USD: The US data calendar is heavy this week and the usually important FOMC meeting and the US labour market report will play second fiddle to the US Presidential election outcome. The market seems to be positioned for the Blue wave scenario, which would translate into weaker USD due to the mix of expectations for larger US fiscal stimulus, the subsequent confirmation of the low real rates for longer (as the Fed would stay behind the curve) as well as the anticipated return to the rules-based system for international relations (thus benefiting the safe-haven dollar less). All this should be positive for G10 currencies but weigh on the dollar. The key risks are a delayed or contested election results, both of which would lead to heightened volatility. In terms of the delayed election results scenario, the three swing states of Pennsylvania, Michigan and Wisconsin don't start counting postal ballots until the election day and there could be delays. However, if some big states such Florida or Texas show Biden’s victory, the picture will get clearer much earlier. The FOMC should retain a dovish bias on Thursday, being ready to do more should it be necessary, while Friday’s US jobs report is likely to show a further loss of momentum.
EUR: After the strongly dovish ECB meeting this past week and its negative implication for the EUR, the EUR/USD price action this week will be all about the US factors, with the result of the US Presidential election being the key driving factor. What seems at this point as the Blue wave outcome is likely to be positive for EUR/USD (largely due to its negative impact on USD) and should push the pair back towards/above the 1.1800 mark. On the domestic EZ front, it is a very quiet week, with September retail sales (Thursday) expected to have a negligible impact on EUR. Rather, more focus will be on the evolution of the Covid situation in Europe and the impact of the rising restrictive measures on the growth outlook.
CAD: Is the G10 currency with the largest positive correlation with global risk appetite and the US election will unilaterally decide the direction for this week for the loonie. A Biden landslide win has the potential to push USD/CAD to the 1.3000 handle (or below). Looking at the domestic factors, the Bank of Canada meeting this past week was characterized by a dovish tone – as widely expected – with a pledge to keep rates lower for longer and a recalibration of QE to purchase longer-date bonds. On Friday, we will also have jobs data out of Canada and while the US election will still be centre stage, it will be interesting to monitor whether the jobs market has continued to stay on a recovery path despite a worsening Covid-19 situation.
GBP: Should continue benefiting from the rising prospects of the UK-EU trade deal. The period of negative headline news has ceased and although there have been no official reports, the news flow suggests progress is being made towards a deal around mid-November / second half of November. The overriding importance of this domestic driver has kept GBP fairly immune from global factors. The possible Blue wave scenario in the US election next week and the support to risk assets and the accompanying dollar decline should push GBP/USD back above 1.30. On the domestic UK front the BoE should keep interest rate unchanged and the QE expansion is widely expected, its impact on GBP should be shallow.
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