06/11 – Dollar weakens further ahead of election confirmation

USD: Civil unrest the next political hurdle

EUR: ECB may not like the euro this high

GBP: Government expands furlough scheme

US Dollar

The votes are still being counted and while US networks are being incredibly cautious over not wanting to get ahead of the story, it does seem clear that Joe Biden will win the Presidency. It looks likely that he will take Pennsylvania, Arizona and maybe Nevada with Trump winning North Carolina, Georgia and Alaska.

While Biden may have enough electoral votes to win, we do not expect a concession from the Trump camp anytime soon. His press conference last night showed a bunker mentality that markets may have to deal with for a number of weeks against a backdrop of wider civil tensions and unrest.

The dollar has moved weaker in the past 24hrs as investors seem to have swallowed their concerns over tax rises from a Biden administration but we will have to wait to see whether riots on the streets occur and what the market reaction may be. We think that the pressure may cause dollar strength to creep back into prices but a lot depends on the scale and length of any civil unrest that may play out and how much a defeated Trump stokes the flames.

We are in some ways heading into the most nerve-wracking part of the electoral process and we would not be surprised if the dollar started to express that angst soon.

Last night’s Fed meeting mirrored the majority of G10 central bank communications in the past month; more stimulus may be needed. We will never know whether they may have felt the need to pull the trigger yesterday were the election not taking place.

Today is also payrolls day but we think the market will have its focus drawn elsewhere by then.

Euro

The euro was happy to beat up on a weakened USD yesterday and is back in the 1.18s as of this morning. A move higher from here may be enough to start concerns that the ECB may need to talk the currency down; the ECB is always more than happy to limit the single currency’s upward progression.

Sterling

Sterling gains yesterday were a biproduct of three factors; the Bank of England’s lack of fanfare around their negative interest rate policy research, an extension of the furlough scheme by the Chancellor and a dollar that  had its worst one day fall since April.

The extension of the furlough scheme is a welcome addition to the UK’s economic response to the Covid-19 pandemic. The fact that it is the 80%, full-fat furlough ensures that employees who were able to navigate the first lockdown will be able to make it through a tough winter as well.

There are some questions that need to be ironed out however, mainly whether the furlough scheme is in danger of ‘mission creep’; we know of no rules that stop businesses furloughing employees after a negative Brexit impact, for example.

As we have said for a while this is not a time to talk about government spending and deficits; borrowing is extremely cheap right now and the costs of longer lockdowns and lower investment outweigh the cost of these measures. Spending too much money is not as big a risk as this pandemic is in the wider scheme of things.

With the election set to be put to bed soon, focus can return to political matters closer to home and we expect Brexit risk to creep back on to sterling’s radar over the weekend.

Elsewhere

Australian businesses, especially exporters, are facing up to a period without Chinese demand for a substantial portion of their products. China’s government has ordered a halt to imports of coal, barley, copper ore and concentrate, sugar, timber, wine and lobster.

Tensions have risen since the Australian government removed all Huawei tech from its 5G communications networks.

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Jeremy Thomson-Cook

Jeremy Thomson-Cook

Jeremy has over 13 years experience working in the FX industry. As a specialist in political risk mitigation and currency hedging, he regularly advises clients on the day-to-day moves of the markets and the implications of fiscal and monetary policy on international businesses.