Dollar rallies ahead of US election, rising virus cases
Risk assets tumbled last week and investors flocked into safe-havens, spooky by worsening pandemic numbers,
new lockdowns in Europe and fears over US election volatility.
Stock markets fell worldwide, while sovereign bonds put in a mixed performance: German Bunds rose but US
Treasuries somewhat surprisingly fell through the week. The US dollar rallied against every other G10 currency
save the yen, in line with typical market behaviour during bouts of risk aversion.
Obviously the US election on Tuesday night is by far the key risk event this week. We reiterate our expectation
for a Biden win and a rough 50% chance of a blue wave where the Democrats take the Senate as well, which
would be dollar negative but a boom for risk assets, particularly stocks. The November meetings of the Federal
Reserve and the Bank of England will also be in focus in an unusually news-packed week.
While sterling made modest gains against the euro last week, these are already being reversed in
early-Monday trading in Asian markets, as traders react to Boris Johnson volte-face on the COVID issue. He
announced over the weekend a second national lockdown of at least four weeks, albeit this one will be
admittedly not as harsh as the previous one.
The November meeting of the Bank of England on Thursday is shaping up to be another key event. We expect
an increase of 100 billion pounds in the quantitative easing programme, as policymakers react to weakening
economic data and the new lockdown. The negative impact on the pound of this policy easing should be
partly offset by Biden’s victory in the US, though the pound may struggle in the short-term against the euro.
Third quarter GDP numbers in the Eurozone were considerably stronger than expected. However, markets
largely looked through this positive surprise, focusing instead on the deteriorating outlook brought about by
the worsening COVID numbers and renewed lockdowns in most European countries. The ECB’s clearly dovish
stance at its November meeting did little to change the negative trend. It is now clear that there will be further
easing of monetary policy in December, in line with our expectations. The ECB Bank Lending survey only
brought further gloom, showing clear signs that banks are tightening lending to households and businesses.
A Biden victory may bring some relief to the euro this week, but we expect recent ranges in the EUR/USD
exchange rate to hold until there are clear signs that the second wave of the pandemic is abating in the
Economic data in the US also showed signs of strength. Third-quarter GDP growth could be dismissed as too
much of a lagging indicator, but retail sales, personal spending and jobless claims all came in better
than markets expected.
Nevertheless, with the US election looming, and the Federal Reserve meeting soon afterwards,
backward-looking economic data received less attention than usual. We expect the Fed’s November meeting
to be largely a footnote to the election drama, with the FOMC leaving policy settings unchanged and largely
sticking to the script of the previous meeting.
The Swiss franc appreciated against a broadly weaker euro last week, although it underperformed both the
dollar and the yen. News from Switzerland in the last few days has been negative. Near the end of the week,
the number of new virus cases increased above the 9,000 mark. As expected, the government announced
tighter restrictions adopted on a federal level on Wednesday. They include curfews for bars and restaurants,
and limits on gatherings, albeit these aren’t particularly harsh, which gives businesses some breathing room.
October’s manufacturing PMI and KOF leading indicator disappointed and fell compared to September’s
numbers. In addition, retail sales declined by 3.6% in September from the previous month, posting its largest
drop since the record decline in April. Overall, this points to an easing in the recovery that will be further
challenged by the new restrictions imposed to limit the spread of the COVID virus.
This week’s economic calendar for Switzerland is mostly empty. Tuesday’s inflation data for October will be the
only important reading, but the Swiss currency will likely brush it off. Nonetheless, we are likely to see
heightened volatility in the franc this week given the worsening virus situation in Europe and the number of risk
events taking place in the coming days, most notably the US election.
One of the big losers from the risk off mode in trading last week was the Australian dollar, which ending the
week well over one percent lower versus the US dollar. Expectations for imminent policy action from the RBA
further weighed on AUD last week. Policymakers in Australia will be meeting on Tuesday, with the market now
bracing for a further cut in the bank’s main interest rate following some dovish comments from board members
of late, notably governor Lowe.
With the RBA showing little appetite for zero or negative rates, a smaller mini-cut of 15 basis points has been
priced in, which would take the rate down to a fresh record low 0.1%. While COVID case numbers in Australia
have fallen sharply, more stimulus is said to be needed in order to fuel the economic rebound. A rate cut is
widely expected and may not move AUD if announced this week, but the unveiling of fresh QE almost certainly
would in our view. The possibility of more bond purchases by the RBA presents itself as a bit of a downside risk
to the currency this week, although a Biden win on Tuesday may well up for this.
There was no major change in policy from the Bank of Canada last week, as expected, with policymakers
signalling that rates would not be hiked until at least 2023. The BoC did, however, announce that it was
tweaking the pace of its asset purchasing programme from from “at least C$5bn” a week to “at least” C$4bn
per week. This scaling down in bond purchases is an encouraging development for CAD and may provide
some support in the more medium-term. Policymakers also noted that the pace of the recovery had been
faster-than-expected, although rising COVID-19 case numbers presented a risk to fourth quarter growth.
Aside from the US election, attention in Canada will be on Friday’s labour report and a speech from BoC
Last minute market jitters ahead of Tuesday’s US election weighed on the yuan last week, which retraced some
of its recent gains to end the week around the 6.7 level versus the dollar.
Investors have, however, pushed the yuan higher in the past couple of trading sessions, as the latest data out
of China continues to highlight a strong recovery in the country’s economy. The October PMIs from both Caixin
and NBS have all beaten expectations. The services index from NBS jumped to a seven-year high 56.2 last
month, well above the 52.1 that economists had pencilled in. The manufacturing index from both NBS and
Caixin also came in stronger than consensus and comfortably above the level of 50 that denotes expansion.
With the COVID situation seemingly under control in China and almost every developed nation around the
world struggling to rein in rising levels of infection, the market continues to view the yuan as a safe investment,
even during mild risk off periods. We think that further gains for CNY could be on the cards this week should
Biden win the US election tomorrow, given that it would avoid the high likelihood of more tariffs from the