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USD: Constrained Biden outcome still negative for medium term USD outlook

USD: Looking through the short-term uncertainty of the contested US election outcome, markets appear to be taking the scenario of a Biden Presidency and Republican Senate as a cross -asset sweet spot as (a) there is clearly lower downside risk to bonds (vs the “blue wave” scenario given the likely smaller US fiscal stimulus); (b) there is still upside to equities (an albeit smaller US fiscal stimulus should still come; material tax hikes might be avoided; and there is likely to be an end to unpredictable trade wars); and (c) the outlook for FX to remain constructive, both in the EM and G10 FX space. For sure, scope for gains in cyclical FX and a more pronounced USD sell-off is now more limited vs the “blue wave” scenario, but is still there nonetheless. We keep our bearish USD outlook for 2021 intact. Short-term, as the election outcome is being legally disputed, the associated period of uncertainty should pause gains in risk asset and introduce two way volatility but if Biden is eventually confirmed (and Republicans retains the Senate), the outlook for 2021 (mainly from Q2 onwards, once through the winter months) for pro-risk currencies looks constructive. The FOMC should not surprise today and have a limited impact on USD.

CAD: The CAD is stronger to start the day so far and trading around one cent higher against the USD as markets settle into a range. All eyes will remain glued to the vote counting. While the USD is likely to remain better supported in the short run, we still rather think that the prospects for sustained USD gains are limited and prefer to look to fade USD rallies over the coming days.

EUR: The ‘’constrained’’ Biden scenario is not inconsistent with constructive 2021 EUR/USD outlook as factors such as less aggressive US international policy, some limited US fiscal stimulus and still behind the curve Fed point to higher EUR/USD next year.

GBP: While the BoE delivered a larger QE top-up than expected (GBP 150bn vs 100bn expectation), the limited new hints on the urgency for negative rates offset the larger QE in terms of the impact on GBP. The pound is expected to stay stable today.

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