Financial markets saw little action this Wednesday, with major pairs mostly consolidating and equities seesawing between gains and losses. The market’s sentiment remained trapped between fears related to covid outbreaks and vaccine hopes. The US health system is stressed amid a continued increase in new cases, with multiple restrictive measures announced in the country. The latest is that the number of new contagions in New York has reached the level where the local government may close schools. US drug maker Pfizer said a final analysis of clinical-trial data showed its Covid-19 vaccine was 95% effective, allowing the company to apply this week for the first U.S. regulatory authorization. U.S. housing starts rose 4.9% in October, stronger than the 3.2% expected, and following a 6.3% gain in September. The gains were led by single family homes. Building permits were unchanged (vs 1.4% gain expected), but remain at the highest level since 2007. The housing market remains buoyant, the pandemic-related shift toward suburbs and single family homes also supported by historically low mortgage rates. Commodities, Brent crude oil futures rose 2.0% to $44.60, copper rose 0.1%, iron ore rose 1.2% to $126.80, and gold fell 0.4%.
AUD/USD: 0.7288 – 0.7328
EUR/USD: 1.1852 – 1.1891
GBP/USD: 1.3257 – 1.3312
USD/JPY: 103.66 – 104.10
USD/CAD: 1.3035 – 1.3099
NZD/USD: 0.6892 – 0.6942
AUD/JPY: 75.74 – 76.15
AUD/NZD: 1.0554 – 1.0577
USD seems to have somewhat lost its safe-haven status in recent days; vaccine news seems to have actually helped USD in the short-run given higher US treasury yields. But many participants likely agree that the vaccine news and associated faster than previously expected end to the pandemic (which will be a huge positive for EM and risk-sensitive FX) will, in the end, be a USD negative.
Some argue that the market is under-pricing near-term risks presented by the continued spread of the virus in the US over the last few weeks, which has resulted in states one by one going back into some form of lockdown. Shouldn’t this be bullish for the safe-haven USD?
Perhaps not, given that the Eurozone (which has already gone back into lockdown) is seeing its virus numbers stabilising and major Asian economies such as China and Japan both look to have kept the virus relatively well under wraps. The Chinese economy has already been one of the world’s best performing in 2020 and this looks set to continue into 2021, while the Eurozone, though suffering right now, might be setting itself up for a stronger Q1 2021 if it can get virus numbers under control by Christmas – all while US Covid-19 deaths continue to rise in the US - this might undermine USD vs the likes of JPY, CNY and EUR going forward.
Meanwhile, FOMC members, including Chairman Powell and Vice Chairman Clarida, have been sounding increasingly pessimistic regarding the near-term outlook for the US economy given lockdowns amid rising Covid-19 cases. With some members hinting that the Fed’s ongoing unconventional refinancing programmes could be ramped up, as well as the rate of QE purchases reassessed, the tone of developments this week has been unmistakably dovish.
AUD could be one of the best beneficiaries amid softer USD conditions going forward; Australia is mostly Covid-19 free, as is their most important trade partner China. Meanwhile, the RBA is essentially now signalling that it is done easing. AUD is already up 4.2% on the month vs USD and is one of the best monthly performers in the G10.
AUD remains likely to continue to gain going forward so long as risk appetite remains buoyant and USD on the defensive. In the near term, offering interest is expected to materialise above 0.7340 and again between 0.7390/7400 while demand is expected to materialise should we drift back to 0.7240 and again at 0.7200.
Event Risk Data Today
Australia: With Victoria under lockdown during October and payroll data pointing to a broader slowdown in the national recovery, Market is expecting the October employment to fall 30k. If the participation rate eases to 64.74%, market forecast would see the unemployment rate lift from 6.9% to 7.2%.
US: Initial jobless claims have been gradually trending down, but the accelerating spread of the virus and the lack of a fiscal package pose a risk going forward (market f/c: 700k). The November Philadelphia Fed Index should pull back after a jump in October (market f/c: 22.5), whilst the November Kansas City Fed Index has recovered to be above pre-COVID levels (market f/c: 11). Meanwhile, the leading index has been supported by moderating initial claims and is expected to hold at 0.7% in October. The market expects to see a 0.5% fall in October existing home sales after turnover reached a 14-year high in September. Finally, the FOMC’s Kaplan (10:00 AEDT), Bostic (11:00 AEDT), Mester (00:30 AEDT) and Rosengren (05:00 AEDT) will speak.