Morning Commentary: Y2K All Over Again

Foreign Exchange - Morning Commentary
Y2K All Over Again
Share this story:
Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Market volatility, especially in the US equity markets, has markets on edge.  The equity market recovered some of its losses yesterday and have opened higher today but continue to seek out a trend amid extreme and sustained uncertainty.  

As we look forward, it is reasonable to say that uncertainty will be the dominant risk for the foreseeable future; geopolitical risks are rising; the trend towards innovation and adoption of new technological solutions has accelerated; and economic slack will remain through at least 2021.  

So while the USD should continue to face near term challenges, the background outlined above makes a sustained USD downtrend unlikely.  Many have argued that the equity selloff was a tech-focused one driven by technical factors and not broader economic ones.  While there may be some truth to the technical story, it is undeniable that US election uncertainty has risen as FX option pricing shows a steadily increased risk premium for most currency pairs.  With the possibility of the election outcome not known by the night of November 3 due to increased absentee and mail in voting slowing the count and potential legal challenges from both sides, election uncertainty could ultimately be higher than previously thought.  

As a case study, we can look at the 2000 US election that was not decided for more than a month after election night.  Asset price action between election night and when the Supreme Court ruled on December 12 could provide clues as to what to expect this year.  During this period in 2000, the US enjoyed strong economic performance with the euro, Swiss franc and gold outperforming and equities (S&P 500) underperforming.  Note that the yen didn’t behave like a safe haven as the country continued to struggle with its post-bubble financial crisis.  Clearly, caveats apply as there are differences in markets conditions between then and now, but the current macro backdrop does support a similar uncertainty-increasing environment of a contested election in 2020 as seen in 2000.  

For the balance of this week, central bank decisions will be the main focus with the Fed, Bank of England and Bank of Japan all announcing rate decisions over the next couple of days.  Expect the Fed to take its first steps in shifting its policies towards accommodation rather than improving market function.  Similarly, the BoJ will remain on hold with any action limited to existing COVID-19 measures.  Finally, the Bank of England should also be on hold with the risk for a dovish shift and downward GBP pressure on negative Brexit headlines.
  • The Problem Solvers Caucus plan, which has been worked by a group of 50 Republicans and Democrats, is attempting to break the stimulus deadlock with a $1.52 trillion relief bill.  Steven Mnuchin has hinted that the White House would be open to accepting such a plan. 
  • The Aussie dollar is the G10’s best performer overnight as the RBA’s minutes showed it didn’t plan on easing again anytime soon.  Better than expected Chinese data also boosted sentiment.  
  • The Chinese yuan continues to strengthen and sits around its strongest levels since mid-2019.  Overnight, China’s industrial production and retail sales number both beat expectations, supporting the view of a continued economic recovery.  The US-China yield differentials also sit near all-time highs which continues to draw strong foreign flows into the Chinese bond market.  With central banks around the world all in lower for longer mode, the search for yield should make these Chinese bond inflows resilient.   
  • The UK government won the first vote on the controversial Internal Market Bill last night as expected.  The bill is expected to face more significant resistance as it continues through the Commons and the Lords, but Johnson’s majority in the Commons and convention for the Lords not to block Commons legislation gives this bill a good chance of becoming law.  The view remains that this bill is for negotiating leverage as much as anything else as the UK government needs to show it is willing to accept a no deal exit.
  • UK unemployment rose to 4.1% from 3.9% and came in at market consensus.  However, the low participation rate and the expiring government furlough program adds noise to this number.
If we can help you with any Foreign Exchange needs, please email or call (800) 447‑4133.
Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!
Follow City National Bank on social media:
Facebook Twitter LinkedIn Google Plus YouTube
Non-deposit investment products:
Are not FDIC insured,
Are not deposits or other obligations of City National Bank and are not guaranteed by City National Bank, and
Are subject to investment risks, including possible loss of the principal invested.
This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.
Unsubscribe from this list  |  Update email preferences
This message has been sent to Please do not reply to this email. To ensure the delivery of future emails, please add to your email address book or safe sender list.
Copyright ©2020 City National Bank – All Rights Reserved.
350 South Grand Avenue, 12th Floor, Los Angeles, CA 90071
City National Bank is a subsidiary of Royal Bank of Canada.
Equal Housing Lender
NMLSR ID# 536994 | City National Bank Member FDIC


Popular posts from this blog

Acquisitions or Alliances: What's Your Growth Strategy?