New investment plan soon to be unveiled

The dollar fell against the euro over the long Easter weekend and at the start of the week.   It had nevertheless reached new highs for this year at 1.1717 against the single currency, 0.9473 against the Swiss franc and 110.97 against the Japanese yen the previous days. And now on the heels of the approval of a $1.9 trillion stimulus package, president Joe Biden is preparing to unveil a new investment plan. The focus this time is on infrastructure – to the tune of $2.25 trillion. The plan would run for 8 years and would be funded over 15 years. To secure these funds, the Biden administration plans to raise the base corporate tax rate from 21% to 28%, and to take the floor tax rate on US corporations from 10.5% to 21%, regardless of the country in which profits are made.  In addition, the plan contemplates a $1 trillion investment in education and healthcare. These statements pushed up long-term rates in the United States where the yield on the 10-year Treasury bill reached the 1.7620% and strengthened the US dollar. Consumer confidence is also back in America. According to the Conference Board, it improved markedly in March and reached its highest level in a year, driven by growing optimism about economic conditions. The index reached 109.7 points, up from 90.4 in February, far exceeding expectations. Furthermore, on Friday, job figures were much higher than economists’ forecasts for March with 916,000 new jobs created outside the agricultural sector, against 647,000 expected. The unemployment rate fell from 6.2% in February to 6% in March. But US government bond yields are down for the third day in a row this morning. The 10-year yield fell to 1.6420% after its high on 30 March. This is why the greenback slid against the main currencies this week. Precious metals have also benefited, with the ounce of gold crossing the $1,740 bar, up from $1,678 dollars at the time of the dollar hit its new annual records.

On this side of the Atlantic, the decline of the euro certainly relieves the European Central Bank in this delicate period in which the two economic engines of the eurozone, France and Germany, are going back into lockdown and risking a delay in the recovery which could be pushed back to the third quarter. The decline of the euro against the dollar reflects the scepticism of the markets. By having vaccinated about half as many people as the United States, adjusted for population, the old continent is doing a less convincing job regarding the speed and potential robustness of its economic recovery. In France, after an exceptional contraction of the GDP of 8.2% last year, the government expected a rebound of 6% in 2021. The new restrictions are now forcing it to revise its forecasts for the year to 5% against the previous 6%. In a piece of good news for our neighbours, however, Standard & Poor’s maintained the French sovereign debt rating at AA and confirmed its stable outlook.

In the United Kingdom, London has announced the reopening of shops thanks to the rapid advance in vaccinations. Some 31 million Britons have received a first dose of vaccines – almost everyone the age of 50. And the pound sterling, currently trading at around 1.3800-1.3900, reflects this positive situation and is performing well even against the strong dollar these days. It also remains close to the highest of the year against the euro.

In Turkey, the shockwave spread by the decision to sack the governor of the central bank after an unexpected hike in key rates has not reduced volatility in foreign exchange markets. The Turkish lira was trading between 8.00 and 8.40 to the dollar in a market that has remained very nervous in recent days. Annualised inflation came out at 16.19%, up from 15.61% the previous month. The next major event will be the monetary policy meeting of the Central Bank of Turkey to be held on 15 April. For the moment, the market expects the current situation will hold, even if the new Governor Kavcioglu is considered to be in favour of a low interest rate policy.

Oil prices fell sharply on Monday morning from $61.50 at the opening to a low of $57.63. The market continues to digest the decision of OPEC members to gradually increase their production in the future as opposed to the status quo policy adopted recently. There are few things on the economic calendar in the coming days. However, we will be looking at the minutes of the last FOMC meeting which will be published today. The main central banks will be holding new monetary policy meetings from 22 April.