Will this be a spooky week for currencies?

Most of the leading currencies traded lower against the USD on Friday as the Dow Jones Industrial Average tumbled more than 300 points. At one stage, stocks were down over 500 points but came off their lows by the end of the NY session. With only two more business days to go before one of the most closely watched US Elections ever, investors are reducing their positions in anticipation of big market moves.

It’s a tight race with an outcome that may not be known until weeks after 3rd November. One thing that we can be certain of is that the week starting on Monday will be a volatile and possibly spooky one for currencies.

In the 24 hours after the 2016 US Presidential Election, there was a 300 point range in EUR/USD, 450 point range in USD/JPY and 500 point range in NASDAQ. If either candidate refuses to concede on election night, we could see even bigger moves in currencies and equities.

EUR fell the most this week but that was not a surprise. The European Central Bank was widely expected to set the stage for easing in December and not only did they deliver, but they said all instruments could be recalibrated at their next meeting.

Even though Eurozone GDP numbers were better on Friday EUR/USD extended its losses on the worry that the contraction in the fourth quarter will be steep.

Earlier this week Germany and France issued nationwide lockdowns and on Friday, Belgium announced strict restrictions to curb the virus. All non-essential businesses will close and schools will see their holiday extended until mid November. While the outlook for EUR is grim, the main driver of market flows next week will be the US Election and the impact it has on risk appetite.

There are 3 potential outcomes for Tuesday’s election – Trump wins, Biden wins or the votes are so close that neither candidate concedes. If Trump wins, stocks should rally and USD could rise. High beta currencies should fall on the prospect of further tensions with nations abroad while USD/JPY will rally alongside the move in equities. If Biden wins, stocks are expected to fall and USD could weaken. If there’s no clear winner, we expect broad based risk aversion that will drive currencies and equities lower.

While the US Election will be the number one focus this week, there are also 3 central bank meetings and labor market reports. US Fed and Bank of England are expected to leave interest rates unchanged, but there’s growing belief that Reserve Bank of Australia will lower interest rates.

Considering that the RBA is meeting on election night, they may opt to wait until the election is over before easing to avoid their move being lost in market disruption. It is actually a pretty important week for AUD with third quarter retail sales, PMIs and their trade balance scheduled for release. Bank of England also needs to ease, but with a Brexit deal still on the table, the central bank may choose to wait.

Employment reports are due from the US, Canada and New Zealand. US companies are expected to hire back more workers in the month of October but Canada, who reported very good job growth in September could see give back this month. New Zealand data should be strong with the country eradicating COVID-19 for a second time in Q3.

 

 

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