Morning Commentary: Improved Knowledge Leads the Way
A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
Improved Knowledge Leads the Way
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Andrew Kositkun Foreign Exchange Head Trader
European currencies have conceded their FX leadership to Asian currencies as the resurgence of COVID-19 cases in Europe weighs on economic activity. In response to increased virus infections, European governments have implemented increased localized restrictions on activity and mobility to stop a wider spread.
The concern, from a growth perspective, is that both voluntary economic withdrawal and government imposed measures will damage an already fragile recovery. Moreover, countries in the Northern Hemisphere are particularly vulnerable as they are heading into the fall/winter season that brings the type of weather/behavior that leads to higher infection rates regardless of the virus situation.
But things aren’t all negative. Certainly caution is warranted, but improved understanding of the virus and better treatment methods have not only improved health outcomes but also the economic outlook. Even though case numbers have broken records set in the spring, test positivity rates and case fatality rates remain lower than spring highs. As a result of better treatments, the bar for blanket lockdowns has been raised. Instead, it appears that less growth-detrimental measures (localized lockdowns) should be enough to slow down the spread without overwhelming the healthcare system.
Notably, FX price action has started to reflect this dynamic with FX performance less negative than what the historical correlation to COVID-19 case increases would suggest. Looking forward, it is reasonable to expect assets in countries better suited to handle the virus to deliver relative outperformance.
Also helping the recovery has been strong fiscal and monetary policy. Policy makers are keeping a close eye on developments, and markets will get another look into their thinking with the European Central Bank (ECB) and Bank of Japan (BoJ) announcing their latest rate decision overnight. It is expected that the ECB and BoJ will keep rates on hold, which is exactly what the Bank of Canada (BoC) did earlier this morning. However, these holds should be seen as more of a “wait and see” as further support is likely should there be any deterioration in the economic outlook.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
U.S. COVID-19 cases have now eclipsed the July peak, with the 7-day average of new cases exceeding 68K for the first time. The spread of the virus has been broad-based, but the Midwest has seen a particularly bad spike. Relative to a week ago, 35 states are experiencing double-digit new case growth. In the Euro area, the 7-day average of new cases has risen by 58% to over 99K in the big 5 Euro-area economies. Globally, the 7-day average of new cases has risen by 21% from a week ago to 432K.
In response to rising COVID-19 numbers, France is expected to announce extended curfew hours and weekend lockdowns. In Germany, a new “circuit breaker” with tight restrictions on social contacts is expected. Spain has reintroduced a “state of alert” and new curfew hours, with Italy and Switzerland also expected to reintroduce lockdown measures.
Early voting numbers show that approximately 70 million votes have already been cast. This is more than 50% of the total ballots cast in the 2016 election. Betting odds have tightened for the Democrats at both the presidential and Senate level but remain within the month’s range.
The USDCNY fix was the highest since Oct. 16. This was the first fixing since the People’s Bank of China signaled it wouldn’t lean against yuan weakness by removed its anti-cyclical factor.
According to news sources, European Union and U.K. negotiations have made progress towards resolving some of their biggest disagreements. While differences remain, the two sides have begun working on a text of a potential agreement. After weeks of stalemate, the tone of the talks has turned more positive but if Brexit has taught us anything, it’s that negotiations do not move in a straight line.
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