Its been a choppy but for the most part risk on day; risk sensitive currencies, such as NZD, GBP, NOK and SEK are all performing well and, as a result of the lack of demand for safe havens in the FX space, USD and JPY sit at the bottom of the G10 performance table for the time being. DXY is down around 0.5% on the day to trade in the 93.20s (from overnight highs in the 93.80s).
Why are markets risk on?
Some commentators and analysts are pointing towards weekend news on the US fiscal stimulus front;
Over the weekend, US House Speaker Pelosi (the leader of the Democratic Majority in the House) said she is optimistic on a the prospect for a pre-election deal and gave the Trump administration 48 hours to reach an accord to pass stimulus before election day. Meanwhile, US President Trump said he wanted an even bigger stimulus deal than Speaker Pelosi is opting for (so does that mean he wants a more than $3.4trln package that Pelosi originally opted for?!).
Either way, talks are continuing, with Pelosi and Mnuchin to speak on the phone at 2000BST/1500EDT today – a call that will be crucial an assessing whether the US Congress is going to be able to pull a rabbit out of the hat and conjure up stimulus prior to the election (markets for the most part do not expect this will be the case), or whether pre-election stimulus talks will finally fail.
Given that most of the financial assistance provided in the CARES Act (Congress’s major fiscal stimulus response to the initial Covid-19 lockdown back in March/April) expired back in July,
markets would prefer further fiscal stimulus to come sooner rather than later. Indeed, we have seen notable slowing in the pace of the US economic recovery since July, hence why the Fed has been urging Congress to get more stimulus done as soon as possible.
That is why the possibility that the Trump Admin and Democrats might be able to get some stimulus through prior to the election is seen as a “risk on” outcome.
However, if they don’t manage to get a deal (which pretty much everyone expects is the case at this point), this ought not be too bad an outcome for markets (stocks markets would likely see only very modest downside);
You see whatever the outcome of the election, BIG fiscal stimulus is coming in early 2021 at latest – that is what both Trump and Biden want. This ought to keep a floor under US equities, and on the same side of that very same coin… ought to keep a lid on USD upside.
Elsewhere, Credit Agricole cite the negative long-term outlook for the USD as one important factor to bear in mind over the coming weeks;
“The most frequently mentioned reasons is the dovish Fed outlook, which could keep US real yields close to record lows for a long time”. Moreover, “FX investors seem to expect that the political backdrop in the US will become less supportive for the USD after the election, either because of ineffective policymaking by a divided Congress and presidency or because of less market-friendly policies that could be the hallmark of a potentially Democrat-controlled Congress and presidency. In turn, this could reduce the appeal of USD assets and encourage portfolio diversification away from the USD.”
Elsewhere, the bank continues, “recent client discussions have also highlighted that he FX investors are fretting about the prospects of a further deterioration of the US twin deficits (current account and fiscal deficit as a share of GDP) that could lead to a period of USD underperformance, similar to 2003-07.
Finally, “Some clients even worry that the USD could lose its status as a preeminent reserve currency as we inch closer to a multipolar global political and economic system and because the growing US external imbalances may render the USD too volatile to be a ‘safe asset’” concludes the bank.
Just a few reasons to be cautious buying USD going forward then..!
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