Good Morning, as was widely predicted, the US election dominated the markets for the whole of last week, and the continued fallout from it is expected to carry on driving sentiment for some time to come.
Currencies remain volatile and until the shape of the Biden Presidency becomes clear, and the seriousness of Trump’s legal challenge emerges, we are in for a further period of instability.
The dollar eased quite sharply against sterling, the euro, the yen and in particular the high beta krone, which saw an appreciation of nearly 4%, as risk appetite returned. Even if Donald Trump continues to contest the election, markets seem confident that Joe Biden will prevail and they have high hopes for the US to slowly return to the status quo of a less protectionist country which is, of course, a positive for global trade.
Looking ahead, we are going to carry on being overshadowed by the same stories as in the recent past, in what seems like another Groundhog week with the Presidency, COVID-19, and Brexit being the drivers. The Biden blue wave, that many were predicting, did not quite materialise, and sadly there is a deadly second wave of COVID-19 sweeping through the UK, Europe, and the US. With an increasing number of countries entering lockdown, economies will carry on suffering not least the UK. The last worry for the markets is Brexit, where most investors are now more hopeful of a last-minute deal being the outcome. The consensus view is that with the Brexit negotiations now entering what surely must be the end game, the hit that our joint economies are currently taking will intensify pressure on the negotiators to reach a compromise.
UK
Sterling gained ground as the dollar weakened last week, ending the week nearly 2 and a half cents better, at $1.3150. This move was almost entirely dollar-driven as investors turned a blind eye to the UK’s domestic challenges. Against the euro, sterling also strengthened slightly to sit around €1.1100, where it has opened this morning. The ongoing Brexit talks are now nearing a conclusion and continue this week in London with a semblance of a deal being hoped for in the near future. With both sides facing ongoing COVID-19 induced recessions, an eventual deal is now broadly expected as the damage both politically and economically of a no-deal is too dangerous to contemplate. Data wise, this week we have the latest employment data on Tuesday, but it is unlikely that too much will be read into these numbers as the furlough scheme, which distorts the numbers, has been extended. Later in the week, on Thursday, the most recent Industrial and Manufacturing Production numbers are released along with preliminary third-quarter Gross Domestic Product (GDP). Bank of England Governor Andrew Bailey is also speaking today and Thursday, again we will be listening out for any hints on the likelihood of negative interest rates.
Euro
The euro, as did most currencies, appreciated sharply against the dollar last week as investors warmed to the idea of a less protectionist and confrontational post-Trump world and have been trading up near the €1.1900 level. With the ongoing second wave shutting many eurozone economies, the rise is likely to be relatively short-lived and probably capped around the €1.2000 level, which has recently been the trigger level for the ECB to start to talk it down. On the data front, the week ahead sees the release of the November Eurozone Sentix survey and the German ZEW economic sentiment survey on Tuesday, then Eurozone GDP on Friday. Towards the end of the week, the ECB is holding an economic forum where all the major central bankers are speaking, including Christine Lagarde (ECB), Andrew Bailey (BoE) and Jerome Powell (Fed).
US
President-elect Joe Biden gave his victory speech in Wilmington on Saturday and now all eyes will be on President Trump’s, who spent the weekend seemingly playing golf. Whatever the outcome, the country remains deeply divided as almost certainly does the Senate which will hamper Biden’s ability to govern. Looking beyond politics, last Friday’s US jobs report almost got lost amongst all the focus on the election, but the October figures were strong with 680,000 jobs created, although the overall number is still 10 million less than February. With COVID-19 continuing unabated in the US, with cases running at over 120,000 a day, there is a growing risk of local and state lockdowns returning which will cause another rise in unemployment. As on this side of the Atlantic, there is still a reluctance for businesses and consumers to return to normal and this knock-on effect in confidence will lead to worsening employment numbers. America has a public holiday for Veterans Day on Wednesday and there is very little data out this week, apart from October’s Consumer Price Index (CPI) on Thursday which is announced at the same time as the weekly jobs report.
Scandi
The return of risk appetite did assist beta currencies, as expected, in their bull run towards the end of last week. EURSEK is now back trading at levels last seen in mid-august and a so-called ‘Santa Claus’ rally may even strengthen the krona further. As mentioned in last week’s update, December is historically a krona positive month. This week we are watching out for the Consumer Price Index (CPI) out on Thursday. It is not expected to have changed significantly and with this figure being the only important data release this week, it is more likely that the general atmosphere on the markets will impact the krona’s movements.
The Krone, on the other hand, suffered at the beginning of last week but managed to regain ground towards the end of it. This week we are watching the CPI figure out on Tuesday which is neither expected to have changed on a month-by-month nor on a year-by-year basis. The most interesting set of data to be released from Norway this week is the GDP figure which is expected to finally show some growth on a quarter-by-quarter basis, growing from -6.3% to 5.2%.
South of the border, a mutated version of COVID-19 has been discovered on a mink farm in Denmark. Although it is too early to say whether this developing story, it may cause Danmarks Nationalbank to take action, we will keep a close eye on those developments since it may impact the wider Nordic region with tighter restrictions or complete closures.
ROW
As with all G10 currencies, the yen benefited from the return of risk appetite last week and is now trading comfortably under 104 against the dollar, however, the trade-weighted yen is still some 4% off its March highs against its closest neighbours. As expected, the hypersensitive aussie gained as risk sentiment improved and with no data or speakers scheduled it will remain driven by external factors as will the kiwi. The Canadian dollar rose on the back of the election as well as better than expected unemployment and again, like all the G10, will remain driven by the fallout from the US Presidential election.