Movers and shakers of currency markets

The most important drivers of currency markets this week will be stimulus talks, Brexit negotiations and new virus restrictions in Europe and Asia. Based on the continued gains in US stocks, equity traders are completely unfazed by the possibility of things going awry. Currency traders on the other hand are more skeptical with USD/JPY falling for the second consecutive trading day and high beta currencies like EUR and AUD slipping lower. The losses are small which suggests that forex traders are still trying to decide if it is wise to go against the move in stocks.

The primary reason why stocks are strong is because regardless of who wins the 3rd November election, investors expect a major stimulus package. The sooner the House agrees to a deal, the better it will be for the equity market. President Trump hopes to boost his chance of reelection by providing stimulus quickly but according to House Speaker Nancy Pelosi, the White House’s latest proposal is “grossly inadequate.”  Therefore, it is highly unlikely there will be an agreement on a big stimulus package before 3rd November, but Treasury Secretary Mnuchin and White House Chief of Staff Meadows are hoping for a quick win with a vote to approve the use of untapped Paycheck Protection Program funds.

The unpredictability of stimulus headlines, leaves data and Fed speak as the only catalysts. The US calendar is busy this week with inflation, retail sales, manufacturing data and the University of Michigan Consumer Sentiment report due for release. Federal Reserve Presidents are also expected to speak every day this week. Although, wage growth slowed in the month of September, a further recovery in spending is expected.  The same is likely for manufacturing but inflation will remain low. Consumer sentiment will be interesting because even though stocks rallied, confidence could take hit from the abysmal performance by both Presidential candidates at their first debate and Trump’s contraction of COVID-19.

Meanwhile the overall strength of GBP is impressive considering the looming Brexit deadline and rising virus cases. Prime Minister Johnson made it clear that he is ready to walk away if there is no agreement with the European Union by Thursday. The main issues are fishing rights and state aid. The EU wants the UK to follow its state aid rules and give their fishing fleets full access to UK waters. Extending the October 15th deadline is also an option but regardless of whether that happens if an agreement is not reached this week, sterling will crash lower. The economic outlook for the UK is grim. The government introduced a 3 tier lockdown plan that will weigh heavily on growth. The majority of England is at a medium level where groups are limited to 6 people and pubs and restaurants are forced to close at 10pm. A high level would restrict any mixing of households and a very high level would involve the closure of all pubs, bars and gyms. The city of Liverpool has been placed on very high alert.

Many Eurozone nations are in a similar boat with coronavirus cases surging across Europe. France reported nearly 27,000 new cases in one day this weekend. The continent is experiencing a full blown second wave and countries with cases far fewer than France, such as Germany and the Netherlands have announced restrictions. Spain declared a state of emergency in the Madrid region that would limit travel outside of Madrid and six other areas – there’s already a curfew in place for bars and restaurants. No matter how one look at it, the Eurozone economy is likely to be hit hard by the second wave. National governments are reluctant to move back to full lockdown despite cases being much higher than March but local citizens may take matters into their own hands and stay home. The Australian and New Zealand currencies traded lower on Monday, while the CAD rallied after last week’s better than expected labor market.

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