Little joy for USD with a week to go until the US elections

-->Little joy for USD with a week to go until the US elections          

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  USD: US fiscal stimulus deal looks unlikely before US elections – a modest but unconvincing blip up in the broad based USD Index (DXY) overnight (up +0.3% to 93.05) is blamed on risk aversion sentiment emanating from stalled US fiscal talks as House Speaker Pelosi and White House Chief of Staff Mark Meadows accuse each other of “moving the goalposts” in negotiations. But even if a pre-election fiscal deal is reached (unlikely) there is now probably not enough time to get a bill written up and passed before November 3rd. Instead, attention now turns to whether a bill is possible in the post-election lame-duck or if it will have to wait until the new Congress both of which potentially pose considerable headwinds for the US consumer (and ultimately USD).   

• USD: Rising US cases offsetting the Covid-19 spike in euro zone - Spain announces a nationwide night-time curfew while Italy introduces further measures including limiting opening hours for bars and restaurants, and shutting entertainment, gambling venues and gyms. Belgian officials confirm that a new lockdown cannot be excluded if the infection rate doesn’t come down by next week. All this should weigh on euro sentiment but USD also appears to be facing headwinds of its own from virus infections in the US on the rise with record cases across the country for a second day (another 85,317 new cases through Saturday, according to JHU and Bloomberg data).

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  USD: US elections – a “blue wave”, status quo or something else altogether? - Polls continue to predict a victory for candidate Biden, but polling averages have begun to narrow and swing state polling differences remain modest. 59m have voted (nearly 43% of the 2016 turnout) with focus shifting to granular early-voting data in North Carolina, which remains a key swing state of the presidential election and a potential tipping point for the Senate majority. Most underpriced are 2 scenarios – (1) a contested election outcome, and (2) Trump winning the White House while Democrats take the Senate (ie. Democrats take charge of Congress). With implied FX vols at near lows, either of these 2 scenarios could potentially cause a material spike in FX vols. As to whether President Trump could still win (resulting in a tactical rally in USD), comparisons to 2016 have increased as the swing state polls (Biden +3.8%) are comparable to 2016 (Clinton +3.8%) even though candidate Biden’s overall lead is significantly larger than Clinton’s at this point. As to whether a Blue Sweep could structurally weaken USD, the unit has weakened noticeably from early June to early September but has more or less flat lined since, which begs the question as to how much of a blue wave sweep is actually priced into USD.            

Data releases overnight             

• EUR: German Ifo Business Climate falls -0.7 points to 92.7 in October, slightly worse than consensus with expectations dropping -1.7 points to 95.0, significantly below consensus but current assessment rising +1.1 points to 90.3, slightly better than expected. Sector-wise, manufacturing improves further (in keeping with the PMIs), while domestic-oriented services and construction cool. Bottom line - the German Ifo index has declined for the first time since April as the second wave of the pandemic spreads and intensifies in Europe. The move is worse than consensus but holds few additional implications for the ECB other than what is already expected (that the ECB will likely add a further EUR500bn to its PEPP in December, raising its total size to EUR1.85trn).       

• USD: New home sales continue the run of solid housing data - US new home sales slow to a still-strong 959K annualized pace in September from 994K in August, just below expectations for 1025K. Citi analysts point to a range of housing data, including September new home sales, signaling a pick-up in housing demand and investment which is likely to persist past the period of pent-up demand. While the current level of activity may not be sustained into H2 2021, Citi analysts expect the sector should remain supportive of growth at least for the next couple quarters.   

Week Ahead

• USD: US GDP Annualized QoQ – Citi: 32.4%, median: 31.8%, prior: -31.4%; Personal Consumption – Citi: 37.1%, median: 38.7%, prior: -33.2%; Core PCE QoQ – Citi: 4.0%, median: 4.0%, prior: -0.8% - US real GDP should bounce-back a substantial 32.4% annualized in Q3 following record drop in Q2.  

• USD: Conference Board Consumer Confidence – Citi: 100.4, median: 101.7, prior: 101.8 – Citi analysts expect a modest pullback in consumer confidence, reflecting a renewed increase in virus cases or possible frustration with lack of Congressional agreement on a new fiscal stimulus package.   

• EUR: ECB meeting – Citi analysts expect no decision of substance taken (though expect the Governing Council to hint at the likelihood of policy easing in December by increasing the overall residual envelope of PEPP (by a minimum of EUR500bn) and its timeline (by another six months).

• AUD: Australia Q3 CPI; Citi headline CPI forecast QoQ; +1.3%, Previous; -1.9%, Citi headline CPI forecast YoY; +0.4%, Previous; -0.3%, Citi underlying CPI forecast QoQ; 0.1%, Previous; -0.1%, Citi underlying CPI forecast YoY; 1.1%, Previous; 1.2% - A modest pickup in underlying inflation but with few implications for the RBA. 

• CAD: BoC meeting – Citi: 0.25%, median: 0.25%, prior: 0.25% - Citi analysts do not expect any change. Citi’s base case is that BoC’s next step will likely be to remove accommodation. Meanwhile, forecasts in the Monetary Policy Report should show a stronger rebound in Q3 than expected back in July, but a slower pace of recovery into 2021, reflecting rising virus cases and new activity restrictions. 

• CNY: China Manufacturing PMI October 51.5 -- 51.5 – Citi analysts expect manufacturing PMI to be largely flat around 51.5 in October.    

This is an extract from the Daily Currency Update, dated October 27, 2020. Please approach a Citigold Relationship Manager if you would like more information.