Wait-and-see if Biden wins (Daily analysis 26.10.2020)

A busy week ahead in terms of macroeconomic releases and central banks events. Nonetheless, the focus remains on political developments and epidemic dynamics.

Instead of analyzing historical GDP figures or guessing if the ECB will grumble on the euro strength, investors will be mulling over whether expectations of a Biden win are fully justified. Consequently, some nervousness might resurface, and recent dollar weakness might not develop into a sustainable trend (just yet). As a consequence, the EUR/USD pair should stay in the last week’s range 1.17 - 1.19. Today’s IFO figures publication, the ECB meeting on Thursday, and Friday’s GDP figures release constitute the most important challenges for the common currency. With the USD/JPY currency pair settled below the 105.00 boundary, some further downside might be on the cards if any signs of reversal in US opinion polls in favour of Donald Trump appear.

Investors have fully priced-in the restart of trade negotiations. To trigger the continuation of the sterling’s advance, some positive Brexit might be required. However, barely any progress in the talks should be expected this week and consequently, the GBP/USD rally is in danger of stalling should the dollar trade sideways as well.

Oil currencies more and more vulnerable

Economies had started to lose momentum before the number of new Covid-19 cases skyrocketed globally. Increasing demand concerns combined with rising OPEC production pose downside threats to global crude oil benchmarks and consequently, some commodity currencies (namely the CAD, the NOK, the RUB). In the short term, the NOK might trade heavily also due to the revival of fears that Europe is sliding towards a double-dip recession, whereas the RUB may be exposed to geopolitical risks. One of the few takeaways from last week’s presidential debate concerned the National Security topic. Biden reinstated his desire to adopt a tough stance on Russia for the US election interference.

As far as the loonie is concerned, the Bank of Canada meeting on Wednesday should not be perceived as a major market mover. Although the labour market has already recovered more than ⅔ of the 3 million payrolls lost in March and April, inflationary pressures remain benign. Consequently, the monetary authorities will reiterate there is neither need for additional stimulus, nor room for any expectations of policy tightening. We expect the Canadian dollar to trend lower in Q4 on a broader US currency trend and oil market weakness.