Wednesday, November 4, 2020

US Dollar Trades Lower on Prospects of a Biden Win

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News shaping
the markets today

     

What’s happening: The US dollar moved lower on Tuesday with improving higher risk appetite as the US Election Day drew to an end.

What happened: The greenback had climbed last week amid uncertainty surrounding the US Presidential election, with the results expected to be delayed this year due to significantly higher in-mail ballots.

The greenback lost favour on Tuesday as investors braced themselves for Democrat candidate Joe Biden winning the election. The rising risk appetite also saw US stocks record significant gains yesterday.

Why it matters: While the current President is not far behind in the swing states, Biden has continued to enjoy a lead in the national polls.

Although both Biden and Trump are expected to prioritise the fiscal stimulus announcement after the election, the Democrat leader is widely expected to launch a significantly larger package. A bigger spend on stimulus is meant to boost the economy; but spells a double negative for the country’s currency. Firstly, it increases money supply, which exerts pressure on the value of the greenback. Also, economic growth prospects support risk appetite in the market, drawing investments away from safe-haven options like the US dollar.

A Biden win is also expected to improve diplomatic relations with America’s long-term trade allies, which helped lift the greenback’s major rivals yesterday.

Meanwhile, volatility indices for various major currency pairs climbed to multi-month highs. The implied volatility for the EUR/USD forex pair jumped to 19% on Tuesday, reaching its highest level since March from a moderate 7% on the previous day.

The Australian dollar also recorded strong gains of around 1.2% versus the greenback. The AUD/USD forex pair reached a high of 0.7141 despite Australia’s central bank cutting interest rates to near zero and increasing its bond-buying program.

The US dollar index, which measures the value of the greenback versus its main rivals, lost 0.77% to close at 93.40, representing the biggest single-day loss since late August.

What to watch: With ballots being counted in many states, strong volatility is expected in the major currency pairs and the global equity and bond markets. Investors globally are hoping for a “clear win” with neither party contesting the results.

The US Federal Reserve is scheduled to conclude its two-day policy meeting today. Investors will monitor the central bank’s stance and any announcement of measures to provide support to the pandemic-battered economy. Markets also await a basket of economic reports from the US, including ADP jobs, balance of trade, services PMI, and ISM non-manufacturing PMI. October jobs data, which is due for release on Friday, will remain in focus.

The Markets Today

     

European stocks will be in focus today, ahead of some important economic reports.

Context: European stocks closed higher on the US Election Day with markets expecting a Biden win.

Details: European stocks took cue from the Asian markets and recorded gains with investors expecting a clear winner to emerge from the US Presidential election.

The pan-European Stoxx 600 rose by 2.3% on Tuesday, gaining the most in almost five months. All sectors closed in positive territory, with banking shares being the top performer, climbing 4.5%. Automakers also recorded significant gains.

Investors overlooked prospects of fresh lockdowns across Europe to send stocks higher yesterday, after last week’s steep decline. The rally came amid expectations of Joe Biden becoming the next US President and the possibility of what is termed as a “Blue Wave” or the Democrats gaining control of the White House, the Senate and the House of Representatives.

London’s FTSE 100 gained 2.33% and Germany’s DAX 30 rose 2.55%, while the French 40 closed higher by 2.44% on Tuesday.

What to watch: Markets will keep a close eye on the outcome of the US presidential election.

Investors also await a basket of economic reports from the Eurozone, including the services PMI, composite PMI, and producer prices. The IHS Markit Eurozone services PMI is likely to decline to 46.2 in October, from 48 in the prior month, while the composite PMI is projected to decline to 49.4 in October, from 50.4 in September. Industrial producer prices are expected to increase 0.3% in September.

Markets will continue to monitor the covid-19 numbers, with total confirmed cases surpassing 47 million globally.

Other Markets: US indices closed higher on Tuesday, with the Dow Jones index, S&P 500 and Nasdaq 100 up 2.06%, 1.78% and 1.85%, respectively.

Support & Resistances
for Today

     

market snapshot

     

Futures at 0400 (GMT)

What else to watch today

     

Spain’s unemployment change and services PMI, Italy’s services PMI and composite PMI, France’s services PMI and composite PMI, Germany’s services PMI and composite PMI, UK’s services PMI and composite PMI, Brazil's industrial production, Canada’s balance of trade as well as the US Mortgage applications and EIA’s crude oil inventories.