The recent dovish Fed comments and “robust updating” to the central bank’s monetary policy framework, which would allow inflation and employment to run at much higher levels, have resulted in the dollar’s further retreat. With the Bloomberg Dollar Index down over 10% since the March highs (DXY Index is ~10% lower), a number of central banks have voiced their concerns over a brewing ‘currency war’, as concerns over growth and disinflation mount globally. Although the dollar’s sell-off has somewhat abated this week central banks, amid the Covid pandemic economic fallout, are faced with increased monetary policy pressures. The ECB for example has noted its concerns over the euro’s 10.7% rise, since March lows. The central bank’s Philip Lane for example said earlier in the week that “The euro-dollar rate does matter,” adding, “If there are forces moving the euro-dollar rate around, that feeds into our global and European forecasts and that in turn does feed into our monetary policy setting.” We look for further comments on the currency’s recent strength at the ECB meeting next week.
Meanwhile, the offshore Chinese renminbi has enjoyed a ~5.7% appreciation since the May lows, this will no doubt play in favour with the Phase 1 trade agreement. In fact, the renminbi’s strength also bodes well with China’s recent “dual circulation” strategy, by cheapening imports, thus bolstering consumer demand/spending, thus domestic growth. The renminbi’s appreciation has supported performance across our renminbi strategy, one of the funds is up ~11.5% this year. On a side note, in a study carried out by Morgan Stanley it was reported that the renminbi is on track to become the world’s third-largest reserve currency by 2030; accounting for as much as 10% of global reserves within the next decade. As regular readers are aware, the internationalisation of the renminbi has been a top priority to Chinese officials, on this the report said “Entering 2020, the increased geopolitical tensions and emergence of a multi-polar world have led to a growing need for China to fast-track RMB internationalization”. Adding, “Meanwhile, the attractiveness of RMB assets could increase in a post-Covid world with ultra-low interest rates elsewhere, while China still holds normal monetary policy.”
We look forward to the dollar’s reaction following the US employment report later today, where the market consensus is looking for +1.35m jobs added in August, the unemployment rate to drop to 9.8% and average hourly earnings to stagnate on a month-on-month basis, falling to 4.5% yoy. The Fed’s Beige Book reported “slowing job growth” and “some pessimism” in some areas. Moreover, earlier this week the ADP employment change release missed expectations of +1m, at only 428k, in August; so it is anyone’s guess what the numbers will be. Some are hoping for a weak reading, in the hopes that it will push US lawmakers to move forward with the much talked about stimulus package, which Nancy Pelosi and Treasury Secretary Steven Mnuchin have reportedly agreed to work on so as to avoid a government shutdown ahead of the US election; the previous government shutdown was in January 2019.