Joblessclaims,ECBandJosephStiglitz

There were three important news items from yesterday, first one was the US initial jobless claims number which jumped unexpectedly to the seasonally adjusted number of 853k against the expectation of 725k. The second news was from the ECB front where on expected lines the PEPP program package was expanded by Euro 500 bn with tenor also getting extended by one year until 2022. The third news item was on Brexit where UK PM Boris Johnson warned that odds of a no deal Brexit are rising. He said “now is the time” and that the UK would prefer an “Australian style option” over a “Canadian one” on its dealing with the EU post Dec 31^st.

Now let’s try to gauge the market impact of the news items on the respective currencies. The UK news is the most straightforward one and the impact of the less than optimistic outlook on the Brexit deal was visible as the pound dropped to 1.3260 from 1.33 on the advent of the news. It has since recovered, the market has also started discounting the scenario that “no deal now” is not actually “no deal ever”. The negotiations can even continue in 2021 and the two parties can reach an amicable settlement. May be once the “no deal” conditions are actually on the ground, the clarity on the relative importance of the sticky issues would increase.

Coming to the ECB announcement, it was more or less expected. The Euro is trading around 1.2160 currently which is its close to its 5 year high. We have written previously that rising currency hurts the export competitiveness of the countries. The Eurozone is a peculiar case as it is made up of countries which are trading amongst themselves as well as the outside world and different countries can be at different points on the export/import and development curves. Being part of the bloc takes away the flexibility to fashion bespoke responses to any crisis. The two important tools from the arsenal of policy makers are gone. One is the interest rate and the second is currency management. You can’t depreciate the currency to help the exports and consequently support jobs in the economy. What the Eurozone though gives in return is the free movement of labour across the zone in search of better employment opportunities. Nobel laureate Joseph Stiglitz writes in his book The Euro that free movement of labour is acceptable in good times but starts meeting resistance in times of stress as local nationalism trumps the bonhomie of pan European identity. He writes that the creation of the Euro hence was predicated on a utopian vision which failed to materialise in reality. Readers would note that the UK is clamouring to exit even when it has kept the interest rate and exchange rate levers with itself.

The third news item was about the US Jobless claims rise. US stocks closed down, with DJIA closing shade below 30k, the Dollar index is trading at 90.60 which is close to its recent lows and a far cry from the pandemic high of 103 in March 20. Now why the risk on markets are not unduly worried about the rising jobless claims is a bit convoluted. Rising claims show the rising impact of the second wave of corona which would goad the policy makers to come up with a relief package quickly. The package can be bigger from the consensus estimate meaning more easy money floating around. The vaccine roll out currently underway in developed countries also means that the economy will be back on its feet quickly.

Domestically INR opens around 73.65 and 10 year benchmark bond at 5.9440.