Mizuho Daily – The Olympics Markets

Mizuho daily market insights by Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury Department, Mizuho Bank, Ltd.,

The Olympics Markets

Exactly 19 weeks from today, Tokyo Olympics will kick off (July 23) through Aug 8; and we will be swayed by the evocative chant of “Citius, Altius, Fortius”. Indeed, “Faster, Higher, Stronger”. Markets though are not inclined to wait out the 19 weeks to get into the Olympics spirit. No. Afterall, patience is not a strong suit for markets. Right off the blocks the ECB has thrown down the gauntlet on “Citius”. Specifically, the ECB flagged “significant(ly)” faster bond purchases to quell recent upswing in long-end yields.

Apart from leaning against potentially destabilizing rise in long-end yields. the ECB established a “holistic” backstop to prevent “undesirable”, “premature tightening of financial conditions”.The remarkable thing about the ECB’s bond market taming act was that there were no new tool (e.g. YCC) or expanded/extended facilities (PEPP unchanged at €1.85trln, expiring March 2022); implying a discretionary front-loading of PEPP with sped up purchases as required.

Equities have not taken eyes off “Altius”. While the Dow may be tipped to be race favourite in “rotation”, both Dow and S&P500 have printed a record highs; two days running for the Dow. Equity markets are indeed having and eating the cake (not the recommended Olympian diet). The prospects of revenue recovery are providing an organic boost, inciting more rotation into cyclicals, while the guarantee of exceptional stimulus is the liquidity manna lifting all boats. And US fiscal policy is the front-runner for “Fortius”. Biden’s $1.9trln fiscal stimulus, at 9.1% of (2020) GDP is priming the US for a stronger, if not the strongest, post-recession boost.

Consensus is for US 2021 GDP growth resurgence to the tune of ~6%; which a more optimistic OECD has identified as the main thrust for global GDP at 5.6% (upwardly revised from 4.2%). The big difference is that the involvement of “stimulants” would be courting disqualifications and bans at the Olympics. But is par for the course for post-pandemic economic policy. But as inspiring as the Olympics is, the reality is that only a select few grace the podium. The less appealing, but necessary corollary then is that the Olympics as is any other sport (or any endeavour for that matter) is defined by those who did not make the podium.

Your scribe shall stop this line of thought as Fridays are not mean to get unnecessarily bitter or sullen. But the point (that not all will win) may be applied more clinically to FX markets. Specifically, examining whether the USD has any inclination for “Fortius” may be helpful in determining the tone of the broader FX theme canvas on which to lay other currencies. Our low conviction base case is for a mellow USD anchored by Fed accommodation.  But the underpinning is that of potentially unstable two-way volatility in USD amid upside risks to UST yields (both nominal and real) colliding with the Fed’s capacity to tame yields.

Despite the onersous caveats on establishing USD trend with no conclusions on whether it will be on the podium, an Olympics-inspired FX market theme may still be established. “Citius, Altius, Fortius”, in our view, will correspond to aspects of, rather than currencies in, FX markets. Namely; i) Faster turnover; ii) Higher volatility and; iii) Stronger differentiation. Faster turnover is expected with a pick-up in global commerce as global economies emerge from the pandemic and demand is being restored. Higher volatility may be unavoidable as markets deal with tensions between navigate rising yields and exceptional stimulus.

Finally, the variable reach of/access to vaccine and stimulus amid reflation will set the stage for a Stronger divergence in outcomes and hence differentaition in FX performance. For now, EUR and AUD traction (at sub-1.20 and sub-0.78) along with softer USD/SGD and USD/JPY (at 1.34 and mid-108) are but consolidation ahead of next week’s FOMC. The ultimate truth is that “Citius, Altius, Fortius” is perhaps most applicable to policy stimulus.

Credit Source: Mizuho Bank Ltd