Dumping dollars before the election

Investors are dumping US dollars ahead of next Tuesday’s US Presidential election. This will be a historic event for the country, the world and the financial markets. The stakes are high and the outcome is uncertain. There’s a very good chance that the next President of the United States won’t be decided on November 3rd which explains wy investors are compelled to reduce exposure and cut positions ahead of the election especially after record breaking gains in stocks this year.

A flurry of US economic reports were released today – none of which lent much support to the greenback. USD/JPY was on a one way decline in the NY session, falling within a few pips of its 1 month low.  Durable goods orders rose strongly in the month of October and house prices increased. Unlike the University of Michigan sentiment index which hit a 6 month high, the Conference Board reported a decline in sentiment in the month of October.  The biggest news today was the confirmation of Judge Amy Coney Barrett to the Supreme Court which could reshape the court for the next decade and play a major role in how mail in ballots are counted. Republicans are pushing for a reconsideration of the Pennsylvania mail in voting case which is important for the markets because it could affect election results.

The broad based move out of US dollars is the only reason why EUR/USD is still above 1.18. Daily coronavirus cases in Italy hit a new record high today and while cases in France and Spain are lower, the recent surge has both countries considering more restrictions. The French government will be holding meetings this week to determine what type of response is needed for this “brutal second wave.” There are reports that they are considering full lockdown for Paris, Lyon and Marseille.  This may be inevitable as we saw how Australia was able to beat their second wave by putting the Victoria region in a 2 month long lockdown. We don’t expect measures this drastic in Europe as they are reluctant to sacrifice their economies but a shorter lockdown could be possible. The European Central Bank meets on Thursday and given recent developments they’ll have no choice but to set the stage for further easing this year.

The Bank of Canada is not expected to change monetary policy on Wednesday. When they last met in September, the BoC was upbeat – they said the economy is recovering as expected. However they felt that ongoing policy accommodation was needed to support a protracted and uneven recuperation.  Data hasn’t been great since then with retail sales growth slowing and consumer prices falling another month. Job growth was very strong but the IVEY PMI index was much weaker. In light of rising domestic virus cases and the raging pandemic abroad, the BoC is likely to sound more cautious. The best performing currency today was the New Zealand dollar which shrugged off weaker trade data but the Australian dollar will be in focus tonight with CPI data scheduled for release. AUD is up  but weaker CPI data could set the stage for RBA dovishness next month.