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Has the gridlock rally got legs?

USD: It has been an impressive week for risk assets, with almost every asset class having enjoyed strong gains. Whether it has been equities, debt, commodities or crypto (+12% on the week) it seems investors feel they know enough about the US Presidential election to put investments to work out along the credit curve. It may well be that results are known from Pennsylvania later today, such that Joe Biden could declare himself the winner, while voting in the other remaining key states may drift into the weekend or even next week. So far investors have been prepared to overlook the threat of a contested election, presumably seeing Trump’s legal initiatives as ‘frivolous’ and these benign conditions have generated a broad-based dollar decline. The fact that USD/JPY (which never moves) is trading at 103.50, tells us that there is a broader dollar move afoot than a mere risk rally. We do think these conditions lead to a further dollar decline. Yet timing is everything. Add to dollar short positions today - or be wary of broadening lockdowns coming the way of the US in December or even a legal challenge from Trump that resonates? The dollar sell-off may have a little more mileage today if: a) Biden formally secures 270 votes or b) a softer than expected October payrolls suggest that the Fed will have to throw more liquidity at the market.

CAD: Economists expect job growth to slow considerably in October to just 50K (cons. 58k), from +378.2K in September. The survey week is likely to be October 11 –17 this year and will capture some tightening in COVID-19-related restrictions. This should put further pressure on high-touch industries such as food/accommodation, which was still 188K below its February employment level in September. Labour force participation has recovered swiftly (65.0% in Sep vs. 65.5% in Feb) and is unlikely to provide much upward pressure going forward. We see the unemployment rate edging down to 8.9% and think that hours worked may see a small decline after five consecutive monthly gains (though the Sep level was still 7% below Feb). A daily close below 1.3029 would cause us to turn from neutral to bearish exposing 1.2952 and 1.2917 thereafter. Resistance is located at 1.3099 and 1.3148

EUR: Away from the broad dollar bear trending lifting EUR/USD, the EUR also got some good news yesterday from EU negotiators reaching agreement on how rule of law conditionalities would be included in the forthcoming EU Recovery Fund. This is an important milestone on the road to releasing a EUR1.8trn rescue package – sorely needed by Europe as it moves into Lockdown 2.0. Expect EUR/$ to stay supported.

GBP: Cable is trading in narrow ranges and despite negotiators warning of little progress in Brexit talks yesterday, the suspicion is that a deal will still be done. Above 1.3175, Cable can push onto 1.3270.

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