The second to last week of December kicked off with losses in currencies and equities. By the end of the New York session, however, much of the weakness eased, leading many investors to wonder if anything could sap the equity rally. The Dow Jones Industrial Average fell more 400 points shortly after the New York open, but ended the day flat. The U.S. dollar started the day strong, but gave up part of its gains as well. This is a shortened trading week, but a variety of factors could influence how the U.S. dollar trades. Congress reached an agreement on a $900-billion coronavirus relief package that would keep millions of Americans from losing their jobless benefits. This is no panacea for the economy, but it is a breath of fresh air after months of haggling. Unfortunately, this deal failed to lift stocks because of broader, more concerning factors.
The most important of these concerns is the mutant coronavirus strain. Over the weekend UK Prime Minister Boris Johnson said this new strain is 70% more infectious. This prompted the UK government to impose intense restrictions across the country, including in the city of London. These tier-4 restrictions prohibit residents from leaving their homes except for essential activities and gathering indoors with anyone outside of their household. Non-essential businesses have also been forced to close. Fearing the spread of this virus, countries around the world, from Germany to France and Canada, have raced to ban flights from the UK. So it's no surprise to see sterling fall sharply against the U.S. dollar and the euro.
Another Brexit deadline has been missed as well, raising the risk of a no-deal Brexit and further losses for the currency. Brexit and coronavirus uncertainty should benefit the U.S. dollar as investors seek safe-haven assets.
The only question is whether investors are worried about the new coronavirus strain. The media is making a big deal out of it, governments around the world are not taking chances and banning travel. But based on the recovery in stocks, investors don’t share these concerns. This is due, in part, to UK officials saying there’s no reason to think that the vaccine won’t protect against this new fast-spreading strain. However, the vaccine is new, distribution has just begun and it's just far too early to declare the vaccine effective on both strains. At any point in time, renewed uncertainty could drive the greenback higher.
Last but not least, year-end flows will also affect how currencies trade over the next two weeks. 2020 was marked by broad-based U.S. dollar weakness and equity market gains. The U.S. Dollar Index fell to 2.5-year lows this year, while the Dow Jones Industrial Average hit record highs. If portfolio managers were to rebalance, they would need to sell U.S. stocks, which could drive the dollar lower. But rebalancing usually happens on a monthly basis, and in December, there was very little movement in stocks.
The U.S. has the busiest economic calendar this week, but there are few market-moving reports. Revisions to Q3 U.S. GDP and existing home sales are due to be released Tuesday, followed by personal income, personal spending, new home sales and the final University of Michigan consumer sentiment report. UK GDP revisions will also be released tomorrow and Canadian monthly GDP due on Wednesday.
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