Deal Day? Tyler Durden Thu, 12/17/2020 - 09:20 By Jane FoleySenior, Rabobank FX Strategist News that US Congressional leaders are nearing an agreement on a coronavirus relief deal of around USD 900 bln has sparked even more optimism in the markets. Stocks were higher across the board overnight with several indices sitting close to record highs and the DXY USD index falling to a two year low. If recent indications from US initial jobless claims and payrolls data were not convincing enough, yesterday’s release of November retail sales data provided further evidence that the pace of the US economic has been slowing. Between July and September this series was producing record levels of growth, by contrast the November headline rate dropped -1.1 m/m underscoring the need for further fiscal support from the US government. Among other measures, the new fiscal package will reportedly feature payments of USD300 /week of enhanced unemployment insurance payments, While the US economic outlook will be lifted by policy support, the headwinds are strong. Covid-19 related hospitalisations continue to hit record highs necessitating various restrictions around the country. The Fed’s 2 day policy meeting ended last night with Chair Powell stating that the case for further fiscal policy was “very, very strong”. As expected the FOMC did provide more explicit guidance on its asset purchase programme. It indicated it would continue to increase its holdings of Treasury Securities by at least USD80 bln a month and of agency MBS by at least USD 40 bln a month until substantial progress had been made towards reaching its maximum employment and price stability goals. The Fed also upgraded its macro forecasts for 2021 and 2022 which included a higher forecast for PCE inflation (see here for Philip Marey’s analysis). The BoE will make its latest policy announcement today. Having ramped up its QE programme already, steady policy is widely expected. The market will be looking for any signals regarding the MPC’s intentions on negative rates although on Monday HSBC and Santander both indicated that they were not ready for such a move. Either way the BoE is likely to be wholly overshadowed by the on-going “will they won’t they” pantomime regarding the UK/EU trade talks. Our house view on Brexit remains unchanged: a skinny UK-EU trade deal is there to be done and the chances of this outcome have been bolstered by overnight news. EU Commission President Ursula von der Leyen has suggested that “there is a path to an agreement now”. Progress appears to have been made on the subjects of fair competition and on how to govern a deal, though fishing rights continue to be a thorny issue. UK MPs may be recalled from their Christmas break next week to approve any trade deal, though it remains uncertain how the ratification process will take place in EU countries. It didn’t take long for the SNB to respond to yesterday’s announcement by the US Treasury that it sees Switzerland, along with Vietnam, as a currency manipulator. The SNB makes no secret of the fact that it uses FX intervention as a policy tool and its sharp retort to the US’s accusation was that it was willing to intervene more strongly in the FX market. Despite the SNB’s use of a negative interest rate, by many measures the CHF has been overvalued for years due to its safe haven credentials. This hasn’t helped Switzerland’s often prolonged battles with deflation and disinflationary pressures. Although G7 authorities pledged for years to avoid intervention and allow markets to set exchange rates, these promises related mostly to a pre-QE world. SNB President Jordan explained earlier in the year that the small capital market in Switzerland naturally limits the size of a QE programme. Also in Switzerland the capital market plays only a subordinate role in the transmission of monetary policy, as comparatively few large companies use it to finance themselves. This means that QE is not a realistic policy option for the SNB. With central banks such as the RBA candidly admitted that its new QE policy is designed to counter the attraction of AUD carry trades and with the Fed’s huge balance sheet having exerted downward pressure on the USD this year, the SNB are unlikely to respond kindly to the Treasury’s accusations. The SNB’s policy meeting this morning may be a more lively affair than normal. Override Early Access On