FX Update: Trump has Covid-19 and first move is risk-off
Head of FX Strategy
Summary: The US dollar and Japanese yen knee-jerked stronger on the news in early European hours that US President Trump and the First Lady have tested positive for Covid-19 after traveling with a sick aide in recent days. The implications of this news could turn in very different directions for markets from here depending on how serious Trump reacts to the virus.
Tactical uncertainty on Trump Covid-19 positive test
The first instinct when any bombshell hits the market that increases uncertainty is to head to the hills. Somewhat surprisingly, the market tone managed to stay positive despite lack of progress on new stimulus measures in the US (more on that below) and even after it was clear that Trump had been heavily exposed to the virus in recent days when it turns out an aide traveling with him to campaign events tested positive yesterday. But the situation can quickly go in very different directions from here
Mild case – Trump gets a light sniffle and is battle ready after a week to ten days. Not only would the net effect be negligible on Trump’s health, but could also provide him with ammunition in his claims that most people – even a relatively older man like himself – don’t get severe systems and that his opponents have been wrong to so strongly criticize his handling of the virus.
Sever case – Trump is sideline with a severe case of the virus for two weeks or more. Anything resembling a case as sever as UK Prime Minister Boris Johnson’s case back in the spring (16 days from announcement of a positive test until he was released from hospital) could underline the severity of the virus and keep Trump’s schedule reduced and his energy low and maybe enhance the credibility of criticisms of his administrations’ handling of the virus and change the mind of some small cross-section of voters.
For now the market is taking this situation as driving a shift in favour of Biden, with the USD positive reaction on the tail of that showing that risk sentiment swings seem more important for driving the US dollar at the moment than any thoughts about the budget deficit outlook and risk to inflation down the road from higher Democrat spending levels (only in the event Dems get the Senate back, of course).
Remember the US stimulus question – the more important factor here if Trump’s Covid-19 proves a mere distraction.
The House Democrats passed a $2.2 trillion bill for new stimulus by a relative narrow margin and with zero Republican votes. This is smaller than their original stimulus package of well over $3 trillion, but their moving forward with this deal is seen by some as providing little hope that the Trump White House is ready to make a deal, with a possibly side-lined Trump adding to the risk of no-deal at the margin. No stimulus is risk sentiment negative and therefore generally USD positive, given recent patterns. A breakthrough is still a possibility over the weekend, with House Speaker Pelosi set to meet US Treasury Secretary Mnuchin at the weekend.
Brexit – spot trading is dangerous business – options an idea.
If it wasn’t already obvious, yesterday’s price action in sterling underlined the risk of trying to express a tactical view in sterling via spot trades, as conflicting headlines on the state of post-Brexit sterling all over the map. Positioning in options is an idea for those who would like to have a position over the next critical few weeks of the negotiation period and even for beyond December 31 for anyone believing that the talks will go to the wire. A long strangle position in either EURGBP or GBPUSD (long both an out of the money put and call) are a way to trade volatility with no idea of the directional view, and those with directional views can consider taking a long position in either a put or a call or a put spread or call spread. An option spread (long one option and short another option that is much farther out of the money reduces the extent of the directional move needed to break even but reduces also the maximum potential profit if volatility spikes significantly. In an escalation of the stakes of the negotiations, UK Prime Minister Boris Johnson is set to meet EU Commission president Ursula Von Der Leyen tomorrow.
AUDJPY is a classic proxy within G10 currencies for risk appetite and found resistance – as did many USD pairs – right at important resistance, in this case, the head-and-shoulders-like neckline around 0.7600 and just ahead of the21-day and 55-day moving averages. Arguably, this is a kind of bull-bear line, as is the 0.7200 area in AUDUSD – for risk sentiment in FX at the moment. Stay tuned – hard to believe that traders would want to get aggressively risk-on ahead of the weekend as we await more news on Trump’s condition.
Oops – what happened in commodities yesterday? Watching commodity FX
The commodity complex had an interesting session yesterday, with oil prices dragged lower still and perched on the precipice of major support. The oil demand picture is looking tenuous as some major European cities from Madrid to London to Paris may be on the verge of new lock-downs and the case count in the US has failed to continue falling. Weak commodity prices are a hitch in the reflationary narrative and are worth watching, not only for petro-currencies, but any commodity-linked currency like AUD and others. The copper price in particular suffered a massive drop yesterday. Still, it is interesting to see that EURNOK has pushed significantly back lower this morning despite both the risk-off and weak oil prices – a strong showing for the krone.
US employment data – not holding breath
US September nonfarm payrolls change is up later today and expected at Some conflicting thoughts and impression on the US employment picture this week – it is still a concern that the weekly initial claims number has only dropped some 50k in total over the last several weeks – a glacial pace compared to what is needed to suggest a more rapid return to normalcy and we have widely covered threats of imminent firings by Disney and airlines. Yes, the continuing claims drop looked impressive and the ADP payroll jump in August was a solid +750k, but isn’t it remarkable that the US ISM Manufacturing Index Employment sub-component continues to fail to show net hiring, with its reading of 49.2? Some of that likely linked to the ongoing malaise in the shale oil/gas patch. The official nonfarm payrolls change number out later today is so statistically massaged that it is often only relevant on a long-term moving average basis. My next focus for US labour market related data will be the Employment sub-component of the Sep. ISM Services survey to be published on Monday.
Upcoming Economic Calendar Highlights (all times GMT)
- 1230 – US Sep. Nonfarm Payrolls & Average Hourly Earnings
- 1230 – US Sep. Unemployment Rate
- 1400 – US Aug. Factory Orders
- 1400 – US Final Sep. University of Michigan Sentiment
Latest Market Insights
Quarterly Outlook Q3 2022: The Runaway Train
- Winter is coming to the financial markets as central banks are tightening their grip. How spring will look is still a question.
European energy crisis: it will get worse before it gets betterThe winter in Europe will be tough, but whether the result is political chaos or sustainable, innovative solutions is still undecided.
A difficult and volatile quarter awaitsAs the year draws to an end, commodities continue to be at centre stage of the world with growth pockets political uncertainty.
The bright side: crises drive innovationThe positive spin on crises is that they come with solutions. It is worrisome that deglobalisation may be a response to this crisis.
Green transformation in China: renewable energy and beyondGoing green, China needs to span numerous energy sources to ensure stability, as every source comes with a challenge.
Asia: Intermittent solutions, but a faster renewable adoption curveAsian energy supply is being squeezed. This and the adoption of renewables may change the investment sentiment in the region.
FX: A Fed thaw needed to deliver a sustained USD turn lowerThe US Dollar can keep momentum when the Federal Reserve continues to tighten, leaving the rest to play to their drum.
Autumn can become ugly for equities and bond holders. Comfort for Dollar longsTechnical analysis suggests that equities could face a tough Q4 as could fixed income. US Dollar positions could provide some upside.
The next stock market sector to watch, with stocks going nuclearAs the world scrambles to find affordable, sustainable energy, nuclear is getting attention from politicians and investors alike.
The crypto space is getting cold when the hype disappearsCryptocurrencies face a winter of their own as retail investors and governments are asking tough questions.