Take on USD & Outlook for EUR and RBNZ

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Take on USD & Outlook for EUR and RBNZ

Daily FX Market Roundup November 10, 2020

Equities extended their gains on Tuesday but currencies consolidated as traders worry about President Trump’s campaign to challenge the election. Senate Majority Leader Mitch McConnell said Trump is within his rights to contest the election results and few Republicans have been willing to acknowledge Joe Biden’s victory. While some share the President’s concerns about election results, most are afraid of losing political equity if he runs again in 2024. What the final results tell us is that the Trump brand is still very strong and they won’t give up control of the party easily.

Forex traders are nervous about Trump’s attempt to annul the votes in Michigan and Pennsylvania. If his efforts will gain traction it will revive election uncertainty and risk aversion. Markets hate political uncertainty and as my colleague Boris Schlossberg noted “Trump-appointed nominee out of the GSA office has refused to release key transition funds and security clearances needed for the Biden team. These moves could not only impede a smooth transition of power but endanger national security as well and as the standoff turns to legal maneuverings the markets could quickly take on a risk-off posture as the United States fails to have a peaceful transition of power for the first time in history.”

The US dollar failed to extend its gains despite another positive day for Treasury yields and stocks. Part of this has to do with comments from Federal Reserve Presidents. Kaplan worries about a new lockdown and thinks a rebound may not come until late 2021. Rosengren feels the economy needs more fiscal and monetary stimulus. As experts predict new virus cases to hit 200K in the US, central bank Presidents have plenty of reasons to be concerned. So far, local governments have been reluctant to respond with restrictions, but their resistance could temper if hospitals get slammed again. There are no US economic reports scheduled for release tomorrow because its Veteran’s Day in the US but US equity markets are open for trading.

The sell-off in the dollar helped euro shrug off weaker investor confidence. The German ZEW index dropped from 56.1 to 39 in the month of November. This sharp deterioration was worse than expected and reflects concerns about a double dip recession. This marks the beginning of what should be a series of weaker economic reports poised to plague the currency. We continue to believe that EUR/USD should be trading closer to 1.16 than 1.20.

Meanwhile sterling was the best performing currency today. Labor market numbers were mixed – employment change fell more than expected but average hourly earnings increased and the claimant count fell. The unemployment rate rose to 4.8% from 4.5%. Yet sterling rallied for 2 main reasons – pullback in the US dollar and EUR/GBP cross flows.

The Canadian, Australian and New Zealand dollars were quiet as they ended the day unchanged against the greenback. The Reserve Bank of New Zealand meets this evening. Thanks to the government’s successful efforts at containing the coronavirus, the country has enjoyed an ongoing recovery. However at their last meeting, the RBNZ said negative interest rates are on the table and last week, the RBA eased. So the big question this month is whether the central bank is still serious about taking rates to negative levels. There’s no doubt that the pressure to ease has diminished and the central bank can be more optimistic but with the virus raging across the globe and Europe back in lockdown, they may not want to rule out that option.

Kathy Lien
Managing Director

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