issues like combatting climate change, and exacerbating its aggressive behaviour in Asia, including in the South China Sea,” he says. So will the US response then have to be Trumpian and EUR negative, like last time? If not, then what exactly?
Of course, the previous administration had been building bridges to India, which has its own issues with China. However, this relationship is still in its early stages, and India has traditionally looked to Russia for muscle, a role Moscow would be happy to play again. In that regard, the White House backing large anti-government protests in New Delhi against an agricultural reform programme ostensibly to the US’s liking, and criticizing the government for cutting off the internet to try to disrupt them, is unlikely to help build bridges: indeed, India has already drawn comparisons to the events of 6 January in the US Capitol, showing the US is not as exceptional as it likes to project it is. These kind of shifts can matter, even if this is just one small step on a much longer journey (and USD trend channel).
Meanwhile, the Aussie government (which has also never and will never target house prices, “just land, bricks, mortar, etc.”) might be wondering what the US will help do about a report that a Chinese company is planning to build a new city on a Papua New Guinea island near Australia’s northern border. ‘New Daru City' allegedly includes an industrial zone, seaport, business and commercial zone, along with a resort and residential area. Will Canberra regard this as a market-driven response to the well-known Chinese demand for lifestyle residences in the vibrant cultural hub that is the PNG hinterland, or as a Bond-villain project to develop a port just 200km from their Northern Territory? The PNG Prime Minister himself says he is “unaware” of this proposal(!) Yes, this may well not come to pass; but one can again see the paving stones being prepared for alternative paths for currencies like AUD, USD, and CNY (to say nothing of PNG’s Kina) to travel over the course of the 2020s.
Meanwhile, the US can at least rely on the UK, as usual, where yesterday saw regulators ban China’s CGTN TV news service, and the Telegraph also reports that three Chinese spies posing as journalists have just been expelled from the country. Somehow, along with the whole BNO passports issue, this is not likely to help ensure the “golden era” of Sino-British relations promised under previous UK leadership. But will it ensure a golden era of Bido-BoJo relations? That is another path as yet untrod.
Happy Friday! “We love it so much, I think you do too.”