Dollar sell-off sharply as market confident of Biden win
This week has been an extraordinary hectic in the foreign exchange market, with the US election, Bank of
England and Federal Reserve meetings creating a volatile trading environment.
Markets are still awaiting confirmation as to the final result of the US presidential election, albeit it looks very
much as though Joe Biden has done enough to secure the keys to the White House. Of the states yet to
declare, its an effective dead heat in Georgia, a must win state for Trump, with Biden marginally ahead in both
Arizona and Nevada and closing the gap in Pennsylvania. With most of the mail-in votes that are yet to be
counted likely to go the way of the Democrats, markets appear to have seen enough to be confident of a
Biden win. Implied bookmakers odds now give Biden around a 90% chance of victory.
Trump has, of course, continue to allege fraud and will almost certainly contest the vote, which could drag the
process on for a few weeks. If Biden were to take either Pennsylvania and/or Georgia, while maintaining the
states that he is already ahead in, then investors may largely shrug aside Trump’s lawsuit as the margin of
defeat would be too big to dispute. FX markets have certainly reacted as if a Biden win is a near sure thing,
with the US dollar selling off sharply across the board and risk assets posting solid gains.
EUR/USD has climbed back above the 1.18 level for the first time in a couple of weeks. The high risk major
currencies, such as the Australian and New Zealand dollars, have rallied between 2-3%, while emerging market
currencies have also moved sharply higher, particularly those worst affected by Trump’s protectionist policies.
We think that further gains for these currencies could be on the cards if a Biden win were confirmed today,
although the prospect of a prolonged legal challenge does present somewhat of a downside risk.
BoE ramps up QE programme by £150 billion
Thursday morning’s Bank of England announcement went somewhat under the radar given all the election
coverage. The Bank of England ramped up its quantitative easing programme by a mammoth £150 billion on
Thursday, saying that it was ready to inject even more stimulus into the UK economy. With COVID restriction
tightened across the UK, further action from the MPC was inevitable at this week’s meeting, although the size
of the QE expansion was greater than the £100bn priced in by the market. The bank’s communications were
also unsurprisingly dovish. Governor Andrew Bailey vowed that the central bank would do ‘everything we can’
in order to support the economy. GDP forecasts were revised sharply lower, as expected, with a 2% contraction
now pencilled in for Q4 versus the 4% expansion that they had previously anticipated.
The reaction in FX was, however, to send the pound higher. While the larger-than-expected QE expansion is a
sterling negative, investors were encouraged by the bank’s apparent lack of appetite for additional interest rate
cuts. There was also very little mention of negative rates in the BoE’s communications, suggesting to us that
the bank is in no hurry to begin lowering rates below zero in the near-term. News yesterday that the UK
government’s furlough scheme will be extended until March, combined with the lack of rush for negative rates
and the growing likelihood that a ‘no deal’ Brexit will be avoided, all provide reason for optimism for the
pound, in our view.
No change from the FOMC as market awaits NFP report
Meanwhile, yesterday evening’s FOMC meeting didn’t deliver anything particularly newsworthy, as we thought
would be the case. Rates and QE were left unaltered and there was very little change in the bank’s statement.
FOMC chair Powell did, however, state that the pace of the US economic recovery had moderated and that
further fiscal and monetary support would be required.
Trading in FX today will continue to centre on the election, with six key swing states still yet to be officially
called. The results may well come through later today, but this is far from a certainty. Aside from that, there is
the small matter of this afternoon US nonfarm payrolls report. Jobs growth is expected to have slowed last
month, although economists have pencilled in an easing in unemployment and increase in wage growth. With
focus on politics, we think that activity surrounding today’s NFP report could be rather limited.