Why FX, Stocks Shrugged Off Capitol Chaos

Why FX, Stocks Shrugged Off Capitol Chaos

Kathy Lien  | Jan 07, 2021 05:52

Equities and currencies traded sharply higher on Wednesday, seemingly unfazed by the chaos on Capitol Hill and in some ways, encouraged by the Blue wave. For the first time in 10 years, it appears that Democrats will have control of the House, Senate and White House. But the process has been halted by an unprecedented invasion of Capitol Hill during the Electoral College vote count. It may be days before there is a final resolution, but there’s very little chance the outcome will change, which is why stocks and currencies held onto their gains. The objections during the Electoral College vote will only delay the inevitable. With that said, the expected confirmation of Joe Biden as President-elect and the Democratic leads in Georgia did not cause any disruption in the markets even as members of Congress were rushed to secure locations after Capitol Hill was stormed.
 
Looking beyond the protests, a united government has significant ramifications for U.S. policy and the economy. Instead of obstruction, we’ll see policy progression. Biden will be able to push through more aggressive stimulus packages and fund spending with higher taxes. According to Senator Chuck Schumer, passing $2,000 stimulus checks will be one of their first orders of business. The fear of higher taxes hasn’t manifested, as investors look to the immediate future of more stimulus, which will, hopefully, revive growth. Not only are risk trades from currencies to equities performing very well, but Treasury yields also rose above 1% for the first time in nine months as inflation expectations soared. 
 
Although Japanese Yen and Swiss crosses performed very well today, the U.S. dollar was mixed. USD/JPY and USD/CHF broke to the upside, but the greenback ended the day lower against the Australian and New Zealand dollars, flat against the euro and the Canadian dollar and marginally higher versus sterling. U.S. data had very little impact on the greenback – ADP reported job losses, Markit PMIs were revised lower, but factory orders rose more than expected. According to the FOMC minutes, some members saw the potential need for future adjustments to asset purchases. This assessment reinforces the central bank’s dovish outlook and its plans to keep interest rates unchanged for the foreseeable future.  
 
The burning question everyone wants to ask is whether the risk rally in currencies and equities can continue. Depending on how long this political theater drags out, we could see some profit-taking. However, historically, stocks rise regardless of a unified or divided government, though it tends to perform best when there’s a Democratic President and split Congress. 2021 is shaping up to be a very different year. Disruption to a peaceful transfer of power has never happened. Governments around the world, the U.S. included, are pumping significant monetary and fiscal stimulus into their economies. Due to the pandemic, countries around the world were plunged into recession (albeit briefly) in 2020. In 2021, with the vaccine rollout, it will be a year of recovery. Pent up demand could lead to very strong growth, and that’s where the optimism comes from and that’s not going to change with the mix of Congress.
 
The Australian and New Zealand dollars continue to be the best performers. The euro and sterling lagged behind following downward revisions to December PMIs. The Canadian dollar shrugged off higher oil prices and an output cut ahead of Thursday’s IVEY PMI and trade balance reports. November and December were tough months in Canada and there’s a good chance the data will be softer. Given the continued increase in virus cases and the strict lockdown across the UK, sterling should be trading much lower.  

Kathy Lien

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