Transition of power starting

It has been another week without much movement on the foreign exchange market, where the EUR/USD parity has moved between 1.1800 and 1.1920. There was an attempt on Monday to break above that range, but the dollar quickly recovered after the release of very good economic indices. It rebounded strongly against all currencies after the release of the Markit Services Index which came in at 57.7, above expectations of 55.0 and up from 56.9 previously. This index is at its highest since 2015. As for the Markit manufacturing index, it came out at 56.7, also above expectations of 53.0 and up from 53.4 previously. This is the highest level since September 2014. On the political front, more than two weeks after the announcement of the victory of his Democratic rival, US President Donald Trump announced that he was allowing the transition to a Biden administration to begin, but without acknowledging his defeat. This decision allows, three weeks after the presidential election, to release the budget used to finance the transition teams of Joe Biden, and the president-elect and his collaborators will now have access to the confidential reports of the main federal agencies. Joe Biden has began to build his team. Two candidates were in the running for the post of Secretary of the Treasury:  Janet Yellen, former Fed Chair, and Lael Brainard who is a Fed Board member. Mr Biden ultimately chose Ms Yellen. It is a decision that will be viewed positively by the markets because not only will it lower the tensions between the White House and the FED, but because Ms Yellen should pursue a more conventional policy, be more receptive to the requests of the Fed in the implementation of the new fiscal stimulus, and perhaps even push for it to be as large as possible. As for Lael Brainard, she remains the only Democrat on the Fed Board and is now more than ever the favourite to succeed Jerome Powell at the end of his term in 2022 if he is now reappointed.

In the eurozone, consumer confidence remains weighed down by the spread of the virus and the resulting restrictive measures. Despite good news on the front of a possible COVID-19 vaccine, the index fell further to -17.6 in November from -15.5 the previous month. In Germany, the IFO indices reflecting the business climate fell significantly even though growth came out better than expected at 8.5% for the third quarter compared to 8.2% previously expected. The prospect of a massive stimulus plan had buoyed the single currency during the summer, taking it from 1.0800 to 1.2000 against the greenback. It should be noted that despite the dissensions made manifest last week among the EU-27 with the veto imposed by Poland and Hungary on the conditions of access to this plan, the single currency is not suffering from this situation for the moment.

Demand deposits with the Swiss National Bank fell slightly last week from 707.9 billion francs to 707.3 billion. It is hardly possible to say anything on this marginal fluctuation except that the optimism born of the discovery of COVID vaccines has allowed the SNB to temporarily withdraw and to slow down in its interventions which aim to prevent the franc from strengthening too much. This is the third week in a row that the SNB seems to stay out of the forex market. The EUR/CHF had rebounded strongly from 1.0680 to over 1.0800 with the announcements from Pfizer and Moderna and is currently stabilising at these levels.

The pound sterling continues to perform well against the major currencies.  Despite the persist possibility of a no-deal Brexit, the currency has been carried in recent days by leaks which show convincing progress on the Brexit case. The Europeans would ultimately consider the signing of an agreement, even if differences in the areas of fisheries, competition and governance remain to be resolved. On the UK side, the legal texts would be in preparation for a vote in parliament scheduled for December.

The Central Bank of Turkey increased its main benchmark rate by 475 basis points to 15%. This increase comes after the double replacement in early November of Finance Minister Berat Albayrak, son-in-law of President Erdogan, and the Governor of the central bank. This meeting was seen as a test of credibility for the bank whose independence had been questioned by the markets following pressure from the Turkish president. The institution pledged to implement a “transparent and vigorous monetary tightening” to fight inflation which stood at 11.89% in October. This change in governance had a beneficial effect on the Turkish currency which climbed back to 7.5325 per dollar after hitting a historic high of 8.5700 earlier in the month.

In New Zealand, the Central Bank announced that it would take real estate prices into account in the conduct of its monetary policy at the request of Minister of Finance Grant Robertson. This announcement bolstered the market’s expectations for interest rates. In the space of two weeks, these have gone from likely negative rates to no further cuts. The 10-year government bond hit 0.945% this morning, more than double the 0.435% low of September 28.  In the aftermath, the New Zealand currency hit 0.7000 US cents after hitting a low of 0.5470 in March during the crisis.

The Dow Jones finished for the first time above 30,000 points, boosted by the positive developments on the health crisis front and by the start of the political transition in the USA. The S&P 500 also finished with a closing record of 3,635.41. The Nikkei is also progressing this morning, reaching levels last seen in early 1991!