FX Daily: Defensive amidst US election and pandemic risks
USD found support on risk aversion. The USD Index (DXY) is back at 93 for the first time since 20 October. The Dow Jones Industrial Average shed 650 points or 2.3% on Monday, its largest one-day drop since early September. Focus has returned to the coronavirus resurgence amidst diminished prospects for a stimulus bill before the US elections. Optimism for a Blue Wave on 3 November have subsided. The race to control the Senate remains too close to call. Fears of a contested outcome for the presidency have not gone away. US President Donald Trump and Democratic candidate Joe Biden have been campaigning hard in the swing states of Arizona, Michigan, North Carolina, Pennsylvania, Wisconsin and especially Florida.
EURUSD is under pressure to break below 1.18 on the coronavirus resurgence. The Euro Stoxx 50 plunged by 2.9% to 3105, its lowest close since the the start of June. French President Emmanuel Macron will decide on Tuesday-Wednesday new tightening measures to slow the rapid spread of the virus. Spain had announced a new state of emergency on Sunday. Italy is facing protests from businesses to the latest restrictions to curb the escalating infections. PMIs in October highlighted the risk of a relapse in the pandemic-hit Eurozone economy. The European Central Bank is expected to pause, at its governing council meeting on 29 October, pave the way for more stimulus in December.
GBPUSD to fall to 1.2930 first, and 1.2860 next, if the support at 1.30 fails. GBP bounced sharply to 1.3177 from 1.2948 on 21 October on the resumption of EU-UK Brexit talks. Since then, the pound has been returning its gains each day. With the transition period set to end on 31 December, time is running out. Both sides have yet to resolve their differences in fishing rights, the settlement of disputes and the level-playing field. The Bank of England is expected to increase its asset purchases programme at the its next meeting on 5 November. Short sterling futures have not abandoned the prospect of negative rates in late 2021.
CNY depreciated above 6.70 per USD for the first time since mid-October. USDCNY bottomed with the DXY at 6.65 on 21 October. The market is sensitive to news of new infections. China reported the highest number of asymptomatic cases in almost seven months in Xinjiang. Meanwhile, the Chinese Communist Party is deliberating its next five-year plan this week. China is expected to pivot away its export- and investment-led model towards more economic self-reliance. Financial risks will be managed with the goal of discouraging excessive speculation and mitigating financial bubbles. Pushing new financial innovation will need to be balanced by stronger regulation.
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