USD: Goldman Sachs - Less USD Strength In Its Baseline
Goldman Sachs: "Tariff disbelief, rate relief, and a changing brief. The Dollar fell despite new tariffs being implemented. We attribute this chiefly to two factors—disbelief and rate relief. More specifically, the market never ascribed a high probability to new tariffs on Canada and Mexico being enacted with any durability, though CAD has started to underperform as reciprocal tariffs are reportedly imminent. Instead, the market has treated this as another source of uncertainty that might weigh on US activity given signs of a slowdown in some consumer and labor market data. As we have previously discussed, the Dollar's safe-haven attributes are only activated when there is no room to price Fed cuts or the recession fears are more global, which is not the dynamic now. We still believe that more durable tariff implementations and the economic disparity they would cause will support the Dollar over the course of the year. However, we acknowledge that the risks have risen in two important aspects of the currency outlook remit. First, tariff threats so far have been less credible and directed in places that are less impactful for the currency—critical imports where the adjustment falls more on prices than FX, and China which has so far kept its currency stable—perhaps a sign of confidence in its export pricing power and competitiveness.
Second, the European policy response has clearly been stronger than expected, which shifts the potential balance between the tariffs that are Dollar-positive, and foreign fiscal spending which should create more attractive investment opportunities elsewhere and weaken the Dollar. On our outlook, despite weaker implementation so far, we think the risks of more global tariffs have gone up not down—in fact our economists just added broader tariffs to the baseline and revised down US growth to now slightly below potential in 2025. And on the foreign response, we are reminded of the discussion around the NGEU funds where there was initial optimism followed by serial disappointments on implementation and activity outcomes, which would be consistent with our economists' expectations for a low multiplier on and slow deployment of military spending. The Dollar has already weakened substantially this week so these are considerations for thinking carefully about tactical positioning. But the combination of potentially a more balanced global growth and asset return picture and more muted response to tariffs is likely to prove the more lasting shift and risks have moved further in the direction of less Dollar strength in our baseline."
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FED: Gov Kugler: "Prudent" To Hold Rates "For Some Time"
Gov Kugler (permanent voter, leans dovish) said Friday that rates were likely to be held for "some time" - making her the latest FOMC participant to express little impetus for a cut in the near-term.
- "The cautious and the prudent step is to hold the federal funds rate where it is for some time, given that combination of factors, given that the economy is solid, given the fact that we haven't achieved our 2% target, and given the fact that we may have uncertainties and other factors that may be pushing up inflation or maybe reducing output and growth into the future."
- "We reduced our policy rate 100 basis points through December, but the recent progress on inflation has been slow and uneven, and inflation remains elevated. There is also considerable uncertainty about the economic effects of proposals of new policies." She noted in a Q&A that inflation has recently "firmed a little bit."
- She noted that the January jobs report is "consistent with a healthy labor market that is neither weakening nor showing signs of overheating,"
FED: Federal Reserve "Earnings" Briefly Go Positive, But Hole Is Still Large
The Federal Reserve posted positive net earnings in the week to Feb 5, the first time it has done so since September 2022. The $0.4B uptick compares with an average of negative $1.3B over the preceding 6 months.
- Technically, this was a less negative "deferred asset". When the Fed "earns" money on its asset holdings after netting out expenses, it remits this money to the Treasury. With the Fed posting negative earnings for the past 2+ years, it is falling in to deeper and deeper cumulative negative earnings, a "deferred asset" which means that until the figure goes back into a positive balance, no remittances are made to Treasury.
- The "deferred asset" is currently $220.8B.
- The variability of earnings is due to the relationship between rates paid on Fed liabilities versus those paid on its assets.
- The post-GFC rise in the balance sheet saw ZIRP policy and a large set of Treasury and MBS holdings, meaning Fed remittances to the Treasury rose from 0.2% of GDP and 1.3% of government receipts in 2007 to 0.6% and 3.4%, respectively, in 2015, per St Louis Fed calculations. The 2015-18 tightening cycle saw a pullback in remittances, with about $900B remitted to the Treasury over the course of the 2011-20 period.
- The pandemic balance sheet expansion and return to ZIRP saw remittances pick up strongly again, but they have since pulled back. The 52-week average of weekly remittances has shifted, from showing about $10B in monthly "losses" in late 2023/early 2024, to around $6B on a monthly basis now.
- This reflects first the inversion of the yield curve amid the Fed's tightening cycle, and the slow normalizing of the curve since then.
- Unless the Fed easing goes much further, the Fed is unlikely to transmit cash to Treasury for some time.
USDCAD TECHS: Trend Structure Remains Bullish
- RES 4: 1.5000 Psychological round number
- RES 3: 1.4948 High Mar 2003
- RES 2: 1.4814 High Apr 2003
- RES 1: 1.4600/1.4793 Round number resistance / High Feb 3
- PRICE: 1.4318 @ 16:55 GMT Feb 7
- SUP 1: 1.4270 Low Feb 5
- SUP 2: 1.4261 Low Jan 20 and a key support
- SUP 3: 1.4178 High Nov 6 ‘24
- SUP 4: 1.4120 Low Dec 11
USDCAD is unchanged, despite some notable mid-session volatility. The pair is trading close to this week’s lows at the close. For now, the latest move down appears corrective and the primary uptrend remains intact. Monday’s cycle high, reinforces and strengthens bullish conditions. The break higher confirmed a resumption of the uptrend and opens 1.4814 next, the Apr 2003 high. Key support to watch lies at 1.4261, the Jan 20 low. A clear breach of this level would alter the picture and signal a reversal.
