Dollar Drops as Pre Election Jitters Set In
Daily FX Market Roundup October 14, 2020
The US Presidential Election is three weeks away and investors are finally beginning to feel the jitters. Stocks sold off for the second day in a row, driving currencies lower in the process. This will be the most dramatic Presidential race in recent history and while most polls show Joe Biden in the lead, investors have grown leery of trusting the polls after being burned in 2016.
Over the past few weeks, equities and currencies rallied on the hope that some type of stimulus would be approved before or shortly after the election. However at this stage, it is looking increasingly unlikely. House Speaker Pelosi has repeatedly described Trump’s stimulus offer as grossly inadequate. The sell-off in stocks today was sparked by Treasury Secretary Mnuchin’s pessimism – after another conference call with Pelosi, he admitted they continue to be far apart on certain issues and getting something done before the election will be difficult. This suggests that he’ll push harder to get Congress to allow the government to tap unused Paycheck Protection funds. Meanwhile the longer that fresh aid is withheld from Americans, the more difficult it may be for the recovery to continue. Over the next 48 hours, we’ll get to see if that slowdown has begun with the Empire State and Philadelphia Fed manufacturing surveys scheduled for release on Thursday and retail sales on Friday.
The US dollar traded lower against all of the major currencies on Wednesday with the exception the Canadian dollar. Despite good data and rise in oil prices, USD/CAD found support above 1.31. The Australian dollar rallied despite weaker consumer confidence but the move in the New Zealand dollar was justified by positive comments from RBNZ Assistant Governor Hawkesby who said some economic data is surprising to the upside. Australian labor market numbers are scheduled for release this evening followed by New Zealand PMI numbers tomorrow. While Australia and New Zealand have their own troubles (the RBNZ is serious about negative interest rates), the fact that Australia reported only 24 new coronavirus cases and New Zealand reported 2 at a time when cases in the US exceed 50K a day, France tops 10k a day and cases in Italy exceeded 7k, the outlook for the Australian and New Zealand dollars are brighter in comparison.
The coronavirus pandemic in Europe is worsening quickly. Italy reported its highest ever daily virus cases while Germany is closing in on its record high. France declared a national state of emergency that will mean curfews for major French cities. As we said in yesterday’s note, the Eurozone economy will be hit hard by the second wave. We’ll see major evidence of this next month when October data is released. For now, we continue to believe that the path of least resistance for euro is lower.
With the October 15th Brexit deadline looming, sterling traded sharply higher, gaining the title of the day’s best performing currency. GBP has been remarkably resilient despite the breakout of COVID, the threat of a circuit breaker if their tiered system doesn’t work and a hard Brexit. Investors remain optimistic as they latch onto reports that the UK won’t give up on Brexit talks. Negotiations are entering a critical stage and we think that the most likely best case scenario is that the deadline gets pushed.