Correlation Between Covid Cases and the Dollar

November 19, 2020

The dollar has frequently benefited from intensifying Covid infections and the rise in general uncertainty that accompanies such. Today has been one of those days.

New coronavirus cases in the United States topped 170k yesterday, but the increase over the last 24 hours as of this writing is in fact just shy of 180,000. And the 24-hour U.S. death count has surpassed 2,000 for the first time. New restrictions on activity have been imposed in many states. U.S. Covid trends have been mirrored around the world including Europe and Japan.

The dollar rose overnight by 0.4% against the yuan and Australian dollar, 0.3% versus the kiwi, 0.2% relative to the euro, loonie, and sterling, and 0.1% vis-a-vis the yen and Swiss franc.

U.S. stock futures are down slightly. Equity markets dropped Thursday by 1.3% in India, 0.7% in Hong Kong, 0.6% in New Zealand, and 0.4% in Japan, Taiwan, and Singapore. Markets in Europe so far are down 0.7% in the U.K., France, Germany and Switzerland and by 0.6% in Spain.

The prices of WTI oil and gold have slipped 0.5% and 0.8% so far today, and the yields on 10-year U.S. Treasuries and British gilts are a basis point lower.

Four central banks announced interest rate decisions today, and three of these involved changes.

The largest move was made at the Central Bank of Turkey, where the one-week repo rate was raised 475 basis points to 15.0% in an action to counter inflation caused by the depreciation of the lira. Among emerging market economies, Turkey’s currency this year has been the weakest. Turkish monetary officials, like their counterparts around the world, had lowered their interest rate progressively in response to the initial appearance of the Covid pandemic. Cuts made in each of the first five months of 2020 had totaled 375 basis points, but today’s action follows a 200-basis point increase at the September policy review, resulting in a net 300-basis point increase of the central bank interest rate from 12.0% at the end of 2019. A released statement after today’s meeting doubles down on the commitment to keep Turkey’s policy stance tight until a trend of disinflation appears intact and likely to endure. Being compelled to do this will be particularly painful to Turkey’s economy because Covid restrictions on activity have had to be reinstated in part.

A 25-basis point cut in Bank Indonesia’s seven-day reverse repo rate to 3.75% had not been anticipated today. The move follows four earlier 25-basis point reductions this year between February and July. According to an accompanying statement, the latest easing is meant to maintain liquid money markets and promote economic recovery in the face of pandemic headwinds and in light of low Indonesian inflation, a stable balance of payments, and a solid financial system. The move complements fiscal stimulus.

The Filipino policy interest rate was reduced by 25 basis points to a record low of 2.0%. This was the fifth cut of 2020, followings ones of 25 bps in February and a trio of 50-bp moves in March, April and June. The Philippines has been slammed not only by the pandemic but also a series of typhoons. GDP contracted last quarter and probably even more rapidly in the current quarter, but as in the above Indonesian case, analysts had not expected a rate reduction at today’s meeting.

Although the South African Reserve Bank’s repo rate was left unchanged at 3.5%, the vote not to ease of 3-2 was razor-thin. Each dissenter preferred a 25-basis point cut to add to earlier easing moves this year of 25 basis points in January, 100 bps each in March and April, 50 bps in May and 25 bps in July. According to a released statement today, real GDP in South Africa is likely to plunge 8% this year and then recover only 3.5% in 2021 and 2.4% in 2022. Each of those forecasts represents a downward revision. Officials also expect CPI inflation of 3.2% in 2020, 3.9% next year and 4.4% in 2022.

Initial jobless insurance claims in the U.S. last week of 742K were 31k greater than in theĀ  prior week and similarly greater than street expectations.

The Philly Fed manufacturing index fell back six index points in November to 26.3 after jumping from 15 in September to a reading of 32.3 in October. This year’s low in April was -56.6.

Euroland’s seasonally adjusted current account surplus widened to EUR 25.2 billion in September from EUR 20.9 billion the month before and EUR 16.8 billion in July. The unadjusted surplus over the last twelve months equaled EUR 228.8 billion, representing 2.0% of GDP compared to a surplus of 2.2% in the previous year ending in September 2019. The surplus normalized as pandemic restrictions were relaxed, but a second Covid wave in Europe may foretell renewed shrinkage in the surplus ahead.

Construction output in the euro area suffered its first decline in five months. Such fell 2.9% in September and was also 2.5% lower than its year earlier level. Nonetheless, construction increased 12.5% in the third quarter as a whole, reversing an 11.6% quarterly drop in 2Q.

Australia’s jobless rate rose for a second straight time to a 3-month high of 7.0% in October, but that deterioration was accompanied by an unexpected 178k leap in jobs and greater labor market participation.

Swiss industrial production recorded a smaller 5.1% year-on-year decline last quarter after plunging 9.3% between 2Q19 and 2Q20. Output had soared 7.9% on year in the year through the third quarter of 2019, by contrast. A separate Swiss release measured the January-October trade surplus at CHF 28.4 billion, up from 21.2 billion francs a year earlier.

Spain’s trade balance swung from an EUR 80 million surplus in the second quarter to a EUR 3.53 billion deficit in 3Q.

Dutch unemployment declined to a 4-month low of 4.3% in October. Swedish unemployment of 7.8% last month was down from 9.8% in June but above the October 2019 level of 6.0%.

The Confederation of British Industries’ monthly industrial trends survey revealed a deterioration in factory orders with a reading of -40 in November versus -34 in October and -18 before the pandemic back in February.

Still due today: U.S. existing home sales, the KC Fed manufacturing index, and the U.S. index of leading economic indicators.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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