US and European equities under sharp pressure for a 2nd day but FX markets fairly muted – what gives? 3 possible explanations for US and European stock market swoon this week while FX markets stay relatively calm
USD: Market capitulation on US fiscal hopes with the realization that even if a pre-election fiscal deal is reached (unlikely) there is probably not enough time to get a bill written up and passed before November 3rd - 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 (in January 2021) – a risk aversion scenario with analysts attributing USD gains earlier this month to the lack of traction in US stimulus talks. But USD hardly moves over the past 2 trading sessions.
USD: Markets sharply raising the probability of a US contested election next week on news that the Senate confirms Amy Coney Barrett to the US Supreme Court – especially relevant to the Trump cause if the Pennsylvania case on ballot deadlines is taken back up by SCOTUS. The outcome of this case can determine if ballots can arrive three days after Election Day, which could have implications for timing of results if it is a close race. Ultimately, this could also see Trump’s strategy of disputing the election outcome and taking the matter to the Supreme Court play out – again, a risk aversion scenario with USD the likely beneficiary due to prolonged election uncertainty. But USD hardly moves on Monday and sees only a modest blip up overnight.
EUR: A worsening Covid-19 situation in Europe and US with hospitalization numbers showing a clear case for further lockdown measures – the big news this morning is that France plans a one month lockdown starting midnight Thursday (according to BFM) though the new lockdown is expected to be more flexible than the previous one. Belgium sees the highest rate of infections within the EU overnight and also mulls a national lockdown, warning about shrinking ICU bed spare capacity that might be eroded in two weeks. Spain has already announced 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. Coronavirus cases also continue to rise in the US with states such as Missouri, Kentucky, Utah and South Dakota expected to be next in seeing a surge in testing sites – a broader risk aversion scenario with hits to global equity sentiment while reaction in EURUSD should be fairly muted as both sides of the pond face a similar spike. But safe havens, especially JPY should respond well given the hit to global equities – which is what has occurred with USDJPY having fallen from a high of 105.04 to 104.40 overnight.
Asia EM FX: China to remove counter-cyclical factor in daily FX fixings?
CNY: A Bloomberg headline overnight (yet to be confirmed by Chinese officials) is that “China is expected to remove the counter-cyclical factor in Yuan fixings”. Reuters also reports that the PBoC has asked banks to neutralize the counter-cyclical factor (CCF) which is typically used to reduce excessive volatility in daily fixings by dampening the influence of USD during such times the PBoC deems moves in USDCNY as excessive (in either direction).
- CNY: Citi analysts point to the move as potentially yet another signal from the PBoC that they want to loosen the reins on the currency and allow for more flexibility. The removal of CCF should therefore have few directional implications for RMB as the focus primarily is on allowing FX to be more market driven and ties into the goal to promote RMB internationalization. But this latest initiative follows 2 other initiatives in recent weeks - China granting additional quotas for Qualified Domestic Institutional Investor (QDII) and PBoC’s announcement that it will relax the 20% reserve requirement levied on banks’ forward FX books – both measures designed to slow the pace of RMB’s recent strength. The removal of CCF therefore may be read as a signal of China’s desire for potentially higher volatility in RMB to discourage investor expectations of a one way bet in the currency (to help slow the pace of RMB gains).
- CNY: Overall however, these initiatives are unlikely to change the fundamentals of a stronger yuan led by the structural weakening of USD, relative growth strength of China, still elevated yield spreads against major peers and index inclusions – these continue to support sentiment in RMB and Citi analysts remain bullish RMB longer term.
Data releases overnight
USD: Another strong increase in US durable goods orders helps alleviate concern over a stalling rebound in manufacturing following the weaker than expected industrial production report for September released last week – US durable goods orders are stronger than expected in September, rising 1.9%MoM, excluding transportation, durable goods orders are up 0.8% while nondefense capital goods orders rise 1.0%MoM. Citi analysts expect strong orders should lead a continued rise in production and shipments that will likely feed through to business investment in US GDP in coming quarters and also note that orders for both durable goods excluding transportation and core capital goods have now risen above pre-COVID levels. The team expects a 2.3pp boost to US Q3 GDP (which we expect to rise 32.4% overall) from business equipment investment.
- USD: But US Conference Board’s Consumer Confidence swings lower in key US election states - US's latest round of confidence data for October misses consensus by 1 point, coming in at 100.9 - the present situation component ramps up from 98.5 to 104.6 but expectations drop to 98.4 from an already revised lower print of 102.9 (from 104.0) in September. The split in the US swing states also deserves mention ahead of next week’s US elections - Florida, a key state for the election, sees expectations drop from 121.7 to 101.7 with the present situation also lower from 103.5 to 98.0. In Pennsylvania, expectations are down from 117.4 to 92.2 while Michigan sees the present situation improve nearly 20 points to 143.8 but also sees a sizeable dip in expectations from 135.8 to 102.9.
This is an extract from the Daily Currency Update, dated October 28, 2020. Please approach a Citigold Relationship Manager if you would like more information.