Morning Commentary: Europe Concedes Currency Leadership to Asia

Foreign Exchange - Morning Commentary
Europe Concedes Currency Leadership to Asia
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Over the past month, the U.S. dollar is broadly unchanged, but this month long view masks significant intra-month movement. During a one-week period at the end of September, the U.S. dollar strengthened by ~2.2%, the second largest weekly gain over the past five years. The magnitude of the U.S. dollar’s move that week was driven by quarter-end rebalancing flows, rising COVID-19 cases in Europe and weaker flash PMI numbers. Of course, we now know that the U.S. dollar subsequently gave up those gains to finish nearly unchanged over the past four weeks.

During this time frame, outperformance for Asian currencies has been particularly notable. This outperformance can be attributed to two key factors. The first relates to economic activity, which continues to improve globally, albeit with a noticeable regional rotation. Case in point, flash PMI data showed a continued improvement in China but was mixed or unchanged in Europe and the U.S. Additionally, rising COVID-19 cases, which are the key offsets to an economic rebound, have predominantly been concentrated outside of Asia.

The second factor supporting Asian currencies has been polling data, at both the national and swing-state levels, that shows an increased likelihood for a Biden administration and a Democratic Senate. The increased probability of a blue wave is relevant to Asian currencies because a Biden administration is expected to take a less confrontational approach on tariffs, hence the recent strength in Asian FX.

Looking ahead, the foreign exchange market is always sensitive to the global growth narrative, but with U.S. elections so close, the elections are likely to dominate headlines and price action.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • Equity markets have lost a bit of steam after yesterday’s strong gains due to negative headlines around a Johnson & Johnson (J&J) vaccine trial. J&J had to halt its trial “due to an unexplained illness in a study participant.” It remains unclear whether this participant received the drug or the placebo.
  • Stimulus talks in the U.S. remain stuck in place after Senate Republicans rejected President Trump’s call for a larger package than the plan proposed by House Democrats. As expected, Senate Republicans are unwilling to move higher than their $500 billion skinny bill, making any deal reached between the White House and House Democrats moot. Treasury Secretary Steven Mnuchin and House Speaker Nancy Pelosi are scheduled to meet again this week, but the prospects of a workable deal remain bleak.
  • The International Monetary Fund (IMF) released its latest forecast and was less bearish than it was in June. The agency now sees global GDP contracting 4.4% this year versus a projected contraction of 5.2% back in June. Despite a less negative outlook, the IMF’s projected contraction would be the sharpest correction since the Great Depression.
  • U.K. jobs data disappointed market expectations with the three-month unemployment rate rising to 4.5% from 4.1%, as employment declined by 153,000 jobs. Both of these numbers came despite government support measures, meaning the country is likely in for further deterioration in the labor market in the months ahead.
  • Germany’s ZEW survey was mixed, with the expectations segment coming in at 56.1 versus consensus for a 72.0 print. The current situation segment came in roughly at consensus.
  • Japan’s prime minister ordered his administration to put together a fiscal package before year-end.
  • China’s trade data beat estimates, with exports and imports rising 9.9% and 13.2% year over year, respectively. Both of these numbers were much stronger than expected. The surge in imports could be related to stockpiling by the telecommunications sector ahead of further sanctions by the U.S.
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