As you can see by the noncommittal nature of currency markets, this morning, traders might be thinking beyond the US election on what could drive and how they can capture the dollar's next leg lower. Vaccine developments will assume center stage, presaged by Brexit. But at the center of all currency markets is central bank policy,cross-asset, and commodity markets correlations.
Traders are stuck in Brexit tunnel vision, and mood music has been made toothsome, but equally, some GBPUSD positioning is also getting a bit long in the tooth. Still shorting spot EURGPB for a material break lower through 90 on an announcement that negotiations are going into the so-called 'tunnel phase' looks to be the best expression of positive Brexit vibes as both ECB and BOE looks to be on the same dovish tilt.
Currency markets continue to look through resurgent case counts, which suggests the vaccine plays a role in holding the bullish Euro view.
Barometers of global demand are selling off early in the Monday Asia session, with crude oil (Brent -2.1%) underperforming in the context of a 0.5% fall in S&P 500 futures. European governments, including Italy and Spain, announced tighter social mobility restrictions over the weekend after a sharp rise in recorded coronavirus cases.
The ECB's Governing Council will be keen this week to lay the ground for easing in December in light of lower market-based measures of inflation expectations. Indeed, t the next contours of its monetary policy debate is emerging. Meanwhile, the start of China's fifth plenum is framed by CNY appreciation this year but growing global imbalances indicated by its rising current account surplus.
Policy meetings (ECB, BoJ, Central Bank of Brazil) and the Chinese Communist Party's Plenum to discuss the 2021-25 five-year plan are the primary currency markets drivers this week. These central banks are expected to leave policy unchanged, although the focus will be on the ECB in light of tightening social-mobility restrictions in recent weeks.
China's policymakers meet between Monday and Thursday this week to discuss the 2021-25 five-year plan. The last time the Central Committee announced major structural reforms was in 2013. The persistent selloff in USDCNH since the May 27 high (7.1%) should mean further momentum to promote flexibility and internationalization of the currency, but traders will remain on watch for any
One of the enormous economic risks from the rise in Covid cases is payroll growth's negative implications, which encapsulates "the sum of all fears," and the gnarly inference of more lockdowns and mobility restrictions could hamper economic activity. When folks do not have jobs, they do not or cannot spend, and unambiguously hurts economic growth on so many levels.
In September, the negative correlation with payrolls was rising as Covid cases rose. September also continued the pattern of slowing job growth. With Covid cases rising, job growth in the coming months in the most unvirtuous circle of events could be a considerable risk.
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