US equity indexes were moderately lower this week: DJIA flat, S&P 500 -0.7%, and NASDAQ fell  -0.6%.

This week, CDC Director Robert Redfield gave fairly specific guidance, saying at a Senate hearing that he sees a COVID-19 vaccine being “generally available to the American public” in the “late second quarter, third quarter 2021.”  On Friday, President Trump said that the US will have vaccine doses for all Americans in April.  In addition, the US Commerce Department announced that it would begin banning downloads and updates of TikTok and WeChat apps on Sunday.

On Friday, Senior Advisor Brad Setser gave a timely interview on the subject as well as on the US-China trade deficit and CNY strength. Setser notes, “The US hasn’t been very clear on the demands it was placing on Tik Tok. The whole deal with Oracle for awhile suggested that TikTok/ByteDance could retain majority control which would be unusual. I think China is also flexing its muscles trying to limit the export of various source code. For now, the US seems to be signaling it wants a shift in majority control and the company is caught in between.”

The FOMC kept rates unchanged and implemented its forward guidance at its policy meeting this week.  Founder Jens Nordvig talks about the market reaction or lack thereof here in this interview – “Its really hard for the Fed to shock the market since we have the curve priced so low all ready. So I don’t think we had any huge surprises at this specific meeting. The result was out of the bag because Average Inflation Targeting had all ready been announced.” The interview discussion continues beyond the FOMC’s latest action and Jens talks how monetary policy is increasingly about  fiscal policy,  why our focus currently is on emerging markets, takes a look at one of our alternative data charts, and talks how the Covid-19 second waves in US and Europe are different from the first.  

USD Heatmap  

The USD was softer this week. As seen in the heatmap, a portion of the weakness occurred vs Asia FX — KRW, CNH and JPY.  We note that USD/Asia is catching up to the forces from lower US yields, changes in tourism and terms-of-trade, which are all supportive for CNY, KRW, TWD and JPY.   Re: CNH strength – Jens notes that the the 4% decline in USDCNH over the last 3-months is at the very limit of the historical distribution of returns. The speed of the move is faster than normal.  Re: JPY strength this week – shows preliminary signs that JPY may finally be converging within G10. (See Media section below to get Brad Setser’s thoughts on Asian intervention in FX market).  Re: G10 FX – the DXY traded above and below 93.00 ending the week on the figure. With an absence of negative Brexit headlines for the time being, GBP gained from the high 1.2700s to 1.2915 area by the week’s end. Down sessions in S&P 500 weighed on NOK. AUD and NZD help up, however. EUR traded lower Thursday to around 1.1750 area but came back Friday, ending the week at 1.1840.  

Part II: Fixed Income is Dead, Long Live FX 

This week, we released Public Letter Part II: Fixed Income is Dead, Long Live FX – A New regime With Different Risk Characteristics. It has more analysis, based on the feedback we have received over the past month on Part I of the letter, which was released in early August. Jens writes, “The demise of fixed income has two main aspects: low (and in some case negative) yields, both in nominal and real space; and a structural break lower in fixed income volatility. The beta proposition has eroded, and the opportunity to generate alpha has also diminished.”  (tweet this)

Head of Asia Pacific Grant Wilson highlighted the concerns we have for risk parity (and other volatility targeting strategies) in this altered environment. You can read his opinion piece ‘All Weather’ Risk Parity Strategy Loses Its Shine in the Australian Financial Review or see this thread for key points/excerpts. 

Jens notes that in this altered environment, there are “profound implications for FX.” We highlight just one here (see Public Letter for others) – we are seeing some long standing correlation properties starting to break down. “The standout here is USDJPY (chart), which has become decided less ‘risk-on’ over the course of this year. This bears close watching, as the second most traded cross in FX…As the world has changed, and risk properties associated with currencies are evolving too.”

 

Coronavirus: Cases & Mobility Indicators

International: Spain reports persistent growth at 1.8%, while in France case growth has accelerated to 2.4%. Hungary reports accelerating case growth, now exceeding 6% per day. Turning to Latin America, several countries report improving or stabilizing case counts, including Brazil, Chile, Colombia, Mexico and Peru.

US: A majority of states report daily case growth below 1.0% and declining or stable hit ratios. Wisconsin’s spike persists, however, with case counts and hit ratios exceeding previous peaks.