Why EUR refuses to fall & the Dollar’s decline

With 13 days until the US Presidential election, it is no surprise to see investors selling US dollars. President Trump and Democratic presidential nominee Joe Biden are locked in a tight race. The polls favor a Biden victory but investors can’t help but eye these surveys with caution. Trump won’t give up easily and in key battleground states, voters are very motivated to vote. If Biden wins by the narrow margin, Trump may not leave office willingly. 

As we wrote in our 5 Crazy Scenarios for the US Election, “If it weren’t tragic, it would truly be comic. Two septuagenarians fighting over the Presidency like it was a game of shuffleboard at Century Village. There is every possibility that with COVID, with US’s highly fractured and badly aged election infrastructure, with key battleground states essentially a tossup, and with a deluge of mail-in ballots that may never be counted by a very badly damaged US Post Office the results of the US election will be contested in every state, in every county, in every precinct.” – which may be the worst case scenario.

House speaker Nancy Pelosi is optimistic about getting a relief deal done by the end of the week but investors are also worried that she’s just dangling the carrot and using it to distract Republicans from the election. We’ll know soon but the mere possibility that she doesn’t really want to deal until after the election is one of the reasons why investors are starting to dump dollars. The Fed’s Beige Book report didn’t help – according to the Fed districts, economic activity improved at slight to modest pace.

 Meanwhile despite a raging second virus wave in many major Eurozone nations, the euro is on a tear. It is almost hard to believe that EUR/USD hit a one month high on Wednesday. Some of the biggest countries in Europe have implemented new restrictions and even outside of curfew, Europeans are staying at home as much as possible. This behavior will undoubtedly weigh on growth. The 10 year German – US yield spread also hit a seven month low which should drive the currency lower. There’s been some comments suggesting that the ECB is not ready to ease but if the economy freezes up from a second wave, they’ll have no choice. The only reason why euro is strong is because its attracting demand from investors selling dollars. 

Sterling also hit a one month high versus the greenback. Brexit deal hopes and mixed inflation data helped to lift the currency. Consumer prices rose 0.4% in the month of September which was less than expected but stronger than the previous month. Producer prices beat expectations and rose at a faster pace. The durability of euro and sterling’s rally will hinge upon Friday’s PMI reports.

The New Zealand and Australian dollars saw strong gains today on the back of US dollar weakness. The annualized decline in credit card spending in September was less than the previous month which helped NZD. AUD on the other hand shrugged off a smaller rise in leading indicators. There’s a very clear trend of improving NZ data and weakening AU data that should continue to drive AUD/NZD lower. The Canadian dollar on the other hand failed to participate in the rally. Loonie saw small gains versus the dollar after Canadian retail sales disappointed. With strong labor market gains, economists were looking for retail sales to rise by 1.1%, up from 0.6% the previous month. However the gain was a far more modest 0.4%. Excluding autos, the 0.5% increase was also weaker than anticipated. Consumer prices on the other hand fell -0.1% which was right in line with expectations.