After hibernation

FIRST, the weather forecast: After torrid rain for the first two months of this year, the UK (and most of Europe) experienced a heat wave, a rare phenomenon for England, at least. Secondly, after a three-month lockdown, the UK plans to ease strict restrictions, which will come into effect from July 4. Independence Day of a different kind.

The measures include an easing in the two meters social distancing rule, to a “one metre plus” rule, meaning that people should keep one metre apart but employ measures such as changing office layouts that reduce the risks of transmission. •therwise, the government is changing their advice such that two households of any size can meet inside, and pubs, restaurants and hairdressers (not relevant to me) will also be able to re-open. That said, there are some “close proximity” venues that will remain shut, including indoor gyms, swimming pools and nightclubs. Even as the government continues to re-open the economy, the country’s Chief Medical •fficer, Chris Whitty, expects coronavirus to be circulating well into Spring 2021. It will be a long, long journey ahead.

Also last week, the Fed concluded its series of policy moves to fight the Covid crisis, including currency swap lines with a broader group of foreign central banks, and wider access to the treasury repo market. The upshot of those moves was a three trillion dollar increase in the size of the Fed’s balance sheet, and a vast improvement in the health of markets. The S&P 500 Index has risen by 40 percent, oil prices have trebled, and copper prices are up 30 percent. Job done.

If only finding a vaccine, managing the end of lockdown and controlling the virus were as simple! The challenges now are very much related to the direct economic effects of the pandemic rather than market liquidity and market disruption. Leading indicators like PMI show how different countries are getting going again at different speeds. But what is clear is that the story varies - and varies most of all between developing and advanced economies. How that affects developed markets will determine whether the dollar is making a smooth turn lower or a multi-month top.

The dollar was caught between a red-hot printing press (USD negative) and a material setback for world trade flows (USD positive) during April and May. Right when the Fed printing press is starting to run less hot, world trade flows are also showing signs of a rebound, which could lead to a renewed ‘caught-between-stools’ scenario for the dollar. The market is slightly positioned for the dollar weakening. The market is net 10 percent long, euro against the dollar taken as percent of open interest, why much more extreme euro/dollar bullishness (USD bearishness) was e.g. seen in 2017 and in 2011 ahead of the debt crisis. •ne could argue that the euro performance has been weirdly subdued despite a market moving from a net short position to a net long position, but it likely has to do with the U.S. recession.