Another week of the US dollar decline (Daily analysis 20.11.20200)

The greenback ends the week on the backfoot although rising new COVID-19 infections elevate concerns about the severeness of a double-dip recession. Evaporating risk sentiment should limit further risk currencies and assets gains.

This week the US dollar has declined against all G-10 peers. The New Zealand dollar and Scandies lead the pack. Emerging markets currencies remain bid as a medical breakthrough spurs not only rotations between sectors but also heavy capital flows into previously underweighted EM equities. The Brazilian real, the Russian ruble and the Mexican peso are the strongest performers. The lira is headed for a consecutive weekly gain, but mainly due to the Thursday’s rally when it appreciated 2.5% after the central bank raised rates corridor sharply.

G-3 currencies trade sideways

The main currency pair still trades sideways, despite the EUR/USD pair soaring towards 1.19 once again. An upside limit of a recent range (1.1920) looks exposed and vulnerable since the US dollar bounces are being quickly faded. The GBP/USD exchange rate stays elevated and continues to trade close to 1.33 despite a short pause in the United Kingdom – European Union trade deal negotiations. This time it was caused not due to a disagreement on one of the vital issues, but after one of the EU negotiators was tested positive for COVID-19. A deal is expected to be announced next week, probably as soon as on Monday or Tuesday. The USD/JPY pair failed to recover above 104.00, and the yen should continue to trade firm. Next week’s Thanksgiving holidays is believed to trigger traditional period-end re-balancing of asset manager flows earlier. This month they should be dollar-negative.

The US Treasury triggers a knee-jerk reaction

New containment measures are not the only factor dragging on the sentiment. The US Treasury asked the Federal Reserve to return unused funds amounting to USD 455 billion and therefore refused to extend five emergency support schemes into 2021. This came as a surprise and hurt market sentiment. Still, a sell-off remains limited as Mnuchin stated the Treasury plans to utilize those funds for grants for the companies that are impacted by the epidemic such as travel, entertainment or restaurants. Nonetheless, less room for manoeuvre for the Fed to act in a case of a sharp economic collapse may be considered as another reason for the Democrats to accept a smaller fiscal package and end the impasse.

Conotoxia research team