COVID 19, US elections and stimulus in the forefront

With three weeks left until the US Presidential elections, tensions in the US are high. Fiscal stimulus talks may be back on, however this still remains uncertain and the markets are rolling. Across the Atlantic, Europeans and Brits struggle to find a way to agree on their post Brexit relationships, while at the same time both areas also struggle with the rise of COVID 19 cases. On the flip side in Australia, the possibility of splitting the country seems to be distancing yet cannot be totally ruled out due to the pandemic.

USD – Presidential elections and stimulus talks

The USD slipped against some of its counterparts and seems poised to lower for a second consecutive week. Investor’s confidence that Biden will win the US presidential elections seems to be increasing, given that polls continue to show a wide lead of the former vice president against Donald Trump. The debate between Harris and Pence failed to give the initiative to Trump, yet no clear winner emerged. Given that Donald Trump seems to be running out of time, we would not be surprised to see the US President’s behaviour being more erratic than usual. Analysts are underscoring the possibility of a smoother US-Sino relationships and the increased possibility of a fiscal stimulus for the economy in the case that Biden wins the elections. We agree regarding the stimulus part, given the Democrat’s current position on the matter, yet we retain our doubts about the US Sino relationships and would also add the possibility of higher taxes. On the economic front the slight rise of the weekly initial jobless claims figure yesterday, tended to increase our worries for the recovery of the US employment market. Fed policymakers tended to underscore the necessity of more fiscal stimulus and the matter still seems to be dominating discussions among analysts and traders alike.

It’s characteristic of the confusion caused for the matter that President Trump initially shut down negotiations for a stimulus package, yet later on implied that he was open in a piecemeal approach for fiscal stimulus, targeting industries such as airlines, small businesses and consumers. We expect the issue to continue to fundamentally move the markets, affecting substantially market sentiment in the coming week. The restart of the stimulus talks may have re-invited the bears for the greenback. As for financial releases, we highlight the US CPI rates for September on Tuesday, the Philly Fed business index for October and the weekly initial jobless claims on Thursday. On Friday we get the US retail sales and industrial production growth rates for September, as well as the preliminary University of Michigan consumer sentiment for October.

GBP – Brexit talks and COVID 19 to move the pound

The pound seemed to maintain a rather sideways movement against the USD despite some volatility on Tuesday. The climate seemed to be tilted to the positive side regarding the EU-UK Brexit “informal” negotiations. UK’s PM Boris Johnson and EU Council President Charles Michel had agreed on Wednesday that some progress had been made in the negotiations, yet media tend to note that the situation may be better than implied. However some worries seemed to be present as both France and Germany now, are reported to hold a hard stance regarding fishing rights. Such a development could pose a substantial threat to the ongoing negotiations. Given that the stakes and at the same time the uncertainty are high, the issue is expected to continue to rattle the pound and any indications showing that the two sides are nearing a deal could provide substantial support for the pound and vice versa. At the same time it should be noted that COVID 19 cases tend to be on the rise in the UK overshadowing the good news from the Brexit front and additional lockdown plans seem to be on the agenda for the UK government. Should the path of the pandemic in the UK intensify the lockdown measures, we could see the pound weakening. At the same time it should be noted that the political discontent about the government’s strategy for the pandemic grows, creating some uncertainty. On the monetary front, a voice of optimism seemed to derive from BoE Governor Bailey as he stated that he expects a second wave not to be as bad the first one and seems to be more confident for a Brexit deal. Overall, the possibility of the bank employing negative rates, seems to be drifted further into the distance.

Recent statements made by BoE officials, it seems unlikely that the bank would employ such a measure, providing some relief for pound traders. As for financial releases, we highlight on Tuesday UK’s employment data for August.

EUR – In the grip of the pandemic again

The worries surrounding the Eurozone seem to be concentrating on the resurgence of COVID 19 cases. Europe’s leaders are stepping up efforts to force tougher local restrictions amid an unrelenting surge in coronavirus cases across the continent. At the same time Spain seems to be considering a possible state of emergency for the wider Madrid area and in Germany Berlin is declared a COVID 19 hotspot as infections spike. Those were only two characteristic cases in Europe which drew attention, however other cities such as Vienna and Prague have a high number of infections, while Paris has allready decided to close bars, gyms and swimming pools for two weeks in an effort to curb the spread of the virus. We tend to expect that, unless European states show a decisive and quick reaction, the recovery of the Eurozone could be endangered. Should the number of new cases continue to spike reaching possibly levels last seen on April, we would not be surprised to see the common currency weakening. It was characteristic that ECB President Christine Lagarde warned that a second coronavirus wave could delay Europe’s recovery.

Also the ECB President stated that the bank would be prepared to add stimulus and cut rates to support the European economic recovery. As for financial releases we highlight the release of Germany’s ZEW indicators for October on Tuesday as well as Germany’s final HICP rate for September on the same day. On Wednesday, we get Eurozone’s industrial production growth rate for August while on Thursday and Friday, France’s and the Eurozone’s final HICP rates for September respectively.

AUD – Employment and Chinese data eyed by Aussie traders

The Aussie seems to have regained its upward direction in the past two days against the USD, yet still hasn’t passed the 0.7200 hurdle since the 22nd of September. The situation seems to be better in Australia as the country seems about to keep its internal borders open despite worries for two Sydney clusters, as per local media. On the other hand, Australia’s borders to the outside world seem to remain closed until late 2021, maybe with an exception to New Zealand, which may form a travel bubble by the end of the year. Nevertheless, the recent measures to tackle the pandemic seem to be accompanied by a high bill given that Australia’s 2020 budget lifts the national debt to near AU$1 trillion. On the monetary front, RBA’s interest rate decision seems to have generated some interest among traders. In Governor Lowe’s accompanying statement, the bank stated that it will not increase the cash rate until progress is made towards full employment and inflation is sustainably within the 2-3% inflation target of the bank.

The bank may have provided a slight ray of optimism as it mentioned that the decline in output “was smaller than was expected” and “unemployment rate is likely to peak at a lower rate than earlier expected”. RBA though could further lower its cash rate to 0.1% from a record low 0.25% at its November meeting, yet has repeatedly said negative rates were “extraordinarily unlikely”. Hence, we intend to closely look into RBA governor Lowe’s speech on Thursday. Should the speech contain any signs that the bank is about to lower its rates, AUD could weaken. In the coming week we could see Aussie traders turning their attention on the release of Australia’s employment data for September on Thursday, yet before that we get from China the trade data for September on Tuesday.

General Comment

As a general comment we expect that the USD may be gaining the initiative over other currencies next week. Fundamental issues such as the US Presidential elections and the possibility of a US fiscal stimulus seem to be of substantial interest for traders. Any hints that the US Congress and Government are nearing a possible deal on the fiscal stimulus package could weaken the USD as safe haven outflows could occur for the greenback. Polls regarding the US elections should be kept under close watch as the market slowly but steadily seems to be pricing in the possibility of Joe Biden being elected. Also mind the positive side-effects for commodity currencies such as the CAD, AUD and NZD, an improvement of the market sentiment may have. At the same time, it should be noted that the US has substantial number of high impact financial releases which could also generate interest from traders. On the other hand, the course of the pandemic on various countries could create volatility for their respective currencies and any signs of increased spreading of COVID 19 could weaken local currencies.

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