EM currencies move lower amid record COVID cases

Risk aversion returned to financial markets on Thursday, leading to a sell-off in equity and a broad move lower
in high risk currencies.

Optimism surrounding news of a potential COVID-19 vaccine from US pharmaceutical company Pfizer boosted
markets on Monday, leading to aggressive rallies in stock markets and a sharp move higher in emerging
market currencies. These moves have, however, proved rather short-lived and have largely reversed in most
cases. While there remains hope that a vaccine could be available for use before the end of the year,
challenges remain regarding its distribution and mass production, meaning that we’ll likely have to wait until
early-2021 to see any sort of impact from the vaccine.

In the meantime, new cases of the virus continue to rise aggressively in the major economic areas. Most
developed nations around the world are now recording all-time high virus caseloads that far exceed the initial
peaks from earlier in the year. In the US, case numbers jumped in excess of 160,000 yesterday alone, with fresh
restrictions being imposed in areas such as New York, including limits on gatherings and early closures of
venues. This will test a US economy that has so far proved largely resilient to growing virus case numbers.

EUR/USD edges higher, despite dovish Lagarde comments

With risks to the US economy growing, FOMC chair Powell adopted a very dovish tone during his speech
yesterday, tempering vaccine optimsm and saying that the US was in for a difficult couple of months. ECB
President Lagarde was similarly cautious towards the vaccine, saying that the recovery in the Euro Area was
likely to be ‘unsteady’. All in all, central bankers are clearly concerned about the second wave of virus infection,
with highly accommodative policy to provide an undoubted drag on risk sentiment in the near-term.

The euro actually outperformed its peers despite Lagarde’s comments, ending higher against the broadly
stronger US dollar. We largely attribute this to investors selling the dollar, rather than favouring the euro, given
the worsening pandemic situation in the common bloc and growing expectations for ECB easing before the
end of the year.

UK virus case numbers spike to fresh record high

Meanwhile, sterling was one of the worst performers in the G10 yesterday, ending London trading lower
against the US dollar and its weakest position in over a week.

The underperformance in the pound is not totally unexpected, given the ongoing uncertainty surrounding
Brexit and national lockdown in England. New COVID cases also spiked to a record high 33,000 in the UK
yesterday, up around a third on a day previous. While it remains too soon to gauge whether the lockdown is
having any impact in driving down rates of infection, we may get a better idea in the next ten days or so. Any
indication that lockdown measures could be extended beyond the first week of December would likely weigh
on the pound as we approach the end of the month.

2020-11-13T10:31:35+00:00 November 13th, 2020|