Will It Be A Spooky Week For FX?

Will It Be A Spooky Week For FX?

Kathy Lien  | Oct 30, 2020 20:10

Most of the major currencies traded lower against the U.S. dollar 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 New York session. With only two more business days to go before one of the most closely watched 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 Nov. 3, the one thing that we can be certain of is that next week will be a volatile and possibly spooky one for currencies. 
 
In the 24 hours after the 2016 U.S. Presidential election there was a 300-point range in EUR/USD, a 450-point range in USD/JPY and a 500-point range in NASDAQ Composite. If either candidate refuses to concede on election night, we could see even bigger moves in currencies and equities. The euro 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 it deliver but it said all instruments could be recalibrated at its 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. Today, 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 the euro is grim, the main driver of market flows next week will be the U.S. election and the impact it has on risk appetite. 
 
There are three potential outcomes for Tuesday’s election – Donald Trump wins, Joe Biden wins or the votes are so close that neither candidate concedes. If Trump wins, stocks should rally and the U.S. dollar 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 the U.S. dollar could weaken. If there’s no clear winner, we expect broad-based risk aversion that will drive currencies and equities lower.
 
While the U.S. election will be the No. 1 focus next week, there are also three central bank meetings and labor market reports. The Federal Reserve and the Bank of England are expected to leave interest rates unchanged, but there’s growing belief that the Reserve Bank of Australia will lower interest rates. Considering that the RBA is meeting on election night, it may opt to wait until the election is over before easing to avoid its move being lost in market disruption. It's a pretty important week for the Australian dollar, with third-quarter retail sales, PMIs and their trade balance scheduled for release. The Bank of England also needs to ease, but with a Brexit deal still on the table (negotiators continue to talk), the central bank may choose to wait.
 
Employment reports are due from the U.S., Canada and New Zealand. U.S. companies are expected to hire back more workers in the month of October, but Canada, which 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.  

Kathy Lien

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Portia Mayers
Portia Mayers

Always appreciate your analysis. I eagerly look forward to the next.  ... (Read More)

Nov 01, 2020 14:26 GMT· Reply
Awi Ans
Awi Ans

exactly there is no corelation bw usd and stock and history says who ever wins stock rally all the way  ... (Read More)

Oct 31, 2020 11:32 GMT· Reply
Richard Collinson
Richard Collinson

Always a good read. Im not sure about USD moving with the stocks, more likely to be inverse as it has been. Also, markets seem comfirtable with a Biden victory & the higher stimulus it would bring, so for me stocks will rally on an uncontested Biden win, a Trump win would be a shock & for me would nean an initial sell off. Interesting week no doubt.  ... (Read More)

Oct 31, 2020 11:09 GMT· Reply
Awi Ans
Awi Ans

if bidden wins why stock goes down????  ... (Read More)

Oct 31, 2020 11:07 GMT· Reply
Albert the inventor Albert
Albert the inventor Albert

very helpful  ... (Read More)

Oct 31, 2020 10:54 GMT· 1 · Reply
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