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USD Languishes Near Lows: What Happened in FX Markets This Week...



It has not been a great week for USD. Despite global equities putting in a broadly not great performance on the week (the S&P 500 is about 0.5% lower on the week, while the Stoxx 600 is closer to being 1.0% lower), USD has not found much by way of safe haven demand. DXY has, sliding from not too far from the 94.00 handle at the start of the week to fresh lows of the month beneath the 93.00 level on Wednesday and to lows of around 92.50 (albeit, DXY is off lows and trades just under 93.00 right now).


Market commentators have argued that FX markets must have been focusing on the USD outlook in 2021; big US fiscal stimulus packages are expected to be in action by latest January, boosting the US economy, while it is hoped that by the end of the Northern Hemisphere winter, Covid-19 will be back under control (hopefully with the help of a vaccine), boosting global growth. Meanwhile, the FOMC has already signalled that, given its new average inflation targeting policy, it will not be jumping to tighten monetary conditions at the first sign of economic improvement… an all in all bearish USD position, which is compounded by other concerns such as the rapidly rising US government deficit and debt/GDP ratio, as well as the country’s ballooning trade deficit.


USD weakness this week has been of greatest benefit EUR, NZD, GBP and CHF, followed by JPY, AUD and lastly CAD. GBP got a sizeable boost midweek after the UK re-engaged in official negotiations with the EU, with the two sides aiming to have a deal ready by mid-November – this has helped GBP understandably. Meanwhile, UK data has largely been a sideshow (although August retail sales was notably stronger than expected)

But the fact that EUR and NZD are doing so well seems a little odd given rising Covid-19 cases in Europe that are already showing up in the data as having a negative economic impact (as you would expect it would – see today’s Eurozone October preliminary PMI data).


One positive factor that some are pointing towards is the successful launch of the EU’s new recovery fund bond; EUR 17bln in EU debt was sold and investors gobbled it up, indicating that markets are happy with the EU’s new move towards fiscal union since the Recovery Fund was agreed on.



NZD meanwhile saw soft CPI data, which hardly dented it, and dovish remarks from the RBNZ governor, who indicated more QE is likely on the way in November. Perhaps markets had already priced in RBNZ dovishness.


CAD might have struggled to outperform given 1) subdued oil prices, which are ending the week a little lower than where they started and 2) the fact that CAD had already been an outperformer in recent weeks and 3) retail sales data midweek was very soft.


AUD, meanwhile, felt the weight of dovish remarks from RBA Assistant Governor Kent and dovish RBA minutes earlier on in the week, which triggered a sell off in AUDUSD at one point to the low 0.7000s (the cross now trades back above 0.7100).


The breakdown in the correlation between stocks and FX (pretty much characterised by stocks up, USD down) is the most significant I have seen in a while, and perhaps is due to the US Presidential election being so close; the final Trump vs Biden debate went down last night without as much fireworks as the first debate.


Biden’s lead over Trump has closed by 3% to just over 7% in the last 10 day. With 11 days to the election, if the gap continues to tighten at this rate, equities will likely start getting more concerned about a possible contested outcome or Trump re-election. This outcome ought to be USD supportive. 

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