Roaring risk appetite weighs on safe havens (Daily analysis 25.11.2020)

The US dollar easily gave up Monday’s gains as Donald Trump opts for a smooth transition of power despite still contesting the election result. Dow Jones Industrial Average climbs over 30,000 pts for the first time in history, gold sinks and crude oil benchmarks rally.

The EUR/USD pair reclaimed the 1.19 handle after finding ground in the 1.1820 area, which reinforced its short term floor status. Monday’s plunge was fully reverted on the back of a roaring risk appetite, and the 1.1920 highs are still exposed. Rotation into cyclical value stocks supports risky and emerging markets currencies while skyrocketing oil prices give a boost to the Norwegian krone, the Mexican peso and the Russian ruble. The GBP/USD pair hovers around 1.3350 and is ready to rally on a positive EU-UK talks outcome. Markets remain optimistic and patiently await an announcement. The Swiss franc and the Japanese yen are the laggards in the G-10 space as investors shun safe havens.

Political risks diminish

Political risk rooted in election anxiety continues to evaporate mainly due to the fact that the federal General Services Administration (GSA) gave a green light for the Biden’s camp to start the process of obtaining the power. More importantly, President Trump tweeted that he had ordered his Administration to fully cooperate, which came as a surprise as he continues to pursue ongoing lawsuits and recount demands in Michigan and Wisconsin. Regardless, those efforts look to be doomed, and markets believe the US presidential election is a closed chapter.

Oil rallies on vaccine hopes

Crude oil benchmarks continue to rally, and Brent has already skyrocketed over 25% since the beginning of the month. Managed money investors flock to buy oil due to quicker vaccine progress than it was assumed. Consequently, Brent time spread has entered backwardation for the first time since June. Oil currencies and the most active contract trades at 48.50 USD/bbl, at the highest levels since March and the outbreak of a price war. The rally boosted oil currencies (MXN, RUB, NOK), but extremely high levels of stocks combined with lacklustre demand for fuels resulting from COVID-19 restrictions may suggest the market rallied too much too soon.

Conotoxia research team