FX: Looming Stimulus Deadline Spooks Investors

FX: Looming Stimulus Deadline Spooks Investors

Kathy Lien  | Oct 19, 2020 21:34

The U.S. dollar traded lower against most of the major currencies on Monday as the new stimulus deadline looms. Over the weekend, House Speaker Nancy Pelosi gave the White House a 48-hour deadline. She said if they want to get something done before the election, it needs to happen by Tuesday. President Donald Trump is pushing for a deal, and the White House is cautiously optimistic, but the sell-off in stocks is a sign that investors don’t believe that there’s enough political support in Congress to support a new package. 
The only alternative for Trump is a quick win with a smaller stimulus package, but that’s also unlikely to receive Democratic support. There will be a stand-alone vote on more Paycheck Protection funds on Tuesday followed by a vote on a skinny $500-billion stimulus bill on Wednesday. If nothing happens by end of day Tuesday, stocks could fall sharply, leading to broad-based risk aversion in the forex market. For now, the possibility of stimulus is the only thing keeping the equity markets supported. 
There are a number of Federal Reserve officials scheduled to speak this week, but there’s very little market-moving data outside of Markit PMIs on Friday that will shed some light on whether the record-breaking new coronavirus cases in 10 states took a bite out of growth in October. Currently, only two U.S. states show a downward trend in new COVID-19 cases.
The impact of rising coronavirus cases in October will be an important question that we’ll get answers to this week, with PMIs from Japan, UK, the Eurozone and U.S. scheduled for release. The euro was one of the strongest currencies on Monday, but the move was driven almost entirely by short-covering. There’s been very little good news out of the Eurozone with France, Italy and Spain all reporting record COVID-19 cases this weekend. Germany reported 7,830 cases on Sunday, the highest ever, but there were only 4,325 cases on Monday. ECB member Robert Holzmann said despite the virus outbreak, there’s no need yet for more easing, but comments from other policy-makers suggests otherwise. ECB President Christine Lagarde said they haven’t run out of tools, and ECB vice-president Luis de Guidos confirmed that recent data shows the recovery losing momentum. We still believe that the path of least resistance for the euro is lower and Friday’s PMI reports could be the catalyst that sends EUR/USD to 1.15.
Sterling also avoided collapse after the EU said it is ready to intensify talks but we’re not optimistic that an agreement can be reached. The UK continues to remain resistant with UK’s Brexit minister Michael Andrew Gove saying talks would be meaningless if the EU did not change its stance. Between coronavirus cases in excess of 16,000 a day, new restrictions and Brexit uncertainty, like euro and sterling should be trading much lower. 
The rallies in the New Zealand and Canadian dollars on the other hand are justified. Not only did New Zealand report stronger manufacturing and service sector activity, but the country reported zero new virus cases on Monday. The government’s successful battle with COVID-19 helped Prime Minister Jacinda Arden secure a second term with a landslide victory this weekend. Her party also won an outright majority for the first time since 1951. So while the Reserve Bank openly discussed the possibility of negative interest rates, the general outlook for the economy is brighter than many other countries. The same could be said of Canada. While COVID-19 cases are on the rise (unlike New Zealand), recent labor market improvements should lift Canadian retail sales, which are scheduled for release this week. In contrast, the Australian dollar lagged behind. Weaker Chinese growth and the prospect of dovish Reserve Bank meeting minutes prevented AUD from rallying. The RBA is widely expected to lower interest rates against this year.

Kathy Lien

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