Global Head of Macro Strategy
Summary: The US dollar may have a hard time pressing its upside directional case any farther here until a clear picture emerges (or just as importantly, does not emerge) in the wake of the US election tomorrow. Tonight, the RBA meets and is likely set to cut rates and launch a QE programme of considerable size. The chief question for AUD traders is how much of that is already in the price.
Please note: I am penning a series of daily articles on the US Election countdown. In Sunday’s article Iran down the evidence, strong or not, that the strong expectations of a sufficiently strong Democratic Blue Wave to avoid election drama, as I highlight credible voices from those who are still suggesting the risk of a strong Trump showing. I take considerable pains to highlight how ugly the market action could get if we are facing a contested election scenario. Also, in Saturday’s article, I looked at how 2016 Election Night unfolded and the market reacted in real time to the result as it crystallized, as well as what to watch for this time around.
Today will feature a podcast round-up of the articles and a few additional thoughts.
Today’s FX Trading focus:
Can the USD continue any higher until we start to see election outcomes?
The EURUSD has eyed the range lows from September this morning and a break could set up stop-loss driven shenanigans below 1.1600 ahead of the US election results very (very) late tomorrow, but is anyone really making any decision on the US dollar here ahead of the event itself besides placing the odd options bet (hedging USD upside risks it would seem, if so). As I discussed in my list of election scenarios and possible market reactions to them, the one outcome that might sustain a stronger US dollar the longest (on the other side of a contested election setup - very tough to decide there whether the USD liquidity premium in volatile markets keeps the USD firm or weaker) would be on in which Biden wins but there is no Democratic majority in the Senate. That blocking Republican majority would prevent an enormous amount of stimulus from seeing the light of day relative to expectations and could derail the reflationary narrative for a time. A miraculous Trump win might prove less restrictive on the stimulus front – his only priority is ensuring that Democratic states aren’t extended a lifeline while drop whatever amounts of helicopter cash are required to improve the stock market and his “ratings”.
If the USD does continue to press stronger, the next key zone for EURUSD, for example, is the 1.1400-1.450 zone if the round 1.1500 level can’t hold. Below 1.1400, the EURUSD structural bullish argument is failing.
RBA tonight - what's in the price?
The RBA is up overnight in the Asian session tonight and our Aussie Eleanor Creagh has penned a great preview of this meeting and the likely set of decisions to be made. The key question is what is already in the price as and where the RBA exceeds or doesn’t quite live up to expectations, with the important drivers for AUDUSD likely switching more urgently to the US election outcome and its effect on the reflationary narrative very quickly after this meeting.
Chart: AUDUSD
We all know what is coming tonight from the RBA, with surprises only at the margin on the size of the cut and the magnitude of the QE programme (current 10-year yield spread to the US is pegged near the post-Covid-19 train wreck lows coming into this meeting). But if risk sentiment remains weak and gets worse (especially in a contested US election scenario or if it emerges quickly that the Democrats will not take the Senate) a US dollar spike higher could deepen and take this pair well south of 0.7000. Regardless, that 0.7000 zone is an important one and could open up for a test of 0.6800, near the 200-day moving average, if broken. But we remain long term bulls beyond short-term volatility on the prospects for a reflationary environment and highly negative US real rates, especially under a strong Blue Wave US Election outcome.
Value in NOK?
Crude oil prices are beating a steep retreat on surging Libyan crude oil production on the supply side (and those fearing a strong Democratic sweep will fear the arrival of more Iranian barrels of crude as well) while on the demand side, the latest series of lockdowns across Europe and perhaps on anticipation that the US could be headed the same way are weighing. On that latter note, we’re not very likely to see anything remotely comprehensive in terms of restrictions on the US front as long as Donald Trump is in the White House, which he will be at least up until Inauguration Day 2021. Sure, the downside threats to oil remain, but we are likely “getting there” in terms of putting in a market low as the kind of shock that sent oil prices nominally negative in the US futures market is unlikely to repeat. And even when we saw that remarkable development back then, together with conjecture of whether things were getting so bad in general that the authorities might have to shut markets, NOKSEK, to take an example, only managed to close down below 0.9000 on one single daily close. With NOKSEK poking below 0.9300 this morning, the pair feels like a good value trade for the long term – and possibly provides some volatility protection at the margin relative to trying a NOK long via EURNOK shorts, as NOK and SEK would both likely suffer during liquidity panics. Of course, traders should note that it is an illiquid pair, so pricing a large trade in volatile markets can prove a challenge.
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