· Dollar wallows at two-week low; bitcoin steadies after surge past $48,000
The dollar traded near two-week lows as demand for safer assets ebbed on Wednesday, with traders looking ahead to an expected recovery from the COVID-19 pandemic this year, driven by massive fiscal and monetary stimulus.
Bitcoin consolidated around $46,500 after reaching a new high at $48,216 overnight following Tesla’s disclosure of a $1.5 billion investment in the leading cryptocurrency.
Traditionally viewed as a safe haven, the dollar has sunk against major peers as optimism over monetary and fiscal support from policymakers, robust corporate earnings and the prospect that coronavirus vaccines could hasten a return to normality in the United States and elsewhere have bolstered risk sentiment.
The dollar index edged higher to 90.509 early in the Asian session on Wednesday, following a two-day loss that took it as low as 90.427 for the first time this month.
There has been a tug-of-war among traders over the impact on the dollar of President Joe Biden’s planned $1.9 trillion fiscal stimulus package.
The dollar added 0.1% to 104.68 yen, after dipping as low as 104.5 for the first time this month in the previous session.
The euro weakened less than 0.1% to $1.21105 following a three-day gain.
The British pound was about 0.1% lower at $1.3803 after renewing an almost three-year high at $1.382 overnight.
· US CPI in focus as Yellen and Fed downplay inflation fears
The coronavirus pandemic dealt a severe blow to inflation, pushing price growth to or below zero almost everywhere around the world. However, although economic output remains depressed far below pre-pandemic levels in most countries, inflationary pressures seem to be picking up far quicker than anyone anticipated, raising some question marks about how loose monetary and fiscal stimulus can stay.
Expectations of a large virus relief package have revived the reflation trade whereby government bond yields and equities rise together as investors bet on the return of inflation but the abundance of liquidity keeps stocks buoyant.
The yield on 10-year Treasury notes hit an 11-month high on Monday, while the 30-year yield topped 2% for the first time in a year. More worryingly, a closely watched barometer of inflation expectations – the 10-year breakeven inflation rate – has soared to the highest since 2014 this week, climbing above 2.2%.
Stimulus floodgates wide open
Yet neither policymakers at the Treasury nor the Fed appear too concerned about this. If anything, their stance is that even more stimulus is needed. The Fed couldn’t be more vocal about calling for additional fiscal support from the federal government while pledging to continue pumping $120 billion a month into the US economy for as long as needed. As for the former Fed chief who is now running the Treasury Department, Yellen has perhaps been the biggest surprise in all this by championing Biden’s ambitious spending plans without much care about the threat of inflation.
Both Powell and Yellen are arguing that any spike in inflation is likely to be ‘transient’ and easy to contain should it get out of control, while the cost of doing too little could have significant long-term ramifications for the economy. However, they may be right to not be very concerned about fuelling inflation just yet.
US CPI is steadying, but for how long?
All measures of US inflation have steadied since the autumn after bouncing back quickly in the summer months from the lockdown dip. But there are risks. Core inflation did not fall as much as the headline figures did at the height of the virus crisis. Core CPI stands at 1.6% year-on-year and the Fed’s preferred core PCE price index was at 1.45% in December. So any surge in prices could easily bump them above the Fed’s 2% target.
Headline inflation is still quite subdued, with the CPI rate currently at 1.4%. But rising oil prices could soon change that. Another danger in the coming months is the possibility of a jump in inflation in the services sector. If America’s vaccination programme stays on track, allowing the reopening of closed-up retail, leisure and hospitality venues, the rush of fun-starved consumers to such places could push up the prices of those services quite substantially as businesses try to make up for lost trade.
But it’s not just in the services economy that policymakers may be overlooking the risks. Manufacturers continue to face spiralling costs from the supply disruptions caused by the pandemic, and it’s probably too early to predict whether the problems will be completely resolved once virus restrictions are gradually removed. Moreover, businesses are still adjusting to increased trade barriers from Brexit and the Sino-US trade war, which the Biden administration has no plans on ending.
Nevertheless, the near-term picture for inflation is quite tamed, meaning Powell and Yellen have no reason to change course. Headline CPI is expected to have edged up by 0.3% month-on-month and by 1.5% on a 12-month basis in January. Core inflation is forecast to have eased slightly to 1.5% y/y.
Dollar rebound suffers a setback
If the CPI numbers beat the forecasts, they could reinforce the view that inflation is on the rise, helping the US dollar to halt this week’s selloff. Dollar/yen was recently capped by its 200-day moving average (MA) and could have another attempt at overcoming it if positive momentum is restored. Above the 200-day MA, currently at 105.54, the 106 and 107 levels will be the next key resistance barriers to watch.
However, weaker-than-expected readings could accelerate the dollar’s decline amidst the risk-on backdrop, pulling dollar/yen towards its 50-day MA at 103.91. Sharper losses could see the pair retesting the 10-month low of 102.57 from early January.
Should the CPI report fail to provide much direction, traders might turn their attention to Powell who is due to speak at an online event organized by the Economic Club of New York later in the day at 19:00 GMT. Powell’s remarks will come under scrutiny after last week’s soft jobs report, but he is unlikely to stray from his most recent views.
· California surpasses New York as U.S. state with most COVID-19 deaths
More than 45,000 people have died as of late Tuesday from COVID-19 in California, the most populous of the 50 states and one of the hardest hit in recent months. New York, severely stricken in the early stages of pandemic last spring, has reported 44,693 lives lost, according to a Reuters tally. here
· Brexit, COVID cast shadow over UK finance tax contributions, report says
· Recovery in global trade to stall again in first quarter: U.N. report
A recovery in global trade is expected to slow again in the first quarter of 2021 as the coronavirus pandemic keeps disrupting the travel industry after world trade contracted 9% in 2020, a U.N. report said on Wednesday.
After lockdowns caused trade to shrink 15% in the first half of 2020, it rebounded in the second half, with global trade in goods up about 8% in the fourth quarter compared with the third, the U.N. Conference on Trade and Development (UNCTAD) said.
That was largely due to developing countries, particularly those in East Asia, with trade in goods originating from the region up 12% in the fourth quarter year-on-year.
· China's factory prices snap year-long decline as demand recovers
China’s factory gate prices rose in annual terms in January for the first time in a year, as months of strong manufacturing growth in the world’s second-largest economy pushed raw material costs higher.
The producer price index (PPI) rose 0.3% from a year earlier, the National Bureau of Statistics (NBS) said in a statement, the fastest pace of increase since May 2019 but slightly lagging a 0.4% gain tipped by a Reuters poll of analysts. PPI declined 0.4% in December.
Consumer prices, however, unexpectedly slipped into deflation in January, the first time upstream prices have risen faster than downstream costs in more than two years.
· Japan PM Suga says coronavirus vaccinations to begin middle of next week
Japanese Prime Minister Yoshihide Suga said on Wednesday that the country would begin COVID-19 vaccinations from the middle of next week.
Suga was speaking at a meeting with officials of the government and the ruling party. Suga had earlier said the vaccinations would start in mid-February.
· South Korea to approve AstraZeneca as first COVID-19 vaccine, including for elderly
South Korea on Wednesday said it would grant its first approval for a coronavirus vaccine to AstraZeneca, and will allow use in people 65 years or older, despite advisory panels’ warning of a lack of data on its efficacy for the elderly
Regulators will grant AstraZeneca’s vaccine emergency authorisation under the condition the company must submit its full clinical trial results, Vice Health Minister Kim Gang-lip told a news conference.
“However, we have added a precautionary line for cautious decision for use of the shots the elderly aged 65 and older,” Kim said.
Several European countries have warned that the shot should only be given to those ages 18 to 64, and such concerns had threatened to upend South Korea’s plan to prioritise elderly residents and medical workers in the first round of vaccinations.
· U.N. experts point finger at North Korea for $281 million cyber theft, KuCoin likely victim
· Oil prices extend rally after surprise fall in U.S. stocks
Oil prices rose again on Wednesday, extending their more than week-long rally after industry data showing a fall in U.S. crude oil stocks added to optimism about an expected rise in global fuel demand.
Brent crude was up by 11 cents, or 0.2%, at $61.20 by 0110 GMT after rising nearly 1% on Tuesday, when it touched a 13-month high. U.S. crude added 2 cents to $58.28.
Crude inventories fell by 3.5 million barrels in the week to Feb. 5 to about 474.1 million barrels, data from the American Petroleum Institute showed on Tuesday.
That compared with analysts’ expectations in a Reuters poll for an increase of 985,000 barrels. Official Energy Information Administration (EIA) data is due at 1530 GMT on Wednesday.
Some analysts are now forecasting there will be a supply deficit in 2021 as more populations get vaccinated and start going away on trips and working in offices, potentially boosting fuel demand.
Reference: CNBC, Reuters, XM
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