USD crumbled on the concern of more QE and U.S. political & policy paralysis

calendar 19/11/2020 - 19:37 UTC

USDJPY was trading around 103.81 mid-U.S. sessions Thursday, almost flat on mixed economic data, surging COVID-19 infections on both sides of Atlantic as-well-as Pacific. But USDJPY also made an 8-month low of around 103.19 on 6th November and so-far crumbled around -0.80% for the month (19th Nov) primarily on the concern of more QE and U.S. political & policy paralysis, especially after the election. Trump is adamant not to concede before 14th December, the official date for the U.S. election result.

As a result of all these political soap opera, the U.S. is now looking more like a ‘banana republic’ and ‘joker state’. Due to Trump’s ‘madness’, Eurasia including China, Russia is emerging stronger post-COVID-19. And for the 1st time transaction in EUR surpassed the ‘king’ USD in the SWIFT system. Thus the monopoly of the US dollar as the global reserve currency may be at stake and there is also no significant USD shortage (as a funding currency) mainly for Fed’s unlimited QQE-4.

On Tuesday, Fed’s Chair Powell reiterated that the U.S. economy now desperately needs grants, not loans. Powell also warned that the US economy has a long way to go’ before it returns to pre-pandemic levels, adding that the next few months may be very challenging, but the economy may never be the same post-COVID-19. Powell stressed that the use of accelerated (digital) technology will change the way the global economy operates. Powell also pointed out about long-term damage to the U.S. democratic and independent institution's image due to the ongoing Trump election tantrum. Powell also said more stimulus will be needed. To keep the economy safe from looming disaster, he mentioned that stimulus will need to find its way to small businesses and the many unemployed Americans:

“There hasn’t been a bigger need for it (stimulus) in a long, long time here---We’re seeing states begin to impose some activity restrictions. The concern is that people will lose confidence in efforts to control the pandemic, and … we’re seeing signs of that already---- We’re not going back to the same economy, we’re going back to a different economy---That’s going to mean that those people who worked in the service industry, they may need help and support for a time as they find work in new places--- direct spending from Congress can be used to target specific groups that need income assistance during the crisis.

There is certainly good news on vaccines in the medium term---but major challenges and uncertainties remain in the near term—we at Fed will continue to use all of our tools to support economic recovery for as long as is necessary”.

Powell also clarified that the Fed is not in a hurry to taper or exit QQE-4 and in any way, it will communicate properly to the market about any drastic change in monetary policy or such exit. For the last few weeks, Powell is signaling more QE (asset purchase) in its December monetary policy meeting in the absence of an imminent CARES Act 2.0.

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Also on Monday (16th Nov), the Fed VC Clarida virtually signaled about more QE to achieve Fed’s dual mandate of above 2% price stability (core PCE inflation) and maximum employment:

“The Committee is committed to using all available tools, including threshold-based forward guidance as well as large-scale asset purchases, to achieve the price-stability and maximum-employment goals specified in our new consensus statement”.

It is important to note that, as our new consensus statement emphasizes, the Federal Reserve is committed to using all of our available tools—not just the federal funds rate and forward guidance, but also large-scale asset purchases—to achieve our dual-mandate goals.

Since our March 2 FOMC meeting, the federal funds rate has been reduced by 150 basis points to its ELB and we have increased our Treasury and mortgage-backed securities holdings by a total of $3.3 trillion; we continue to add to these holdings at a pace of $120 billion per month. These large-scale asset purchases are providing substantial support to the economic recovery by sustaining smooth market functioning and fostering accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

At our November FOMC meeting, we discussed our asset purchases and the critical role they are playing in supporting the economic recovery. Looking ahead, we will continue to monitor developments and assess how our ongoing asset purchases can best support achieving our maximum-employment and price-stability objectives”.

Bottom line:

In any way, the stimulus addicted Wall Street is now looking for CARES ACT 2.0 progress as-well-as ‘superhero’ Powell for more monetary stimulus amid Capitol Hill logjams. In Dec, Powell/Fed may recalibrate QQE-4 by more asset purchases or extending its tenure further along with more liberal conditions for various emergency lending instruments under 13A. And Fed may also bail out various states and local governments by offering virtually unlimited credit facilities at rock bottom borrowing costs (under 14B). For a currency, monetary stimulus is always more negative than fiscal stimulus, and the USD tumbled. For Fed, additional QE is now the only tool left as it will never go for NIRP or even YCC for a ‘Japanification’ of the U.S. economy.

Technical outlook: USDJPY

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