US dollar sells off as risk appetite improves
Renewed hopes of a significant fiscal stimulus package in the US brought about a relief rally in equities and
credit worldwide, and most major currencies moved in sympathy, rising against the US dollar.
Commodity currencies led the way in hopes of a faster economic recovery, and the lagards were the yen and
sterling. The latter is still struggling to find its footing as markets fret over the state of Brexit negotiations.
Everywhere in the G10, short-term rates are at rock bottom levels and political pressure is growing everywhere
for more intense fiscal stimulus, resulting in a general steepening of the interest rate curves as traders price in
waves of government bond issuance.
With the Democrats widening their lead in the polls and lower prospects for a disputed election in the US,
attention should shift to the EU summit this week, which Boris Johnson has claimed as a deadline of sorts for
reaching a Brexit deal. Inflation data out of the US Monday should get some attention, as we have seen some
divergence in inflation dynamics between the US, where it has rebounded back to pre-COVID levels, and the
Eurozone, where it continues to print record lows.
Sterling traders are squarely focused on the 15th October deadline set by Boris Johnson to pull out of Brexit
negotiations if no deal is reached by then. We think that this deadline is almost certain to be pushed back, as
both sides are making positive noises about the progress being made towards a modest deal.
The employment report on Tuesday is likely to be overshadowed by the drama of the EU-UK negotiations right
before the EU summit, but it will provide key insight about the impact of the COVID second wave on the
labour market. Investors will also be paying close attention to any tweaks to the UK government’s virus strategy
following the sharp increase in new COVID cases in the past couple of weeks.
While the euro rebounded nicely last week on the back of increasing risk appetite, we are starting to see
short-term risks accumulating for the common currency.
First, new COVID cases continue to increase, and have just crossed the US level. The resulting partial
lockdowns will affect Eurozone economic performance. Second, the minutes of the ECB September meeting
highlighted the institution’s concern with deflationary risks; this was before the even more dismal September
inflation numbers were released. The chance that the ECB will ease further in December is growing.
Finally, traders’ speculative positioning in long euro trades has barely begun to shrink from the record levels of
late-August. All in all, we see some risks for a temporary pullback in the common currency over the next few
In a data-light week, politics are likely to drive dollar trading. Investors will be looking for fresh polls to confirm
the likelihood of a Democratic wave that pushes off the prospect of a contested election and makes it more
likely that additional fiscal stimulus will be forthcoming in 2021. Joe Biden currently holds around a nine point
advantage in the latest poll of polls, with the Democrat leaders now holding an advantage in almost every key
In the shorter-term, we still think we are likely to see a compromise spending package before the election, as
the market is increasingly pricing in. This would be unambiguously positive for emerging market currencies,
though the impact in the EUR/USD rate is harder to predict.
Despite ending the week little changed against the euro, the Swiss franc yet was again the best-performing
safe-haven currency. While last week’s economic data from Switzerland brought a welcome surprise, showing
an unexpected decrease in the unemployment rate, newsflow from the country has been largely negative.
Similarly to neighbouring countries, Switzerland recently saw an increase in the number of new daily
coronavirus cases, which crossed crisis highs last week.
These worrisome virus numbers overshadowed both macro data and SNB president Jordan’s speech, which
was rather reassuring but didn’t bring much to the table. The main takeaway from his Thursday’s address was
that the SNB’s actions do not pose a risk to the franc’s stability and that the bank is quite flexible in adapting to
market conditions. With virus infections on the rise, the focus in the coming days should be squarely on the
news from that front, especially considering that Switzerland’s economic calendar is mostly empty this week.
The Australian dollar outperformed most of its major peers last week, notably the New Zealand dollar that has
been weighed down by talk of negative rates from the RBNZ.
While the Reserve Bank of Australia appears highly unlikely to follow such a policy, the bank did continue to
strike a dovish tone during its communications last week. Rates were kept unchanged at 0.25% for the seventh
straight meeting, although the board noted that it ‘continues to consider how additional monetary easing
could support jobs as the economy opens up further’. Governor Lowe gave particular attention to the labour
market, stating that addressing high unemployment was a ‘national priority’. We think there remains a good
chance of smaller rate cuts from the RBA in the coming months, although the bank’s lack of appetite for
negative rates should support AUD relative to its New Zealand counterpart.
Another speech from Lowe and Friday’s labour report will be the keys to look out for in Australia this week.
CAD was the best performing currency in the G10 last week, with the exception of the Swedish krona. We
believe that this outperformance can be attributed to renewed hopes for more US stimulus, with a well
supported US economy set to benefit those economies with close ties to America, Canada being one of those.
Last Friday’s labour report also helped lift the dollar to its strongest position in three weeks. The report was
much stronger-than-expected, with unemployment easing and job creation growing. The jobless rate fell to 9%
in September, while the Canadian economy created 378,000 jobs last month, well above the 156k forecast.
This take the employment rate to just 3.7% below its pre-pandemic levels, a stronger rebound than witnessed
among many of Canada’s major counterparts. Whether this strong jobs growth can continue is likely to depend
on virus. We’ve seen some concerning signs of an uptrend here, with the moving average of new cases now
exceeding the crisis peak in Canada. This may begin to weigh on CAD should this uptrend show signs of
The yuan continued to move sharply higher versus the broadly weaker dollar late-last week, as traders returned
to their desks following the Golden Week holiday period. CNY briefly rallied below the 6.7 mark against the
greenback on Friday, its strongest position since April 2019.
While emerging market currencies in general are benefitting from the increased likelihood of more US fiscal
stimulus, the absence of new virus cases and strong rebound of the Chinese economy has continued to
improve sentiment towards the yuan. We had more evidence of that rebound on Friday, with Caixin’s services
PMI leaping up to 54.8 in September, well above the 50.7 forecast.
We have, however, seen a bit of a retracement in CNY this morning as investors reacted to the weekend’s news
that the People’s Bank of China had eased policy by cutting its reserve ratio for banks. The reserve requirement
when conducting some foreign exchange forwards trading was cut to zero from 20% for financial institutions.
The move suggests to us that the PBoC is becoming increasingly uncomfortable with a stronger currency,
given its impact on export competitiveness, and is a signal to the market that a short-term retracement may be
on the cards.