FX Update: Market nerves fraying on this last pre-US election week.
Head of FX Strategy
Summary: Some observers are selling a narrative of a tightening US race, but the outcome for the US Senate is the only issue credibly in play, as a Trump win would mean that the entire polling profession needs to be disbanded. Plenty is at stake, however, on that Senate outcome. Elsewhere, the moment of truth is approaching fast for sterling, and the Turkish lira is testing new lows.
Sterling’s moment of truth is coming fast.
Last week I aired my general perspective on how sterling would react to the announcement of a breakthrough in Brexit negotiations in favour of a reasonable post-transition period trade deal. Generally, I am constructive on sterling from this angle, but have suggested that the market may be surprised at how low the ceiling for a sterling rally proves on a breakthrough in talks, simply because of the ugly structural backdrop for the UK and it parlous economic state in the wake of the Covid-19 impact. As well, with the country running external deficits, stimulus is a more costly affair when it merely takes the form of income replacement and injecting relief into the economy (as opposed to investment in increasing productivity and output). And on that note, I am open to the risk that sterling simply fails to rally much at all due to those structural issues and the long term uncertainty that sufficient capital inflows lie in wait to offset external deficits and the risk of longer term scarring that is taking place from Covid. A sterling downside hedge is worth considering here if a deal arrives, but fails to spark a rally..
USDTRY above 8.00 on France-Turkey spat
The Turkish lira was already under pressure late last week after the Turkish central bank surprised consensus by failing to hike the key interest rate. And now the pressure on the currency has intensified on a bit of general weak risk sentiment, but more importantly on a fresh diplomatic spat between France and Turkey as Turkish president Erdogan has hurled criticism at French President Macron for his approach to the issue of the beheading of a French school-teacher by an Islamist radical after that teacher showed cartoons of the prophet Mohammed in school. After telling Macron that he needed to seek psychiatric help, France recalled its ambassador to Turkey. Additional diplomatic turmoil for Turkey has come on their test of a Russian missile system, which has raised the ire of the US.
USD choppy on gaming of election outcome
The US dollar remains a choppy mess ahead of Election Day next week as markets try to game the outcome. Polls have moved here and there enough for the odds of the Democrats taking back the Senate to drop notably last week, but those odds shifted higher today after a poll at the weekend suggested Biden is leading in Texas, state that hasn’t gone to the Democrats since 1976. Huge early voting numbers in Texas suggest higher odds of a Democratic landslide if the activity there is representative of tendencies nationwide in voter turnout as the demographics of the traditional non-voting population (the young in particular, but also ethnic minorities) skew heavily Democratic. I will be running a series of small updates all week into Election Day on notable developments.
The G-10 rundown
USD - so critical to know whether we are facing a Democratic clean sweep scenario or a Biden win while Republicans narrowly retain control of the Senate (obviously I am assuming a Trump loss as very high odds – a Trump win would almost mean that the polling profession needs to be disbanded entirely). More on this later, but a blocking Republican Senate under Biden could be particularly brutal for weak prospects of fiscal relief and trigger a USD backup initially.
EUR – the long shadow of Covid-19 continues to hang over the outlook – but could encourage a more generous fiscal response eventually – could even be positive for the euro if this means more bond issuance. ECB can expand QE now or not until December – not sure it matters either way. The fiscal is the more important factor
JPY – the US yields have backed down again and risk is a bit wobbly – usually ideal feeding grounds for some JPY strength – would expect this more in the crosses than in USDJPY – but the latter is important as a benchmark as long as USDJPY is south of 105.0.
CHF – time is too precious these days to spend it on the franc. CHF a nonfactor within 1.06-1.09 range in EURCHF.
GBP – as noted above, not entirely sure the market gets what it expects if a breakthrough in talks is evident by Wednesday (the latest extension in EU chief negotiator Barnier’s stay in London).
AUD – The Chinese yuan in for further consolidation lower, but perhaps AUD getting a relative boost from easing Covid-19 lockdown measures. A bit of worry at the margin as Mongolia replaced Australia as the top supplier of coal to China
CAD – CAD a notch lower after recent outperformance and on weak oil prices to start the week, but let’s have a look at Bank of Canada meeting on Wednesday (no expectations around that). Upside pivot for USDCAD remains the 1.3250 area.
NZD – continues to press its case stronger against the Aussie as the market brushed off the weak NZ Q3 CPI last week. The big level there coming into view is the 200-day moving average, currently at 1.0630.
SEK – remain impressed with SEK resilience despite string of bad news in EU and latest Covid-19 developments, but backdrop preventing more determined krona rally – could yet push slowly to 10.20-25 in EURSEK
NOK – weak oil markets to open the week have EURNOK testing 11.00 this morning – but note the NOK buying that came in on the breech of that level – it’s the clear line in the sand here.
Upcoming Economic Calendar Highlights (all times GMT)
- 1230 – US Sep. Chicago Fed National Activity Index
- 1400 – US Sep. New Home Sales
- 1430 – US Oct. Dallas Fed Manufacturing
- 2300 – South Korea Q3 GDP
- 0230 – Australia RBA’s Debelle and Bullock to speak
Quarterly Outlook Q2 2022
Quarterly Outlook Q2 2022: The End Game has arrived
- Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
Productivity and innovation have never been more importantAs the world economy hits physical limits and central banks tighten their belts, could equities be facing a 10-15% downside?
The great EUR recovery and the difficulty of trading itIf the terrible fog of war hopefully lifts soon, the conditions are promising for the euro to reprice significantly higher.
Tight commodity markets – turbocharged by war and sanctionsWith supply already tight, commodities keep powering on. But will it last for yet another quarter?
Between a rock and a hard placeGeopolitical concerns will add upward price pressures and fears of slower growth, while volatility will remain elevated.
The Great ErosionInflation is everywhere and central banks try to combat it. But will they get it under control in time?
Australian investing: Six considerations amid triple Rs: rising rates, record inflation and likely recessionWhile global financial markets are struggling in an uncertain world, the commodity-heavy Australian ASX index is poised to keep a positive momentum.
Cybersecurity – the rush to catch up with realityWith the invasion of Ukraine, governments and private companies are rushing to reinforce their cyber defenses.