FX Update: USD breaks support but do bears want to press their case pre-election?
Head of FX Strategy
Summary: The US dollar closed last week below important support levels as investors position for a large US stimulus deal and wax positive on a Biden presidency as odds continue to tilt his way in the latest polls, easing fears of a contested election. Elsewhere, China initiated a move overnight apparently aimed at slowing the pace of yuan appreciation.
USD crosses below important support, China applies the brakes to CNY rally
The US dollar closed Friday on a weak note, with risk sentiment continuing to improve on the prospects for a stimulus package possibly set to pass before the election on Trump’s latest change of tune in favour of a large package and the market apparently warming to a strong Democratic outcome (which must include taking the Senate to realize any portion of Biden’s campaign platform), choosing to see the glass half full of significant new stimulus under a Biden presidency and ignoring for now the glass-half-empty of the risk of climate regulations and even more importantly, higher taxes on corporations and high incomes and large capital gains. The close above 1.1800 in EURUSD and above 0.7200 in AUDUSD (discussed further below) sets the tone as the week gets underway, and after the strong run higher in risk sentiment, we’ll need to see US politicians deliver on stimulus to keep the US dollar heading weaker still. My chief question is whether USD bears want to press their case in further here with more than residual uncertainty around election outcomes, particularly on whether the Dems can take the Senate.
Earnings season is also getting under way this week and will be important for risk sentiment as well. One interesting one to watch for insight on the economy is Wells Fargo, the largest, largely Main-Street focused US bank, set to report earnings on Wednesday. What it is seeing with its enormous client base as the initial US stimulus push has slowed could provide fresh insights on the “K-shaped” narrative of diverging fortunes for winners and losers in the Covid-19 crisis.
Moving somewhat at odds with the weaker US dollar, China overnight launched a push apparently aimed at making a statement against the recent pace of yuan declines as it eased rules for financial institutions on speculating against the yuan (dropping the reserve ration to zero from 20%) and set the fix much stronger than expected. This, after the USDCNY rate traded near the lows of early 2019 on Friday. If China makes a more concerted effort to reverse the tide, this could certainly frustrate the pace of USD weakening elsewhere.
It is rather impressive that the Australian dollar managed to close up above the important 0.7200 pivot and maintain that price action today despite China’s moves to at least slow the pace of yuan appreciation. This move above 0.7200 was an important technical trigger for keeping the focus to the upside but needs further support from the reflationary narrative of rising commodity prices and a US stimulus package on its way to keep the USD weaker – otherwise, we risk another false directional move as the market may frustrate any attempt at chunky directional moves until we clear up the US election uncertainties once and for all.
Sterling – still no clarity, but market placing its chips on a breakthrough ahead of Thursday.
UK Boris Johnson continues to claim that he is ready to walk away from talks with the EU if a deal in principle is not reached by the October 15 (this Thursday) negotiation deadline he set months ago for the terms of the post-Brexit transition period relationship. After weekend talks between Johnson and France’s Macron and Germany’s Merkel, Johnson said that the EU will have to move on its position on fisheries. Top EU negotiator Michel Barnier and the UK’s David Frost are set to resume talks in Brussels today. The market continues to price sterling as if a breakthrough is more likely than not this week, but the situation will almost inevitably produce significant volatility in either direction depending on the outcomes around the Thursday deadline. The 1.3000 level in GBPUSD was crossed more due to USD weakness, while EURGBP has dithered below 0.9100 without approaching the more pivotal 0.9000 area. To get below there, we would likely need an agreement-in-principle headline this week.
The G-10 rundown
USD – the US dollar is on its back foot but the chief question is perhaps whether the market is really ready to doing anything dramatic on the greenback until we at least get to the other side of the election.
EUR – the positive risk sentiment in the US only echoed weakly into Europe and the positioning in US futures market is still extremely heavily long EUR – not the usual starting place for a major advance.
JPY – both eyes on US yields this week after the recent spike higher – JPY could stay resilient if this is a false signal and yields head back lower – EURJPY one way to get contrarian on that account. Actua
GBP – two-way risks this week as noted above on the UK’s October 15 deadline, though even a breakdown in talks doesn’t necessarily mean that no deal is possible before December 31.
CHF – the franc hanging in there below 1.0800 in EURCHF even as the weekly CHF sight deposits actually shrank slightly last week.
AUD – as noted above, the local technical key is the 0.7200 level in AUDUSD, while China moving against CNY appreciation could slow the prospects for upside, as could the uncertainty of the US election.
CAD – the USDCAD moving in sympathy with USD weakness and has some room left ahead of the giant 1.3000 chart level – have a hard time seeing a major new move ahead of the US election.
NZD – the RBNZ dusting off its negative rates talk still has AUDNZD above 1.0800, a pivotal level for differentiation with the relative NZD strength or weakness in the crosses.
SEK – the krona enjoying the risk sentiment surge, but is the momentum positive enough here in the EU economy to continue to drive a fall in EURSK all the way to the sub-10.25 lows again – doubtful tactically.
NOK – watching the price action in the pivotal 10.75-80 area in EURNOK as a recent oil recovery has helped reverse a good portion of the NOK’s steep decline from September, but we need more from oil and risk sentiment in Europe specifically to mount a challenge toward the 10.40 area cycle lows again.