US Fed and Treasury clash over emergency funding
23-11-2020
George Lucas, Raiz Group CEO
The news this week will be the fight between the US Federal Reserve and the US Treasury that came to light on Friday, with Treasury Secretary Steven Mnuchin deciding to let several of the Fed’s emergency funding programs expire on December 31.
Notably, the US Treasury decision to not extend the lending facilities set up by the US Fed was made without consulting the central bank. In response, the Fed warned that the economic recovery remained strained and vulnerable, marking quarrel between the two federal agencies public.
Looking ahead, the spat is a worrying signal that Treasury may not provide the tools that the Fed needs to keep the US economy on a path to recovery, especially given the agenda of Republicans in the US Senate to withhold fiscal stimulus before President elect Joe Biden takes office in January.
What’s more, it is unusual for the Fed and Treasury to quarrel so openly in public and with the move reducing the Fed’s ability to support the financial system, it’s not a good look for confidence and the markets.
Emerging Market currencies receive support
Turning to currencies, most Emerging Market (EM) Asian currencies have appreciated against the US dollar in recent months and in general they are now stronger than they were at the start of 2020.
Indeed, EM Asian currencies have generally held up much better than their counterparts in other emerging markets this year, reflecting their stronger balance sheets, the favourable shift in their terms of trade from lower commodity prices and the fact that they have been more successful in containing COVID-19 than other emerging markets such as Latin America for example.
Asian economies likely to move on currencies in 2021
When it comes to EM Asian currency strength against the US dollar, not everyone is going to be happy and it’s likely that policymakers in Asia will try to talk their currencies down if they strengthen further against the greenback. The aim here is to shore up economic recoveries.
Even so, with growing risk appetite and improving current account surpluses in many EM Asian economies, further upward currency pressure against the US dollar is likely over the next year.
In my opinion, this is the reason why Bank Indonesia cut its main policy rate by 25 basis points last week, and you can expect more easing early next year if the Indonesian Rupiah continues to appreciate against the US dollar. The same analysis will hold in relation to the Australian dollar, which will probably rally another 20 per cent against the US dollar over 2021.
Australia’s wage growth slows to a glacial pace
Turning to Australia, last week saw the release of wage data showing wages during the September quarter grew just 0.1 per cent — well below the average we have seen over the last five years.
I suspect wages growth will remain soft given there’s significant slack in the labour market. However, it’s worth noting that the 178,800 lift in jobs in Australia during October was much larger than consensus, so the jobless rate will probably fall back to around 6 per cent by the end of 2021.
Stocks rally on COVID-19 vaccine hopes
The recent rallies in stocks have been driven by the news that potential coronavirus vaccines have a higher rate of effectiveness than first expected and are ready to be submitted to regulators for emergency approval. So now we wait and see how long it takes them to roll out to the public.
US pharmaceutical giants Pfizer and BioNTech filed for FDA approval of their coronavirus vaccine this week, while Moderna will likely follow in the coming days.
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