Central banks, GDP rates and inflation in the forefront

With the US elections closing in, the political climate in the US becomes more and more tense. Next week, is the final week ahead of the elections and we expect volatility to be present once again. On the monetary front, we highlight the release of three interest rate decisions by central banks, namely the ECB’s, BoC’s and BoJ’s. As for financial releases, albeit the action may be a bit slow at the beginning of the week, we note the preliminary inflation rates for countries of the Eurozone for October, Australia for Q3, as well as the preliminary GDP rates for Q3, of the US and countries of the Eurozone.

USD – GDP rates eyed as presidential elections near

The debate last night tended to create little volatility for the USD. The debate was fierce, yet the two candidates seemed to be more restrained in comparison to the first debate as they largely kept within time limits and the discussion was less chaotic than the first time. Overall, the debate failed to provide a clear winner in the sense that no one of the two candidates showed to have the edge over the other, keeping practically the situation unchanged. Yet, there are indications that the US President may be closing in on Biden. Its’ characteristic that recent polls show the gap between the two candidates narrowing to 9%. As for the fiscal stimulus negotiations, House of Representatives speaker Nancy Pelosi stated yesterday that the negotiations were making progress with the White House, yet once again Senate Republicans seem to be negative.

We still see that the chance of a fiscal stimulus being approved before the US Presidential elections is rather slim, yet any headlines showing further progress could cause safe haven outflows for the USD. On the other hand, it should be noted that such a stimulus seems to be badly needed for the US economy so some sort of a deal is expected, yet the elections may complicate the situation. On the monetary front, we expect the situation to be a bit quieter after last week’s flurry of statements by Fed Officials. However, its not only politics and monetary policy next week. Financial releases such as the US GDP (advance) rate for Q3 could capture trader’s attention. Before that, we also note the release of the US Durable Goods orders for September and the consumer confidence for October on Tuesday. While on Thursday we get the weekly initial jobless claims figure, which unexpectedly dropped substantially yesterday, while on Friday we get the US consumption rate for September and the final University of Michigan Sentiment for October.

GBP – Fundamentals to keep monopolising trader’s attention

The pound rallied after reports surfaced that the UK and the EU were to restart intensive negotiations over a post Brexit deal in London yesterday. As per officials the aim is to reach a deal by mid-November in order to leave enough time for it to be implemented ahead of UK’s departure on December 31st. EU chief Brexit negotiator Barnier stated that a deal is “within reach” if the UK and the EU work hard to overcome any differences in the coming days.

Analysts mention that probably a deal seems to be in the cards ahead of the deadline, albeit we also add that it may be on limited issues and not the full range. Brexit could continue to dominate the headlines in the coming days and be a prime mover for the pound. However we tend to worry for the economic outlook of the UK. It was characteristic how the preliminary composite PMI for October retreated to a four month low today. However it’s not all bleak, as today the retail sales growth rate for September accelerated, providing a positive signal. Given the rise of covid 19 cases in the UK and the coming winter months with possibly stricter restrictions, its difficult to see how the UK’s economic recovery is to be refueled. It was characteristic that Chancellor of the Exchequer Sunak, publicised a wide range of meassures a rather generous government support yesterday. The measures include further wage subsidies as well as wider grants for businesses. BoE policymakers seemed prepared to provide furhter monetary stimulus. They still are keeping negative interest rates in the toolkit yet they consider such a scenario as somewhat remote. As for financial releases, next week we highlight UK’s CBI distributive trades for October on Tuesday and the Nationwide House prices growth rate for October on Thursday.

CAD – BoC interest rate decision in focus

The Loonie ended the week stronger that when it begun against the USD. It should be noted that there was political unrest in Ottawa in the past days, as Trudeau set the future of his government on the line. Nevertheless, Trudeau’s government was able to survive politically the confidence vote and avoided a snap election. On the other hand, oil prices remained largely unchanged, despite OPEC’s promise for some action to support the oil market. The low volatility of oil prices tended to provide little if any help for the Looney. Focus of CAD traders could be on BoC’s interest rate decision next Wednesday. The bank is widely expected to remain on hold at +0.25%, and currently CAD OIS imply a probability of 97% for such a scenario. Despite some expectations for a stronger than expected recovery of Canada’s economy, we expect the bank to maintain a rather cautious if not dovish tone and probably stick to its line of a bumpy and prolonged recovery ahead. As for the bank’s QE program, we could see the bank maintain a wait and see position in the coming meeting. Also BoC Governor Macklem’s press conference with BoC Deputy Governor Wilkins could generate some interest among traders. As for financial releases, we highlight Canada’s Building Permits growth rate for September on Thursday while on Friday we get the producer prices growth rate also for September and most importantly the monthly GDP rate for August.

EUR – ECB meeting in the middle of the pandemic

The common currency weakened against the USD, largely driven also by the strengthening of the US currency in the past two days. Yet also the rising COVID-19 cases in Europe seem to weigh on EUR. The situation seems to be especially grave in France given that yesterday’s new infection cases surpassed 41k, increasing market worries. It’s characteristic that reportedly, France extended its curfew lockdown measures for some 46 million of its residents. The situation remains worrying also for other parts of Europe as Germany yesterday had over 11k new cases and Italy confirmed 16k new infections yesterday. We expect that the new restriction measures in place could intensify without ruling out even a possible full lockdown for various parts of Europe, and the resurgence of the pandemic could drag on Eurozone’s economic recovery, slowing it down. Today’s preliminary PMI readings for October were discouraging, as all readings for France, Germany and the Eurozone as a whole retreated, with the exception of Germany’s PMI for the manufacturing sector. Hence, traders are expected to keep a close eye on ECB’s interest rate decision next week. The bank is widely expected to keep rates on hold keeping the refinancing rate at 0.0%, yet more stimulus may be in the cards via the bank’s PEPP program, possibly with an extension or the announcement of its extension. Overall, we expect a substantially dovish tone. However, the bank’s meeting may prove to be no game changer for the common currency as a number of important financial releases are also due out. We note Germany’s Ifo indicator’s for October and Germany’s France’s and Eurozone’s preliminary CPI rates for October and GDP rates for Q3.

JPY – BoJ interest rate decision once again in the spotlight

JPY strengthened on Wednesday against the USD substantially, mostly due to safe haven flows for the Japanese currency and was able to maintain those gains. We tend to expect that safe haven flows could remain the dominant driver behind the Japanese currencys’ direction next week as well, yet BoJ’s interest rate decision could also generate some interest.

The bank is widely expected to remain on hold at -0.10% and currently JPY OIS imply a probability of 81.58% for such a scenario, with the rest favouring a possible 10 basis points rate cut. Analysts also expect the bank to remain on hold, yet we could see the bank implying that it will extend its extraordinary measures for responding to Covid led crisis, given Kuroda’s comment’s last month. We are eager to see whether the bank’s slightly optimistic outlook for the Japanese economy is to be repetated and if the bank is to reiterate or reaffirm that “Japan’s economy has started to pick up with economic activity resuming gradually”. It should be noted that the bank had underscored the stability of the country’s financial system a few days ago. As for financial releases we would highlight Friday, as we get a slew of economic data, among them we note the release of the Preliminary industrial output growth rate for September as well as Tokyo’s inflation rates for October.

General Comment

We understand that there are fundamental issues around the globe as mentioned above and we highlight the course of the pandemic in various countries around the world as well as Brexit in the UK and the central bank interest rate decision mentioned also above. Yet we tend to focus on the US fundamentals, given the gravity of what is in stake with the US elections. Hence, we may see the USD gaining the initiative over other currencies somewhat in the coming week. The uncertainty surrounding the US political stage seems to be perplexed further given that besides the US presidential elections, also a number of Senate seats could flip over to the Democrats, changing the balance of power in the US dramatically. On the other hand, the possibility of an approval or not of a fiscal stimulus package in the US could also create substantial volatility for the greenback once again. Also note that the stock-markets are going through an earnings season, which could also affect the greenback’s direction.

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