The Week Ahead: When Close Does Count

Foreign Exchange: The Week Ahead
When Close Does Count
Share this story:
Facebook
Twitter
LinkedIn
Email
Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
The US presidential election is less than 45 days out.  Given all the elements at play in the global economy and geopolitics, it is easy to see why this election is seen as one of the most important, if not the most important, election in decades.  According to a Pew Research Center poll, a record 83% of respondents say this election matters, up from 73% in 2016 and 63% in 2012.  As would be expected, consequential elections tend to draw bigger turnouts as illustrated by the 2018 mid-term elections.  If those mid-term turnout numbers provide any clues, this year’s turnout could challenge the record 63% turnout set by the 1908 presidential election.

While investors acknowledge the importance of this election cycle, it is less clear what the markets have priced in.  On one side, you have November implied volatility up aggressively which implies the expectation for elevated uncertainty.  At the same time, general market risk premium is relatively subdued.  A possible explanation for this could be the markets taking polls at face value. Namely, this means a Biden victory accompanied by a refrain from implementing policies that could derail the economy.

The market’s assumption on a Biden victory stems from Biden’s 7.5 point average lead in national polls.  For comparison, Clinton led Trump by only 2 points at a similar point in 2016.  However, it has to be noted that things are getting tighter.  Since August, Trump has been cutting into Biden’s lead in swing states.  According to the Real Clear Politics poll average, Biden’s lead in top battleground states has fallen to 3.5 points from 6.3 points in July.  Again for comparison, Clinton’s equivalent lead was 2.4 points in 2016.
 
In reality, the polls may be understating how close the race is as a material number of survey participants have indicated they would not report their true preference on telephone polls due to concerns their responses were not truly anonymous.  Finally with the debates still to come, many undecided voters should firm up their preference soon.

Given the above discussion, a close race seems like a reasonable assumption.  History has shown close races to be less supportive of US assets and this could be especially true this time around with Congress struggling to agree on a second pandemic stimulus package.  It would seem that the closer we get Election Day, the less incentive there is for the two sides to cut a deal.

Interestingly, the biggest risk from the market’s perspective might not be who wins but for a prolonged contested outcome.  Both sides have already begun preparing for a legal battle and rhetoric about the fairness of the election has already begun.  Should the race be close, the chances of contested outcomes that lead to prolonged uncertainty and create a policy vacuum with negative consequences substantially increases.  In light of these risks, safe haven assets including the US dollar could find support, despite its recent sell off, as market volatility rises.

FORECASTS

EUR

The overall view remains for further consolidation.  The USD remains under pressure but is unlikely to start sustained trend depreciation.  On the euro side, good news from the recovery fund has largely been priced.  A less-dovish-than-expected ECB should provide some support and chatter remains around the ECB and EUR strength.  This is countered by rising infections in Europe and a pullback in European economic surprises.  These push/pull factors likely net out to more range trading.

GBP

The Bank of England kept its policy rate and its bond purchase target unchanged by a 9-0 vote.  Notably, the bank surprised markets by announcing it is studying how negative rates might be implemented.  The combination of the Internal Market Bill and negative rate news dropped the GBP but optimistic comments out of the EU on a deal limited the downside move.  Looking forward, the GBP should remain pressured as it faces a sizable fiscal cliff and rising hard Brexit risks.  On the Internal Market Bill, PM Johnson granted a strategic concession to Troy rebels in a sign that he realized he overplayed his hand.  How this bill ultimately plays out and the EU response are key near term catalysts.

JPY

The Bank of Japan held rates unchanged as expected but upgraded its economic assessment.  On the political front, Suga has been confirmed as the new leader of the LDP, which confirms the continuation of Abenomic policies.  This should relieve some of the risk for rapid JPY appreciation but the bias for gradual appreciation remains.  Uncertainty around the virus and upcoming US presidential elections support safe haven assets, and real rate differentials continue to skew support towards JPY appreciation.

CAD

Over the past couple of weeks, the CAD has outperformed most of its G10 peers as it played catch up on previous underperformance.  Given this, on a YTD basis, USDCAD remains at the bottom of the G10 table, reflecting Canada’s unique vulnerability to COVID-19 shocks.  Canada depends on foreign financing and with yields expected to be near zero for the foreseeable future, the currency would have to adjust weaker should there be insufficient foreign investment to cover trade and FDI deficits.  The expectation remains for the loonie to be supported with the risk for consolidation as the CAD is now near fair value.

CNY

Headlines around US-China tension continue to come out but ultimately the markets are viewing the recent actions/rhetoric from both sides as largely symbolic.  A strong balance of payment position and the market consensus for USD weakness form the base for a stronger CNY.  Capital inflows, especially on the bond side, have been strong and are expected to be persistent as the global search of yield continues.  Longer term, geopolitics remain a concern especially as we get closer to the US election, but for now, expect the yuan to be supported.

AUD

The overall view remains unchanged for the Aussie.  Further strength as optimism around reopening remains but this strength should be capped given recent equity price action.  Risks from China remain as reports indicate that China is looking for other iron ore suppliers.  This past week brought a good jobs report, but it’s notable that most of the jobs created were part-time ones.  USD weakness should support AUDUSD but domestic headwinds and the AUD’s correlation to equities, that have turned shaky, should limit gains.

MAJOR CENTRAL BANK ACTIVITY THIS WEEK

9/24 Mexico Expectations for rates to remain unchanged at 4.50%
9/24 Switzerland Expectations for rates to remain unchanged at -0.75%
9/24 Sweden Expectations for rates to remain unchanged at 0.00%

KEY MARKET MOVING ECONOMIC RELEASES

United States and Canada

9/22 US Existing Home Sales Expectations for a 6.0 million print
9/23 US Manufacturing and Services PMI Expectations for a 53.3 and 54.5 print, respectively
9/24 US Initial Jobless Claims Expectations for a 840K print
9/25 US Durable Goods Expectations for a 1.3% increase

Europe/Eurozone 

9/23 EZ Manufacturing and Services PMI Expectations for a 51.9 and 50.5 print, respectively
9/23 UK Manufacturing and Services PMI Expectations for a 54.0 and 55.9 print, respectively 
9/23 German Manufacturing and Services PMI Expectations for a 52.5 and 52.9 print, respectively

Asia/Japan, and New Zealand 

9/22 Japanese All Industry Activity Index MoM Expectations for a 1.3% increase
If we can help you with any Foreign Exchange needs, please email foreignexchange@cnb.com 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 bank@banking.offers.report. Please do not reply to this email. To ensure the delivery of future emails, please add foreignexchange@emails.cnb.com 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.
TERMS & CONDITIONS  |  PRIVACY STATEMENT
Equal Housing Lender
NMLSR ID# 536994 | City National Bank Member FDIC
                                                           

Comments

Popular posts from this blog