Trump's Weaker Dollar Arrives on Cue to Help Biden

John Authers is a senior editor for markets. Before Bloomberg, he spent 29 years with the Financial Times, where he was head of the Lex Column and chief markets commentator. He is the author of “The Fearful Rise of Markets” and other books.

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Counting Votes, and Selling Dollars

Like many people, I have Georgia on my mind at the time of writing. The big set piece that we could see coming years ago, the November Federal Open Market Committee meeting, came and went with almost no market reaction. Instead, the U.S. election, and the growing probability that Georgia of all places will deliver the presidency to Joe Biden, has dominated discussion throughout the day. Just like the last election, it has prompted a surge in risk assets, as there is relief that the election is over — even though, just as in 2016, the policy that will likely result is very different from what had been expected.

The moves across markets are unambiguously “risk on.” Risk assets are doing well across the board. However, in both bonds and equity markets, the reaction remains within the recent ranges. So lets focus on the exceptions, which are in the zero-sum world of foreign exchange.

According to Bloombergs broad dollar index, the action of this week has brought the U.S. currency to its weakest in 30 months:

Donald Trump consistently wanted a weaker dollar, and was aggrieved by the currencys upswing from the summer of 2018 onward. It looks as though a weaker dollar, bringing with it help for exporters, is arriving just on cue to help a possible President Biden. A stronger currency did boost the performance of U.S. equities compared to the rest of the world. For the last two years, however, that outperformance has been mostly due to the remarkable U.S. tech industry. With a weakening dollar, as last seen in 2017, non-U.S. stocks have a chance to outperform:

The Trump era was particularly tough for emerging market currencies. JPMorgans emerging market FX index had at one point dropped more than 20% against the dollar since election day in 2016. On Thursday, it surpassed its 200-day moving average for the first time in more than a year. For now, markets are operating on the belief that a Biden administration hemmed in by congressional gridlock is just what emerging market currencies need:

This could be positive, as devaluations on this scale usually leave strong GDP growth in their wake. They are also very unusual. Research from the Institute of International Finance suggests that Argentina and Brazil in particular should be well placed:

Meanwhile, the strategy team at Citigroup Inc. ran the cross-correlations between emerging market equities and a weak dollar. This exercise also reveals that Brazil should do particularly well. Japan, still treated by markets as though it is totally reliant on exporters, does badly from a weak dollar:

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The most important factor boosting emerging markets is simply that the event risk of the U.S. election is now behind us, and so particularly risky assets can now rally. Dirk Willer of Citi commented in a note that this behavior is reminiscent of an emerging market election: “The underlying reason is that risk had been reduced before the event, leading to a (minor) market pull-back. And, as we had stated prior to the election, after the event goes away, risk markets go up, irrespective of the actual outcome.” To underline this, some of the worlds best performing assets since Wednesday night have included short-dated bonds from Brazil and Egypt, which at least in theory should barely be affected by American politics. As Willer put it: “This illustrates that investors just wanted to make sure that VIX is not exploding higher on Election Day, only to then put on their favorite trades that they always wanted to have on the books in the first place.”

Some of the market action can be dismissed much this way; it is selling the rumor and buying the news. If the argument that gridlock will mean more protracted easy money from the Fed is valid, however, and other countries become more fiscally aggressive, that should mean a weaker dollar. And that should buoy the emerging markets.

Bitcoin

One other asset has broken decisively out of its recent range: Bitcoin. It is now at its highest since the top of the last bubble in late 2017. Like gold, bitcoin is an asset with no obvious intrinsic value. Valuing it is surpassingly difficult, particularly as monetary authorities might yet attempt to close the entire endeavor down.

But it has been around long enough now for some broad price trends to emerge. Charlie Morris, a City of London veteran who is now the CIO of ByteTree in the U.K., suggests that it is beginning to behave more and more like a growth stock. First, he shows that it has a distinct relationship with the dollar. As might be expected with a currency, it strengthens when the dollar weakens:

Further, it also has a specific relationship to easy money. This chart shows the size of the four main central banks‘ balance sheets compared with Bitcoin’s price since 2011. The cryptocurrency was meant in many ways as a guard against debasement of fiat currencies, so this shouldnt be surprising — and its latest spurt comes as the Bank of England announced a new round of asset purchases Thursday.

Unlike Apple Inc. or Amazon.com Inc., Bitcoin doesn‘t reliably produce huge profits. It doesn’t reliably throw off any cash at all. But Morriss theory is that it is benefiting from a network effect. As more people use and trade with Bitcoin, it is gaining in value. Added to this, it gains when markets become more positive about risk. As Morris puts it: “Bitcoin is a reliable risk-on asset and has tended to outperform pretty much everything when general asset prices are rising. Having no CEO or profits, which can disappoint, can have its benefits.”

The snag is that Bitcoin performs better when real rates are rising. That might explain some of its recent uptick. The election has cast doubt on rising real yields. Still, the way Bitcoin has moved in tandem with the FANG stocks this year is remarkable. Bear in mind that these assets have virtually nothing in common. The FANGs are open to a swath of institutions that cannot touch Bitcoin:

Morris expresses what is going on clearly:

There‘s an old saying that if it quacks like a duck, it’s a duck. Bitcoin quacks like a growth stock. Sure, it likes central bank printing and a weak dollar, but what doesnt？ It is risk-on and broadly follows the path of equities, especially social media stocks.

All of this helps explain the Bitcoin rally. A continued dose of low real yields would help.

Of Viruses and Vaccines

Jerome Powell said little to move the market during his press conference. This was doubtless his intention. But he did provide a salutary reminder of the issue that remains more important to the economy than any other: the coronavirus. He described the recent rise in cases as particularly concerning.

Even as the virus has left the headlines amid the political drama, hospitalization data compiled by the Covid Tracking Project remove any doubt that the U.S. is now in a “third wave.” Now we wait nervously to find out if the outbreak will get worse as true winter weather begins to bite, and whether economic activity will dive once again:

The trend in Europe is even more alarming. The number of cases is now far in excess of what was seen during the first wave in the spring. Treatment is improving, and the disease isnt as mortal as it was, but the spread puts to rest any hope that the virus had reached some “choke point” where it would begin to retreat. The following chart is from Bloomberg Opinion colleague Jim Bianco:

Vaccine hopes remain real. Reports suggest a vaccine might even be ready for first responders before the end of this year. If this happens, it will be a remarkable achievement, and will set the scene for a massive logistical exercise to produce and deliver enough vaccine to enough people to allow life return to normal. Such reports help to explain why the pandemics latest resurgence is causing so little alarm on markets. It would be good if they turned out to be true.

Survival Tips

Remember, remember, the Fifth of November. This is the day when England celebrates Guy Fawkes night, the nation's biggest annual excuse to put on firework displays. Except it largely didn't happen this year. Guy himself, a Catholic plotter who was caught attempting to blow up the Houses of Parliament when James I was to make a speech, suffered hanging, drawing and quartering. And yet every year, he suffers the additional indignity of being burnt in effigy.

In my home town of Lewes, normally a tranquil and well-heeled place, people go further. It isnt just Guy Fawkes who is burned in effigy, but also Pope Paul V, who was head of the Catholic church at the time of the plot. It's an extraordinary event, as I hope this short documentary shows.

You could argue that the whole event is a tasteless anachronism. It grew out of Britain's religious turmoil of the 16th and 17th centuries, which means little or nothing to the young lads who now volunteer to run down a hill pulling a flaming tar barrel. But it's still painful to have to allow the virus to bring it to a halt. Best to remember that excuses for fireworks will come again, and that fireworks will continue to provide a great excuse for music. Have a good weekend.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:

John Authers at jauthers@bloomberg.net

To contact the editor responsible for this story:

Matthew Brooker at mbrooker1@bloomberg.net