CROSS ASSET: Threats To Fed Independence Promotes Fresh “Sell the US” Dynamics
Yesterday’s concurrent selloff in the US dollar, US Treasuries and US stocks was the seventh such session this year, and the largest one-day fall in “US assets” since March 2009 (see below for more). The selloffs were driven by US President Trump’s continued threats against Fed Chair Powell’s position and lingering tariff-related stagflation concerns.
- Although markets are generally conditioned to expect the dollar and USTs to rally when stocks fall, and soften when stocks, the top left chart indicates that situations where US assets move in the same direction are not uncommon. What is more notable is that this year’s simultaneous selloffs have been of a greater average magnitude than most of the last 40 years (save for 1987, 1990 and 2008) – see the top right chart.
- Crudely summing yesterday’s 0.96% fall in the DXY, 2.36% fall in the S&P and 0.32% fall in US Treasury futures gives the largest one-day fall in “US assets” since March 2009.
- While yesterday’s moves may have been exacerbated by lower liquidity given the EU/UK public holidays, it is still suggestive of a broad-based shunning of US assets amongst investors, a trend that will continue to be monitored in the coming weeks/months.
- In US Treasuries, term premium estimates (as indicated by the Adrian Crump and Moench model) have lurched higher since Trump’s April 2 reciprocal tariff announcement, given heightened policy uncertainty and more recent questions around the future of the Fed’s independence.
- Although the DXY is over 10% off its January highs at typing, Citi’s US real effective exchange rate index is still 3.4% above its five-year average, and 7.2% above its ten-year average. As such, there remains room for a more significant dollar correction if current dynamics extend.
- The clear beneficiaries of a diversification away from US assets as reserves/safe havens have been the likes of gold and the Swiss Franc, with the former reaching fresh all-time highs this morning and USDCHF extending 10-year lows yesterday.
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US TSYS: Available "Extraordinary Measures" Pick Up Slightly From Lows
Treasury has $163B of "extraordinary measures" remaining for authorities to use to fend off hitting the debt limit as of March 19, per the latest release of Treasury data. That's up from $86B on Mar 17 and a low of $34B on Feb 24.
- That's a little under half of the $377B in measures available to Treasury, with most of the amount remaining ($143B) coming from the so-called "G Fund".
- This headroom is in addition to $416B in cash left in the TGA, at last count.
- We haven't seen any changes recently to "x-dates" by when Treasury will run out of cash until the debt limit is lifted.
- Consensus still centers around late July/early August, but much will depend on April's major mid-month tax take. Treasury wrote to Congress last week that they would be able to provide an update on the x-date in the first half of May, after the conclusion of tax season.
USDCAD TECHS: Short-Term Outlook Remains Bullish
- RES 4: 1.4793 High Feb 3 and key resistance
- RES 3: 1.4700 Round number resistance
- RES 2: 1.4641 76.4% retracement of the Feb 3 - 14 bear leg
- RES 1: 1.4452/4543 High Mar 13 / 4 and a bull trigger
- PRICE: 1.4345 @ 16:27 GMT Mar 21
- SUP 1: 1.4242 Low Mar 6 and a key near-term support
- SUP 2: 1.4151/4107 Low Feb 14 / 50.0% of Sep 25 - Feb 3 bull run
- SUP 3: 1.4011 Low Dec 5 ‘24
- SUP 4: 1.3944 61.8% retracement of the Sep 25 ‘24 - Feb 3 bull cycle
USDCAD is trading closer to its recent lows. The bull cycle that started Feb 14 remains intact and moving average studies remain in a bull-mode position, highlighting a dominant uptrend. Note that the latest pullback has exposed a near-term key support at 1.4242, the Mar 6 low. Clearance of this level would undermine the bull theme and instead highlight potential for a test of 1.4151, the Feb 14 low and a bear trigger. The bull trigger is 1.4543, the Mar 4 high.
US DATA: Current Account Deficit Set To Widen Further In Early 2025
The Q4 current account deficit reported this week was much smaller than expected at $303.9B ($330B consensus), unexpectedly narrowing from $310.3B in Q3.
- This came despite a widening of the net trade deficit to $250B (widest since Q2 2022), from $236B prior as the goods deficit jumped $17B on the quarter to $326B.
- Offsetting this however were a pickup in primary income (positive $2.3B, after two consecutive negative quarters) as reinvested earnings soared $38B to $42B, the highest in 4 quarters (which appears to account for most of the consensus miss, though offset by a $20B pullback in dividends/withdrawals). There was also a $3B increase in the services surplus and a $4B decline in the secondary income deficit.
- The Q4 current account shortfall came to 4.1% of GDP, slightly smaller than Q3's 4.2% - but still above the sub-4% levels for the preceding 8 quarters.
- Obviously trade is a sensitive topic in policy circles at present, and bump in the primary income account (which looks like a one-off) doesn't obscure the very large sustained trade deficit which looks to have expanded substantially in Q1 even if that's on the back of idiosyncratic factors such as gold imports/tariff front-running.
- January's goods and services trade deficit was $131.4B, representing a material jump from December's $98.1B and by far the largest monthly print in history. Next week we get February advance goods trade data - more in a separate note ("US OUTLOOK/OPINION: Macro Week Ahead: PCE Plus A Rare Flagging Of Trade Data").
