With 13 days until the U.S. presidential election, it is no surprise to see investors selling U.S. dollars. President Donald Trump and Democratic presidential nominee Joe Biden are locked in a tight race. The polls favor a Biden victory, but investors can’t help but eye these surveys with caution. Trump won’t give up easily, and in key battleground states, voters are very motivated to vote. If Biden wins by the narrow margin, Trump may not leave office willingly.
As we wrote in our 5 Crazy Scenarios for the U.S. Election:
“If it weren’t tragic, it would truly be comic. Two septuagenarians fighting over the Presidency like it was a game of shuffleboard at Century Village. There is every possibility that with COVID, with the U.S.’s highly fractured and badly aged election infrastructure, with key battleground states essentially a tossup, and with a deluge of mail-in ballots that may never be counted by a very badly damaged U.S. Post Office, the results of the U.S. election will be contested in every state, in every county, in every precinct.”
That may be the worst-case scenario.
House speaker Nancy Pelosi is optimistic about getting a relief deal done by the end of the week, but investors are also worried that she’s just dangling the carrot and using it to distract Republicans from the election. We’ll know soon, but the mere possibility that she doesn’t really want a deal until after the election is one of the reasons why investors are starting to dump U.S. dollars. The Fed’s Beige Book report didn’t help. According to the Fed districts, economic activity improved at a slight to modest pace.
Meanwhile, despite a raging second virus wave in many major Eurozone nations, the euro is on a tear. It is almost hard to believe that EUR/USD hit a one-month high on Wednesday. Some of the biggest countries in Europe have implemented new restrictions. And even outside of curfew, Europeans are staying at home as much as possible. This behavior will undoubtedly weigh on growth. The 10-year German–U.S. yield spread also hit a seven-month low, which should drive the currency lower. There’s been some comments suggesting that the ECB is not ready to ease, but if the economy freezes up from a second wave, it will have no choice. The only reason why the euro is strong is because it's attracting demand from investors selling U.S. dollars.
Sterling also hit a one-month high versus the greenback. Brexit deal hopes and mixed inflation data helped to lift the currency. Consumer prices rose 0.4% in the month of September, which was less than expected but stronger than the previous month. Producer prices beat expectations and rose at a faster pace. The durability of the euro and sterling’s rally will hinge upon Friday’s PMI reports.
The New Zealand and Australian dollars saw strong gains today on the back of U.S. dollar weakness. The annualized decline in credit card spending in September was less than the previous month, which helped NZD. AUD, on the other hand, shrugged off a smaller rise in leading indicators. There’s a very clear trend of improving NZ data and weakening AU data that should continue to drive AUD/NZD lower. The Canadian dollar on the other hand failed to participate in the rally. The loonie saw small gains versus the U.S. dollar after Canadian retail sales disappointed. With strong labor market gains, economists were looking for retail sales to rise by 1.1%, up from 0.6% the previous month. However, the gain was a far more modest 0.4%. Excluding autos, the 0.5% increase was also weaker than anticipated. Consumer prices, on the other hand, fell 0.1%, which was right in line with expectations.