FX Update: Resumption of the Everything Up and USD down trade?
Head of FX Strategy, Saxo Bank Group
Summary: Since election day, nearly all assets are enjoying a strong surge, from government- and high yield bonds to stocks and precious metals, while the US dollar is the flipside of this development, weakening sharply. This despite at least two years of political gridlock likely preventing US fiscal stimulus from flowing. Is the market assuming that a hyperactive Fed will compensate?
The US Election votes are still being tallied and could show by the end of today that Joe Biden has taken the lead in Pennsylvania and may even take Georgia, where the very last votes have put Biden ahead by just under a thousand votes as of this writing. If the Pennsylvania result is sufficiently clear, there is no real path for Trump and the question will be if the Biden campaign dares to step forward and declare that they have won by the end of today? How long will Trump hold out? Regardless, the market is taking the contested election risk far less seriously than was anticipated heading into Election Day. Even so, are we really going to see a strong extension of what has unfolded over the last couple of days if there is no concession from Trump into the weekend?
By the way, in all likelihood, a Biden presidency will see have a Republican blocking majority in the Senate, but the election drama in the Senate will be extended until early January if both of the Georgia Senate seats head for a runoff election there (one of those races has the Republican leading with 49.9% of the vote, and about 2% of the remaining votes apparently yet to be tallied and only goes to a run-off if the winner has less than 50%). In the House, the story is that the Democrats have performed extremely poorly, suggesting little appetite for the more progressive Blue Wave policies ahead of the 2022 mid-term elections.
Today’s FX Trading focus:
The Everything Up, USD down trade?
Judging from the market action of the last couple of days, it appears the market is surprisingly happy with the prospect of political gridlock in Washington for at least the next two years (before the 2022 mid-term election). A gridlocked Washington means no risk to the major equity indices and mega-cap stocks from a monopoly-busting, tax-raising Blue Wave. Still, it also likely means far less stimulus generosity. So if that is the assumption, then an extension higher in the everything up trade is that instead we will see a Powell Fed that will do everything to provide offsetting continued easing and levitate all asset markets with enormous further liquidity provision. Of course, it is possible for it to do so if it has the appetite, but as I argued yesterday in the “pre-postmortem” of this election, its actions are already creating long term headwinds for productivity and real GDP growth by propping up zombie companies by enabling over-generous credit terms.
And the Powell Fed’s pleas for more fiscal stimulus already suggested long ago that it doesn’t believe in the efficacy of its own tools to address its dual mandate – especially the labour market. Imagine the prospect of a winter of discontent, with mass evictions for millions of unemployed whose benefits are running out while the Nasdaq 100 marches to new all-time highs…the K-shape squared.
In short, I am watching the current market with a dose of skepticism, willing to uncomfortably play along with the narrative as long as the technical evidence and momentum suggests we should, but maintaining a healthy wariness around key event risks and the next steps from here.
The first test in coming days and weeks is the fate of the next round of stimulus that establishes what happens after December 31, when further provisions of the CARES Act expire, and then we will quickly transition to how further stimulus shapes up in a Biden administration, while the December FOMC meeting becomes a major testing point for the above narrative, especially if whatever stimulus is agreed is modest. A wild-card for the next two-plus months is a lame-duck Trump’s behavior and attitude on stimulus. At last night’s Fed meeting, the Fed maintained as low a profile as possible in hardly changing its statement, and no new message of note in the Powell press conference. Nor should anything have been expected, as the Fed has just shifted to its new flexible Average Inflation Targeting regime in recent months.
AUDUSD has rallied hard above local previous highs and really only has the 0.7414 cycle top remaining for the bulls to open the chart for the huge 0.8100+ area that was the resistance back in late 2017 and early 2018. The first order of business, however, is a hold above the 0.7150-0.7200 zone after this knee-jerk reaction to the US Election “outcome”.
The G-10 rundown
USD – the US dollar as the flip-side of the everything up trade is the current theme as we await first a hold above key levels like 1.1900 in EURUSD, and new highs in AUDUSD, while USDJPY has already broken down below 104.00
EUR – the EU economy is set to suffer through an ugly winter of Covid-19 lockdowns, but that isn’t stopping the euro from rallying here. The next step for EURUSD bulls is a hold above 1.1900, but we may need to see a new more powerful fiscal signal from the EU to work significantly above the 1.2000+ highs.
JPY – the USDJPY finally broke below that major 104.00 level, but the beta of USDJPY relative to other USD crosses is weak – suggesting the weak USD is the driver here. Tough path to JPY strength when financial conditions are going maximum green and EM is strong. Still, the hold below 104.00 keeps the focus on 100.00.
GBP – sterling neither here nor there as EURGBP is flat after multiple teases below the pivotal 0.9000 level. Next week needs a breakthrough to keep the pressure to the upside for sterling.
CHF – the EURCHF pair edging to the 200-day moving average here – no pulse there, while SNB won’t like USDCHF banging on the 0.9000 level that was the cycle low over the summer.
AUD – shouldn’t Aussie outperformance ease off and then some on the diminished prospects for the big reflationary story on the absence of the Blue Wave? Offsetting this for AUD at the moment is the Chinese yuan making new highs against the US dollar and key commodities markets taking the news well.
CAD – oil markets aren’t liking the latest Covid-19 concerns, so CAD weak in the crosses, but USDCAD withing striking distance again of the critical 1.3000 area that unlocks the chart toward 1.2000 if the USD remains weak.
NZD – the kiwi is having a poke at the cycle highs and high since early 2019 here around 0.6800 ahead of next Wednesday’s RBNZ meeting.
SEK – EURSEK making a bid for the cycle lows here – positive risk sentiment, if maintained, could overwhelm Covid-19 dark clouds as we watch whether 10.20 can fall and open up the chart for 10.00.
NOK – EURNOK is back having a poke at the 200-day moving average and well below 11.00 again – if oil markets stabilize together and this “everything up” backdrop continues, the path may clear quickly for a 10.50 test.
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