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US election related risks continue to multiply


-->US election related risks continue to multiply       


  • USD: Already elevated US election risks get another jolt - Prior to Friday, markets seem to be grappling with the possibility of a contested US election and deferred phase 4 fiscal stimulus talks (though Friday sees some move towards a possible fiscal deal). On Friday, President and First Lady Trump contract the Covid-19 virus. Markets de-risk by offloading US equities while safe havens such as Yen and USD find a bid against risk currencies (EM and G10 commodity FX).                

  • USD: Impact on Trump’s campaign – President Trump cancels a scheduled campaign rally in Florida while his aides tell The Washington Post that his political events are also canceled for the foreseeable future. Most important is how Trump’s condition progresses in the next two weeks and whether he is still able to make the second presidential debate in Miami on October 15. Focus will also likely be on Biden’s Covid-19 status and whether (or not) Congress decides to delay the election. Covid-19 back in focus - Covid-19 risks have been off the radar in recent weeks, but that will now likely change and become a bigger campaign issue. Tail risks delayed/ contested election outcome still remains the key tail risk should Trump recover quickly and resume his election campaigning whereby if he is not be able to continue as President and/or the Republican candidate, a likely Pence candidacy/presidency may remove such tail risks.     


A Brexit Deal: All a matter of time(ing)

  • GBP: Recent news on Brexit negotiations mixed - on the one hand, reports of UK concessions on the pivotal state aid rules, with a landing zone now reportedly visible but on the other, talks in other areas seem to be making little progress. EU has also launched formal ‘infringement proceedings’ against UK over the Internal Market Bill (IMB). Citi analysts though still think the two sides are converging on a rudimentary Brexit deal and if anything, tensions over the IMB highlight that both sides need a no-tariff deal for Northern Ireland.
  • GBP: Three scenarios for a path to a deal here – (1) An outside chance that the UK and EU enter the final ‘tunnel’ phase of the negotiations in coming weeks to secure a political agreement before the European Council Summit on the 15 - 16 October. (2) UK and EU move to enter the ‘tunnel’ during or immediately after the EU summit, with a deal agreed by end of October. (3) UK and EU agree to enter the ‘tunnel’ in the latter weeks of October with a deal agreed by early November. Citi analysts think the end of October is likely a hard deadline for principle level discussions        


Data releases Friday

  • USD: US September nonfarm payrolls growth slower but rebound continues - 661K new jobs are created in US in September (below consensus for 859K and Citi’s 1.2mln), but offset by 145K upward revisions to prior months. US unemployment rate falls to 7.9% from 8.4%, due to a drop in participation rate while wages are up 0.1%MoM and 4.7%YoY and hours worked rise to 34.7. Bottom Line September jobs data reinforces the narrative that pace of rebound will slow over time but data is also strong enough to indicate the rebound has extended solidly into September. 
  • EUR: Negative inflation print puts pressure on ECB to act - euro zone HICP flash falls to -0.3% in September, core drops to a below consensus 0.2%, both downside surprises relative to consensus. Bottom Line - persistence of low inflation prints is likely to increase pressure on the ECB to expand/extent its PEPP envelope by the December    
  • AUD: Australian August retail sales decline confirmed, but better data seen ahead - final August retail trade data (-4.0%) pretty much confirms the preliminary data’s fall (-4.2%). Looking ahead though, activity across the rest of Australia should offset the negative demand shock from Victoria and increase in household incomes should help offset fiscal tapering.      


Key data/ events in the week ahead   

  • USD: Phase 4 fiscal developments and election polls - Even if a phase 4 fiscal deal is reached in US this week, there will likely be uncertainty about whether there are enough votes to pass in Congress. Election polls will also be watched to ascertain whether there is any shift based on Trump’s positive COVID-19 test or the first Presidential debate. 
  • USD: FOMC Minutes and Fed speak- Forward guidance in the post-meeting statement at the September FOMC was changed to reflect the new long-run goal of achieving 2% inflation on average. The debate around the exact wording may be helpful about eventual plans for liftoff (which, for most officials, likely occurs around 2023 end). Markets will also watch for guidance on potential changes to asset purchases. Fed speak includes Chair Powell, Williams to discuss Flexible Average Inflation Targeting and Evans to discuss US economy and monetary policy.
  • AUD: Federal Government Budget preview - JobKeeper and JobSeeker are unlikely to see a broad-based extension of the JobKeeper wage subsidy past its Q1 expiry date in 2021; Personal income tax cuts - stage 2 and 3 of the previously promised personal income tax cuts from the start of FY23 and FY25 respectively could be brought forward; Infrastructure spending Citi analysts think around AU$37bn could be flagged as high priority projects that are fast-tracked, increasing infrastructure work done by 8% p.a. over the next 5 years.
  • AUD: October RBA Monetary Policy Board Meeting: Citi cash rate target forecast; 0.25%, Previous; 0.25%, Citi 3-yr target forecast; 0.25%, Previous; 0.25% -  Calls have increased for the Bank to cut the policy rates in October. However, for Citi analysts to switch to the rate cutting camp, it would require a dovish addition that suggests further rate cuts are imminent.       


This is is an extract from the Daily Currency Update, dated October 5, 2020. Please approach a Citigold Relationship Manager if you would like more information.

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