October 2020

Sterling just sitting on the fence

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Good Morning, after a week dominated by rumour and counter rumour, sterling ended up slightly stronger as investors became optimistic that at least both sides of The Channel were back talking.

Some in the market took the view that the politicking early in the week was at best “a third-rate, will-they-won’t-they melodrama, in which a knowing audience in Brussels and London opened and ahead, safe in the knowledge that the two sides would ultimately return to the table — if only to avoid taking the blame for failure”.

Sterling is now hovering just above the middle of its trading range reflecting the consensus that there is a slightly better than 50:50 chance of both sides breaking the deadlock. Apart from Brexit, the American election, in just over a week’s time, looms large over the world’s financial markets and despite President Trump’s better showing in last week’s debate, commentators are wondering if it is too little too late and continue to predict a blue wave. If a blue wave does indeed sweep Biden to power and give him control of both houses, the dollar could fall further in the aftermath of the election as he is broadly perceived as anti-business.

The week ahead is again going to dominated by the US elections and currencies will be buffeted by the changes in risk sentiment caused by it. Brexit is still uppermost in the thoughts of both sterling and euro traders, and we will spend the week yet again, watching the headlines. As we are becoming sadly accustomed to COVID-19 and its destructive grasp on the world economies, this is a resurgent danger that the markets must watch. With the ECB setting the pace this week, Central Banks are sure to continue to offer unlimited help and resource in addition to most governments continuing to do the same to support businesses, but increasingly the question will be who and how will it all be paid for?

UK
As the UK government celebrated the signing of an all-encompassing trade deal with Japan (having settled the Stilton war) the larger matter of a trade agreement with Europe appears to be edging forward after the resuming of talks last Thursday. There is now a cautious optimism over these negotiations after Michel Barnier extended talks into this week and President Macron appears to be softening his stance regarding fishing. However, the continuation of the talks is fully priced into sterling as are the chances of a satisfactory outcome, consequently the danger now lies in an “unstaged” breakdown in the talks which would see sterling fall sharply. We will be watching domestic developments particularly on the containment of COVID-19. With next to nothing on the data front this week, sterling is again most likely to be driven by the dollar switches in risk sentiment.

Euro
The euro, assuming an absence of Brexit news, will be overshadowed by COVID-19 and thoughts about this Thursday’s meeting of the ECB. With last week’s release of disappointing Purchasing Managers Indices, ECB President Christine Lagarde is expected to deliver a dovish message hinting at further quantitative easing in December. The euro may also gyrate more this week against the dollar as it is the largest and most liquid currency pair in the world of FX. Consequently, it is also the most sensitive to changes in risk assessments over the upcoming US election. On the data front, we will be watching for the release of further information regarding confidence starting with the German ifo data today. This data is followed by European consumer confidence and September’s German Consumer Price Index (CPI) on Thursday. The week closes with European CPI and third-quarter GDP.

US
The dollar spent last week reacting to rumours over the likelihood of a stimulus bill being passed, which at the end of the week didn’t seem any closer than at the start. The longer this stimulus is withheld, the more the damage to the economy will continue, and with COVID-19 surging towards 85,000 daily cases, the need for economic help is growing. With just over a week until the polls in the US election, the market has been broadly selling dollars in expectation of a win for Joe Biden. Despite over 50 million votes already being cast, there does remain a ray of hope, amongst his supporters, that Donald Trump can triumph in a repeat of the last election when he trailed Hilary Clinton in the polls. The Trump team will be partly pinning its hopes on this Thursday’s release of third-quarter GDP which should see a huge recovery and embolden his claims of his economic prowess at the White House.

Scandi
The krona had a very quiet week despite the political uncertainty hanging over it. The pound strengthened modestly against the krona, mainly on the back of the restart in Brexit talks more than anything impacting the Swedish currency. With schools closed for half-term this week, most political commentators do not believe any major domestic breakthroughs will be made and that the uncertainty will spill over into November. This week we will be keeping a close eye on the trade balance and the latest household lending figures out on Tuesday. An important economic tendency survey is released on Wednesday and the latest retail sales figures as well. The latter is expected to have remained stagnant on a month-by-month basis.
Over in Norway, a growing number of COVID-19 cases has seen the government impose tougher restrictions. Just like its big brother, the krone had a very quiet week and was range-bound. The most important data release this week in Norway will be Friday’s unemployment rate which is expected to have decreased to 3.5% from 3.7% on a month-by-month basis.

ROW
The Japanese yen will remain the main beneficiary of any fallout from the US election especially if it looks like it is going to be a contested result. The new Japanese Prime Minister, Yoshihide Suga, is due to address parliament today but it is unlikely he will announce anything to move the markets. Elsewhere, with little out on the data front apart from third-quarter inflation figures on Wednesday the Australian dollar will remain vulnerable to any further protectionist moves by Beijing. Apart from the policy meeting of the Bank of Canada on Wednesday, the week looks quiet for the loonie and its movement will most likely be dominated by the likely outcome of the US election.

Question
Why do the clocks change?
The Germans were the first to implement the idea in 1916 during the First World War, in the hope, it would improve productivity in their war economy by saving coal. Britain and most of its allies soon adopted the concept. Once the war was over, most countries abandoned Daylight Saving Time (DST), except for Canada, the UK, France, Ireland, and the United States. The rationale is to put clocks back every year heading into winter to allow people an extra hour of daylight after work. This was the original idea first originated by George Hudson, an entomologist and astronomer, who invented modern DST and proposed it in 1895. He was a British-born New Zealander who wanted to allow himself an extra hour of sunlight in the evening to collect insects!

Decision day for UK and US

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Good Morning, President Trump dominated the headlines and the market’s attention last week, as he returned to the White House much earlier than anticipated full of vim and vigour. The markets responded positively, and risk appetite returned which helped beta currencies such as sterling, which ended slightly better on the week at $1.2975.

There is still a slight question mark about his health and whether he is fully recovered, so currencies will stay jittery for the foreseeable future. Away from the health of the president and American politicking over fiscal stimulus, the overriding driver of the markets for sterling is Brexit. With the self-imposed deadline of the 15th October for agreement over a trade deal just a few days away now, we are expecting the markets to be extremely sensitive to Brexit headlines.

Looking forward, the focus this week will be on the EU summit on Thursday and Friday, which coincides with Boris Johnson’s deadline. At the time of writing, it seems extremely unlikely that an agreement will be reached by then and with Michel Barnier saying October 31st  is the “realistic deadline” an extension of the talks is to be expected, even if it is just to discuss how best to cope with a no-deal. We will also be watching how the second wave of COVID-19, both in the UK and Europe, develops. So far, the spread has been ignored, but the economic impact is still real. The harm already inflicted was reflected in last week’s economic data which was worse than anticipated both in the UK and America and sadly local lockdowns look more and more likely to increase as will the damage they inflict.

Sterling
As mentioned, the week ahead is a big week ahead for sterling as we enter the end game on the Brexit negotiations, with the most likely outcome an agreement to continue negotiations into November. Sterling is sitting just on the key technical level of $1.3032* which many feel is the middle of its trading range, reflecting a 50/50 chance of a no-deal. If there are any truly positive signs of a breakthrough, the pound would break this level and rapidly appreciate. The pound has been holding steady around the €1.1000 level, but this week we expect to see a little more movement. With economies both in the UK and Europe set to suffer more from COVID-19 induced restrictions, the pressure is firmly on both sides to agree to a compromise and increasingly the market senses that a resolution will only come from direct intervention from the key players involved, namely Angela Merkel, Emmanuel Macron and Boris Johnson. The focus on the data front will be the release of unemployment data on Thursday, which is expected to be gloomy as we approach the end of the main furlough scheme. The only scheduled noteworthy speech is from BoE Governor Andrew Bailey who is speaking late this afternoon.
*50-day moving average

EURO
The euro enjoyed a relatively stable week against both sterling and the dollar, despite the verbal interventions of the ECB to try and talk the single currency down. We expect to see more jawboning from ECB officials especially when the currency approaches $1.2000 which appears to be the level that concerns the central bank. In the coming week, the main story will be Brexit and naturally what is good for sterling will be good for the euro as both sides equally need a deal. Christine Lagarde is scheduled to speak late this morning and again on Wednesday but apart from that, it’s a quiet week until the EU summit on Thursday and Friday. The only major data of note is from Germany where the Consumer Price Index is released Tuesday as is the latest ZEW economic survey.

US
Today is Columbus Day, a national holiday in the US, so we are expecting a very quiet start to the week. Over the weekend Donald Trump made a public appearance at the White House and was declared COVID-19 negative. Despite the clean bill of health surprisingly the second presidential TV debate has been cancelled. As the election looms ever closer, politics and Donald Trump’s health will naturally continue to dominate the headlines. With the opinion polls now suggesting a clear win for Joe Biden, the risk of the result being contested is receding which will support riskier currencies and suppress the dollar. On the data docket this week we have inflation figures released on Tuesday, jobless claims on Thursday and retail sales on Friday.

Scandi
Towards the end of last week, we saw some hefty movements in the krona caused by the global switch in risk assessment. Speculation has increased in Sweden about the Vänster Partiet (the left-wing coalition partner of the ruling Social Demokraterna party) joining the opposition parties in a vote of no confidence in the government. Should this happen, the fragile coalition would falter, and new elections would have to be held. This unstable political situation will most likely dominate movements in the krona from a macro-perspective the coming days. We will also be keeping a close eye on the CPI release on Tuesday and the unemployment rate out on Thursday.

The Norwegian krone has recouped some lost ground in October and is back trading at levels last seen in mid-September against major crosses. With no major data releases out this week, we will be monitoring the oil price as it has a direct effect on the oil-exporting country’s currency.
We rarely mention the Danish krone since it is pegged against the euro, making it easier to just follow the euro’s movements, however, it is worth noting that the EURDKK is currently trading at its lowest level since 2018, even though EURUSD is currently near its highest level since 2018.

ROW
In common with other G10 currencies, the Japanese yen remains beholden to moves by the US dollar and as a safe haven currency, it will benefit from any political fallout in America during the run-up to the election. The aussie dollar will be dominated by two events in the week ahead, firstly the speech from RBA Governor Philip Lowe on Wednesday ahead of the employment data which is due on Thursday. With the RBA stating the importance of jobs to its policy stance, it is unlikely that any surprises are in store. The kiwi will remain dominated by domestic politics with the general election on the 17th October which the incumbent is expected to win. As always, the Canadian dollar will be following its southern big brother but may gain some strength if oil stays relatively strong.

Question
What is a moving average?
A moving average is a popular technical analysis tool. Moving averages are usually calculated to identify the trend direction of a currency or to determine its support and resistance levels. It is a trend-following indicator because it is based on past prices. The longer the time period for the moving average, the greater the lag and the greater the influence. So, a 200-day moving average will have a much greater degree of lag than a 20-day MA because it contains prices for the past 200 days. The 50-day and 200-day moving average for currencies are widely followed by investors and traders and are amongst the most important trading signals. As they are so closely followed, they can become self-fulfilling prophecies and when a currency breaks through a moving average many investors will follow the move.

Autumn storms ahead

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Good Morning, as the world’s markets waited all last week for the release of the Non-Farm payrolls data only for more serious news to partly side-line the event with the announcement that President Trump and his wife Melania had tested positive for COVID-19.

The markets knee jerk reaction was a flight to safety which benefitted the dollar, yen and to a lesser extent the euro.

The health of the President and its effect on the forthcoming election, now under 30 days away, will certainly dominate the headlines and the markets over the next week and for some time after. The markets will also remain fretful that other members of his administration could fall victim to the virus, especially Vice-President Mike Pence.

When the employment numbers were released and digested, they were somewhat underwhelming and served to underline that the recovery in the US is stalling and the need for a fiscal stimulus package to be delivered sooner rather than later. Unfortunately, the combination of the President’s illness and the forthcoming election makes the agreement of a stimulus package further away than ever. Looking ahead to Thursday the markets will focus on increased interest on the Vice-Presidential debates. The market is likely to continue to be volatile and with China on holiday all week, volumes will be thinner which in turn will exaggerate moves. Closer to home it will continue to be all about Brexit. After Boris Johnson’s Saturday call with Ursula von der Leyen, they both said that significant differences still exist and that both sides need to intensify efforts to find solutions. As the Brexit clock ticks ever louder the efforts of both sides to find a solution will dominate domestic news.

UK

Sterling had a good week making gains over the dollar to close above $1.2900 and on the euro where it settled €1.1000. So far sterling has stayed immune to the recent outbreaks of COVID-19 and traders’ attention has instead been concentrated on the chances of a Brexit trade deal. The coming week will be dominated by Brexit and after Saturday’s call between the leaders yielded little movement sellers may reappear.  Also as a beta currency sterling is vulnerable to the buffeting caused by changes in risk assessment.  The data docket looks a little bare in the week ahead with only August’s Gross Domestic Product and Manufacturing production being released on Friday.

Euro

With COVID-19 infections creeping up, the lack of agreement on the recovery fund is starting to concern traders and will continue to do so unless these concerns are addressed. However, these worries were side-lined as the euro benefitted from its safe-haven status as a risk-off mood returned to the markets and with President Trump in hospital this is set to continue. Retail sales are released later this morning and after these figures the economic calendar is light but there is a European Finance ministers meeting on Tuesday and a selection of speakers from the ECB during the week including Christine Lagarde twice on Wednesday. The drop in inflation may be starting to worry the ECB and the release of the minutes of their early September meeting may give a clue to how they are thinking about further stimulus.

US

The focus, of course, will be on the President’s health in the coming week and the shifts in risk sentiment associated with it. There was a rise in the Vix index last week, often known as the fear index, and the market was already bracing itself for heightened volatility ahead of the announcement of Donald Trump’s illness.  After the disappointment of the jobs report last Friday the market will turn its attention back to Fed this week with Fed Chairman Jerome Powell delivering a speech on Tuesday and the release of September’s FOMC meeting notes on Wednesday. Very little else of any importance is released apart from ISM services data today and the weekly employment figures on Thursday.

Scandi

Last week it was confirmed what many had feared: Swedes spent and shopped less which meant that retail sales contracted by 0.3% on a month-by-month basis. However, there was some light seen at the end of the tunnel when PMI Manufacturing data which came in showing that manufacturing activity had expanded. The krona remains rangebound and still cannot return to the levels it traded at during the summer against all major crosses. This week we are watching the industrial orders, the budget balance, and Swedish Housing Price Data. Any further mention of lockdowns will naturally grab our and the market’s attention. The Norwegian krone is still under pressure and this week the market will be watching out for the GDP figure and the latest inflation figures released on Friday which are expected to be well above most other major economies at 2%.

ROW
The Reserve Bank of Australia meets this week and more dovish rhetoric is expected, but this is likely to pale into insignificance when seen in the light of the likely shifts in global risk sentiment. Its near-neighbour the kiwi is also a hostage to global risk movements although it does have its own election looming on 17th October. The main beneficiary of uncertainty over both the US election and President Trump’s illness will most likely be the Japanese yen which looks set to strengthen whilst the Canadian dollar could suffer if its payroll number, released on Friday, is worse than anticipated and oil continues to weaken.

Question
What is the FOMC?
The Federal Open Market Committee (FOMC) consists of twelve members – the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis. By law, the Federal Reserve conducts monetary policy to achieve its macroeconomic objectives of maximum employment and stable prices. FOMC announcements inform the world about the US Federal Reserve’s decision on interest rates and are one of the most anticipated events on the economic calendar as are the detailed minutes of the meetings which are released about two weeks after.

Have a great week,

Synergy Exchange