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USD: 3.5% equity sell-off causes barely a ripple in FX markets

USD: Somewhat surprisingly this morning is the fact that the 3.5% sell-off in US equities has caused barely a ripple in FX markets. True, some of the cyclical currencies (NOK, SEK, NZD & AUD) are still down 1-1.5% on a 48 hour basis, but the Asian FX sell-off has been far smaller (0.2-0.5%) and Asian equities are starting to deliver some meaningful out-performance. That the dollar is not a lot stronger probably owes to the fact that: i) the Fed stands ready to provide a lot more stimulus if necessary ii) a fourth stimulus package is expected January at the latest and iii) the US will be struggling just as much with Covid as Europe. That Fed back-stop probably helps investors to run with a conviction that the dollar will go lower. Inputs to this equation today include: i) what should be a very strong 3Q20 US GDP figure, ii) focus on whether weekly initial claims stay low and iii) Big Tech 3Q earnings today – these may well beat expectations, as did Samsung today, but Samsung’s shares dipped on a weaker outlook.

CAD: A great leap forward for the economy over the summer hasn’t altered the Bank of Canada’s outlook for a long road back to normalcy, leaving no reason to back away from aggressive policy stimulus. It had underscored that the 0.25% policy rate was at its effective lower bound, so it had no change to announce there. It did unveil some fine tuning to get more bang for fewer bucks devoted to bond purchases, but its overriding message to markets was that it’s committed to keeping the interest rates that matter for borrowers at ultra-low levels for some time to come. Expect some further CAD weakness.

EUR: The EUR/USD has been holding up relatively well despite clear signs of a slow-down in Europe. The strong EUR should be less of a focus at today’s press conference and we think EUR/USD can handle strong hints of an extension of PSPP (in December) without the need to sustain a break below 1.1700. If the market has got ahead of itself in looking for more QE at today’s meeting and is disappointed.

GBP: The lack of Brexit news flow this week probably means that UK-EU negotiators are already in the tunnel – a good sign for a deal. With national lockdowns spreading across continental Europe, expect the GBP to trend lower.

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