Expectations are rising for a breakthrough with regard to a new US stimulus package. US Treasury Secretary Mnuchin said post-Wednesday’s US close that an agreement had been reached on the contentious issue of direct payment to Americans, clearing a significant hurdle in moving forward – Market Analysis: Expectations rising on US stimulus .
He also said that President Trump had instructed them to come up significantly, although a gap remains in terms of the size of any stimulus package with the Democrats at about $2.2 trillion while the GOP is at around $1.5 bn.
The escalator clause could be the special sauce and maybe how the Republicans try to meet the Democrats where they are, and House Speaker Nancy Pelosi can still feel like she can claim victory in getting the number closer to her $2.2 trillion target.
The stimulus deal is very much needed and will come as a massive relief to many unemployed Americans who were having a vision of that proverbial lump of coal in their holiday stocking this year. Mind you, more than a few traders were too.
While the moves in USDCNH have been lightning quick, it is a classic day of sharp moves exacerbated due to poor liquidity. The Asia session have session has seen some considerable moves with jaw-dropping moves on the USDCNH to 6.7330 from 6.7903 after some supporting bids at 6.7500 were knocked out.
The direction of travel sure feels right, but history tells me to be cautious about the speed of the move.
Pound and EUR trading lower
The Pound and the Euro were trading lower on news that British and EU trade negotiators have failed to close the gap on state aid, a key element barring their new agreement on post-Brexit trade ties.
The street so desperately wants to get long EURUSD on dips. But it’s not 100% clear to me that the uptrend remains intact. We have decoupled from the absolute bullish uptrend, (ECB more dovish FED less dovish).
But with month-end/quarter-end out of the way, the focus will increasingly shift back to the US presidential election just a bit over a month from now.
The greenback is currently on the back foot vs the CNH as sentiment has improved considerably over the last 24 hours that US stimulus is imminent and some market participants seem to be piling into EURUSD longs again despite the increasing virus cases and local lockdowns in the core of the continent.
Sometimes you go with the flow and other times you push against it.
Price action has been choppy. EURUSD was briefly back below 1.17 after two consecutive days of gains, but 1.1690 was held again.
Besides the rise of Covid-19 cases in Europe, attempts to finalise the EU Recovery Fund’s text are running into a few snags.
But the main dead weight for the EUR is that European inflation is falling hard. With Germany in deflation and France about to cross from positive to negative YoY CPI, the ECB may need to react, and Lagarde is already laying to the ECB version of average inflation targeting (AIT).
What we know about the stimulus deal so far
A house vote on a Democrat-only $2.2 trillion fiscal package has been delayed by 24 hours until late Thursday to allow US Treasury Secretary Mnuchin and House Speaker Pelosi more time to talk and make an agreement.
Although the Democrat plan could make it through the House as it stands, it will not pass the Senate.
The delay in the House vote allows Mnuchin and Pelosi time to try and get a compromise together that allows it to pass both chambers. The two met for around an hour and a half on Wednesday and both later reported a productive meeting.
Importantly, Mnuchin reported that President Trump has “instructed us to come up significantly”. However, indications are that the Republicans are looking at around $1.5 trillion, so there’s still a large gap between them.
Asian markets have made the most of the potential for a deal. Dollar softer, risky currencies higher, equity futures higher, Treasury yields up.
Look before jumping
From any moral compass perspective, we do like the chances of a US stimulus deal, but probably a good idea to look at the facts before jumping.
There is little sign that the fiscally-conservative wing of the Republican party is in any mood to accept a fiscal package that is much larger than the $500 bn the Republican senators agreed last month.
The Club for Growth, a powerful lobby group, immediately opposed the new proposal, saying “This bill spends an enormous amount of money while previous COVID relief money has yet to be spent. Congress must prioritize spending”.
Many Republican senators will take their cue from this statement and that means the $2.2 trillion Heroes Act is out of the question.
For a sign of real progress, there needs to be a sign that those senators are participating in the talks between Treasury Secretary Mnuchin and the House.
Market Analysis: Expectations rising on US stimulus