Dollar Retreats as Dow Jumps 500 Points

Equities kicked off the week with gains on Monday as the Dow Jones Industrial Average rose more than 500 points. At the end of last week, Treasury Secretary Mnuchin and House Speaker Pelosi revived hope for another coronavirus stimulus package. We didn’t see any new developments Monday but stocks leaped higher on the possibility of a new deal and reports that President Trump will announce the shipment of millions of coronavirus tests to states urging them to use them to reopen. The first televised debate between Trump and Biden is also tomorrow night and investors are eager to hear updated plans from the two candidates on stimulating the economy. No US economic reports were released but non-farm payrolls are due on Friday and the labor market is expected to improve as states continue with reopening. The greenback lost value against all of the major currencies except for the Japanese Yen.

The most important events on this week’s calendar will be the debates, Chinese PMIs, German labor data, Australia’s manufacturing PMI report and US non-farm payrolls. As long as President Trump performs adequately however, the debates should have a limited impact on the markets. Biden will most certainly attack Trump on reports that he paid just $750 in federal income taxes in 2016 and 2017 but Teflon Don will most likely get away with pounding the data and claiming it as fake news.

The best performing currency on Monday was sterling which broke to the upside after three days of tight consolidation. Brexit talks are back on this week and investors hope progress will be made. We are skeptical but when a currency has fallen as much as GBP/USD (from a high of 1.3480 to a low of 1.2675 in September), it doesn’t take much to trigger a relief rally. The Bank of England has also been sending out mixed messages about their stance on negative rates. Governor Bailey and MPC member Ramsden doesn’t seem keen on the idea but Tenreyro talked about the possibility.

The Australian dollar was a close second. Like sterling, AUD/USD sold off aggressively this month. It fell every single day last week. The currency was helped by reports that banks are retracting their rate cut call and the Australian government sees iron ore prices remaining high. Australia has successfully battled a second wave with only four cases reported on Monday. In response to this improvement, the government finally relaxed restrictions on Melbourne, the country’s second largest city. The 9pm curfew was lifted and childcare centers can reopen. The Canadian and New Zealand dollars also ticked higher against the greenback but compared to AUD and GBP, their gains were modest.

The same can be said for euro which failed to strengthen above 1.1680 during the NY session. ECB President Lagarde spoke this morning and she talked about dissent within the central bank and the effectiveness of negative interest rates. While she said dissent and discussion are healthy amongst members of the Executive board, the market fears that the division could endanger future policy response.