There are roughly 4 months until the presidential election, and currently, public sentiment surveys, national and state polls, and betting markets all point to Joe Biden as well positioned to win. Given this, history has shown that we need to be careful when drawing conclusions from surveys given polling errors. If anything, the current cycle is representative of this more than normal. Not only does rising COVID-19 cases raise uncertainty around the public’s view of the president, it could also affect voter turnout/shift large parts of voting to mail-in ballots. Nevertheless, a Biden presidency remains a very real possibility. Should there be a Biden administration, a key question will be Biden’s approach to China.
It is important to remember that US policy makers on both sides of the aisle have expressed concern on China. Even Chinese officials agree on this point. Zhou Xiaoming, a former Chinese trade negotiator has been quoted as saying, “I don’t think the election will change the relationship in a fundamental way. The deep feeling in the US is that the US should contain China…If Biden is elected, I think this could be more dangerous for China, because he will work with allies to target China, whereas Trump is destroying US alliances.”
Based on Biden’s policy proposals and comments, expect the Biden administration to pivot back towards a multilateral approach with an emphasis on strengthening the post WWII international order. This could take the form of a revised agreement in the Asia-Pacific area—such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (formerly TPP). Alternatively, it could be a renewal of the US-EU trade agreement or a new alliance designed to unite democratic capitalist countries.
Regardless of the path chosen, expect Biden to incorporate requirements in trade and investments with national security and preferential trading elements to encourage technological cooperation. As a result, the view remains that it is more a matter of how, and not if, the US-China relationship will weaken regardless of who wins the election.
The ECB’s latest meeting came and went pretty much as expected. The bank left its policy rate unchanged and remains in a wait and see mode. Overall, the euro remains stuck in a tug of war between improving economic data as economies re-open and rising infection numbers. Several countries have paused their re-opening/re-imposed lockdowns as a result of negative infection numbers. If this trend of increasing infections continues, it will have to matter, but for now, markets remain focused on the positive. Recent price action indicates that markets are selling into dollar strength rather than buying dollar dips which suggests a bias for USD weakness.
The GBP finds itself at the bottom of the G10 once again. Markets continue to weigh the possibility for negative BoE rates with other banks expected to hold the effective lower bound. There have also been few signs of progress on Brexit. While it’s difficult to directly monitor progress, both sides appear to be far apart. As we move closer to the end of the transition period, expect the GBP’s risk premium to increase. The UK also finds itself facing one of the poorest fiscal imbalances in the G10 and the reliance on foreign inflows without an interest rate advantage. All together, the GBP bearish stance remains intact.
USDJPY should continue to be range bound as the tug of war continues between improving economic data and rising COVID-19 infections both domestically and around the world. The BoJ kept its policy measures unchanged at its latest meeting and is likely on hold for the foreseeable future. Should USDJPY break out of its current range, the bias is for yen strength. Japan is facing a period of disinflation which should lead to real interest rates supportive of yen appreciation. Additionally, should the mortality rate get dragged higher by rising infection numbers, expect safe haven currencies to be supported.
The BoC held rates steady at Governor Macklem’s first meeting but it did move to a more accommodative stance with explicit forward guidance and a recast of its asset purchase program. Notably, the loonie has underperformed in the G10 despite the market’s risk on stance. This likely represents Canada’s unique vulnerabilities to the negative economic impact stemming from the COVID-19 crisis. Expect USDCAD to continue to range trade.
The yuan continues to remain supported despite headlines around rising US-China tensions. Ultimately, the markets are viewing recent actions/rhetoric from both sides as largely symbolic. Specifically, the markets have moved past fears that the Phase 1 deal could fall apart with both countries moving back to tit-for-tat tariff escalation. However, over the medium term, skepticism that risks have fully receded is warranted especially as we move closer to the US election. For now, expect continued CNY stability.
The AUD’s correlation to risk assets/equity prices continues but this relationship could be set to weaken. Australia’s recovery prospects took a hit with the reinstatement of lockdowns in the state of Victoria due to rising infection numbers. The adverse effects on tourism, education and international travel will be headwinds for the AUD. Additionally, the risk for a pickup in tensions with China still remain. On the monetary front, the RBA continues to be accommodative and provide liquidity.
MAJOR CENTRAL BANK ACTIVITY THIS WEEK
No Major Central Bank Meetings
KEY MARKET MOVING ECONOMIC RELEASES
United States and Canada
US Existing Home Sales
Expectations for a 4.82 million print
US Initial Jobless Claims
Expectations for a 1.28 million print
US Manufacturing and Services PMI
Expectations for a 52.0 and 51.0 print, respectively
Canadian Retail Sales MoM
Expectations for a 22.0% increase
EZ Manufacturing and Services PMI
Expectations for a 50.0 and 51.0 print, respectively
EZ Consumer Confidence
Expectations for a -12.0 print
UK Retail Sales MoM
Expectations for an 8.0% increase
UK Manufacturing and Services PMI
Expectations for a 52.0 and 51.5 print, respectively
German Manufacturing and Services PMI
Expectations for a 48.0 and 50.3 print, respectively
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