How month end flows & Presidential debate moved FX

Currency trading was just as messy on Wednesday as the first US Presidential debates. Euro, which rallied against the US dollar in Asia, came under selling pressure in Europe, snapped higher shortly after the NY equity market open only to see its gains fizzle by the end of the day. Similar price action was seen in USDJPY which rallied in the early hours but fell sharply after the NY open.  It is not unusual to see wild swings this time of the year as month and quarter end flows played a large role in currency volatility. EUR/USD and USD/JPY moves aside, today was not a good day for the greenback. The dollar sold off against most of the major currencies despite stronger US data.

Non-farm payrolls are scheduled for release on Friday and according to ADP, US companies added 749K jobs in the month of September. Second quarter GDP was revised slightly higher and pending home sales rose 8.8%, over two times more than expected. While the ADP beat is encouraging, its hard to trust that this report is indicative of the broader economy or where the labor market is headed when Disney, Shell, Dow, Continental and Marathon Petroleum announced plans to cut thousands of jobs. Nevertheless, better than expected US data and positive stimulus package headlines drove equities and Treasury yields sharply higher. The Dow Jones Industrial Average rose 2% or more than 500 points intraday before settling a bit lower. Normally the dollar moves in lockstep with Treasury yields but we saw no signs of a broad based risk rally. 

The first US Presidential debate had very little lasting impact on the financial markets. With both candidates talking over each over and spending most of the time on personal insults, Americans were left more frustrated than. It was such an abysmal failure that the Commission on Presidential Debates said they will be making changes to the format of future debates. They did not provide any details but there have been calls for allowing the moderator to cut off speaker microphones. One of the main reasons why equities and currencies recovered today is because at the end of the day, most Americans already decided who they will vote for in November.  The number of undecided voters are at a record low and in many ways, it can be argued that depending on who you support, their performance on Tuesday night solidified your opinion. The price action in the markets tell us that the only thing that matters to investors right is another COVID relief bill and US data. Equities and risk currencies could extend their gains if tomorrow’s ISM manufacturing report and Friday’s NFP numbers surprise to the upside. The market thinks a deal is close but according to McConnell, they are very very far apart. 

The Australian and New Zealand dollars continue to be two of the best performing currencies but the strongest was the Canadian dollar. Supported by the turn in risk appetite, reversal in stocks, 2% rise in oil prices and better than expected GDP data, USD/CAD broke the lower barrier of its 4 day range.  Sterling extended its gains for the fifth straight day while euro lagged behind. We are constantly surprised by sterling’s strength because so far EU-UK Brexit talks are still going nowhere. New UK COVID-19 cases hovered for a second day near record highs. The only reason for its gains aside from the risk rally are recent comments from Bank of England officials who have grown less eager about negative rates. Euro on the other hand lagged behind on low inflation and tighter virus restrictions.