US dollar falls as Biden wins presidential election
As the votes were tallied over the week in the key swing states, it became increasingly clear that Biden was
headed for victory.
While US authorities and media organisations were extremely cautious and delayed the decision until the
weekend, markets celebrated earlier, with stocks rallying worldwide and safe-havens, including the US dollar,
The key for the next couple of weeks will be how well FX markets digest the combination of a Biden victory
and a senate that looks set to remain in Republican hands. Trade tensions will almost certainly ease, while the
prospects for a sizable fiscal stimulus in the US have receded.
With no major central bank meetings or economic releases this week, we expect markets to remain focused on
COVID numbers and lockdown announcements worldwide. The possibility of Trump’s refusal to concede the
election gaining some legal traction is a lingering worry, but we think it is a very unlikely scenario at this point.
The Bank of England surprised markets (and ourselves) with a larger-than-expected increase in the QE
purchase programme target, a £150 billion increase to £895 billion. They also revised sharply lower their Q4
GDP forecast, while suggesting that the UK economy may not return back to its pre-pandemic size until 2022.
This dovishness and the lack of clear cut progress in the EU/UK Brexit negotiations took their toll on sterling,
which underperformed every other G10 currency save for the dollar and the Japanese yen.
This week is filled with data out of the UK, notably the labour market report on Tuesday and third-quarter GDP
on Thursday. However, they may not move markets much given that they are backward looking and will not
reflect the economic impact of renewed lockdown measures.
The common currency rallied strongly on the back of increasing expectations for a Biden win, with the euro
now back around the 1.19 level versus the dollar and its strongest positions since mid-September. However,
further gains from here may be harder to come by, at least in the short-term. The worsening COVID pandemic
and the raft of new lockdown measures are already having an impact on economic activity, as can be seen in
the October PMI numbers.
This week, the ECB and the potential for aggressively dovish measures at the December meeting come back
into focus, with four key ECB officials giving speeches in the first half of the week.
The combination of a Biden victory and a better-than-expected Republican showing in the elections has
impacted markets according to our expectations, bringing about a modest risk asset rally and US dollar sell-off.
The better-than-expected employment number in the US monthly payrolls report last Friday makes it even less
likely that we will see an aggressive fiscal easing package any time soon, in spite of the worsening COVID
numbers in the US. This week we go back to focusing on regularly scheduled data releases, with inflation
numbers out on Thursday the most important.
The Swiss franc outperformed other safe haven currencies, ending last week little changed against the euro. An
increase in EUR/CHF volatility related to the US election turned out to be quite limited.
News from the country’s COVID front has been mixed. On the one hand, the number of new infections seems
to have stabilised, with Switzerland now registering around 10,000 cases per day. On the other, new deaths
surged. Nonetheless, the restrictions currently in place are relatively light compared to many other European
countries, with no second lockdown in sight.
The most recent macroeconomic data from Switzerland was overall positive but doesn’t alter the economic
picture by a lot. Last week’s October inflation reading showed the smallest drop in prices since March but
inflation still remains deep in the negative territory at -0.6%. Except for today’s labour market data, which
showed a stabilisation in the country’s unemployment rate in October, this week’s economic calendar doesn’t
display any reading particularly worth following. The franc should continue to react to shifts in market
sentiment, but the volatility of the EUR/CHF pair will likely be quite low since the US election is behind us.
The Aussie dollar rallied in line with risk assets last week following Biden’s election victory, up to its strongest
position versus the US dollar since the third week of September.
Markets took last week’s RBA rate cut in its stride, given that it was widely expected going into Tuesday’s
meeting. Rates were cut by 15 basis points to a fresh record low 0.1%, with the bank also announcing it would
be buying an additional 100 billion AUD worth of government bonds. Governor Lowe did, however, once again
effectively rule out the possibility of sub-zero interest rates. We think that as long as this remains the case, we
think that AUD could remain relatively well bid in the near-term.
With no major data releases out of Australia this week, we expect AUD to be driven largely by investors
appetite for risk.
CAD rallied to around the 1.30 level versus the US dollar late-last week, its strongest position since the
beginning of September, as investors viewed a Biden presidency as positive for US-Canada trade relations. The
avoidance of another four years of Trump’s protectionist policies has been good news for those countries that
rely most heavily on US trade – Canada arguably chief among them.
Last week’s Canadian labour report fell short of expectations. 84k jobs were created in Canada last month,
below the 100k investors had priced in and well below September levels. The rate of unemployment ticked
down to 8.9%, although this was also higher than consensus. Trading in Canada is expected to be quiet this
week, with a speech from BoC member Wilkins on Thursday the only real highlight. We expect CAD to
continue trading off expectations for US fiscal policy in the absence of major economic data.
As we expected, the avoidance of a second term for Donald Trump triggered a sharp relief rally in the Chinese
yuan. CNY ended the week almost 2% stronger, with the currency currently trading below the 6.6 level versus
A Biden presidency is undoubtedly a positive for China, in our view, given his view towards increased
multilateralism and his opposition of the trade policies implemented by Trump. A renegotiated US-China trade
relationship is likely to be forthcoming, although as we noted prior to the election, we expect Biden to
maintain a degree of protectionism and a complete rolling back of Trump’s tariffs is by no means guaranteed.
Biden’s view towards relations with China will be closely scrutinised in the coming weeks and is likely to be one
of the main drivers for CNY in the next couple of months or so.
Chinese inflation data out on Tuesday will be the main economic data release this week in an otherwise
relatively quiet few days.