FX Daily: Vigilant against volatility

Group Research - Econs, Philip Wee / Oct 05, 2020

Relative fundamentals are gradually favouring USD amidst multiple event risks.

Photo credit: Unsplash Photo

The USD Index (DXY) has scope to resume its uptrend above 94 after last week’s correction. Investors have become worried about stock market volatility ahead of the US elections on 3 November after US President Donald Trump tested positive and was treated for covid-19 last week. The US Treasury yield closed higher at 0.70% with an upside bias last Friday after the US employment rate fell to 7.8% in September, below 8% for the first time since March. US PCE deflator has risen to 1.4% YoY in August from 0.0% in April. The Atlanta Fed GDPNow last predicted an annualized growth rebound to 34.6% QoQ in 3Q; final 2Q growth was revised up to -31.4% from -31.7%.

The above developments are unlikely to deter Fed Chairman Jerome Powell, during his address to the National Association for Business Economics on 6 October, from urging US lawmakers to deliver more fiscal help for the US economy. Unfortunately, a bipartisan stimulus deal remains elusive. More so now that the Senate has adjourned till 19 October because several Republican Senators have also tested positive for the coronavirus.

EURUSD has reasons to test and slide to below 1.17. EUR was brought down from 1.20 in September by the European Central Bank’s concern over its strength undermining inflation. EUR is likely to be dragged lower in October by the ECB’s strategy review which will bring its policy more in line with the Fed’s new average inflation stance. The ECB expects inflation to stay negative for the rest of the year. CPI inflation further shrank by -0.3% YoY in September from -0.2% a month earlier. Today’s EU Sentix Investor Confidence is expected to worsen to -9.3 in October from -8.0 a month earlier. Unlike its US counterpart, the EU unemployment rate has not fallen but risen since the pandemic outbreak to above 8% in August.

GBPUSD in a 1.2770-1.3040 range for now. British Prime Minister Boris Johnson and European Commission President Ursula von der Leyen have agreed to extend Brexit talks by a month. Mr Johnson and EU leaders will decide by the EU Summit on 15-16 October if a deal would be “possible or not”. If so, talks in the final two weeks of October will be crucial in achieving a deal for ratification in early November. The Internal Market Bill, however, remains a hurdle to achieving any agreement. Not surprisingly, both sides have indicated their desire for a deal but could not rule out a no-deal Brexit. Hence, it was understandable why speculators turned net short GBP for the first time since mid-August.

AUD faces downside risks ahead of more fiscal and monetary stimulus measures on 6 October. Australian Treasurer Josh Frydenberg is set to deliver the largest budget deficit in decades to pull the economy out of its first recession in 30 years. A shortfall of more than AUD200bn would push the budget deficit to more than 10% of GDP, significantly above the 5-6% projected by consensus. Mr Frydenberg intends to provide government support until the unemployment rate falls below 6% again. The Reserve Bank of Australia (RBA) is not expected to cut rates but is likely to complement the budget initiatives with adjustment to its Term Funding Facility. Interest rate futures are still looking for the cash rate target to move lower to 0.10% from its present 0.25%. AUDUSD is presently capped by around 0.7210 or its 50-day moving average and supported around 0.7040 or its 100D MA.

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