Pessimism dominated the market this week as stock prices fell. US Wallstreet has dropped by 3% before the London session opened on Friday.
However, the lower risk appetite has driven the dollar to significant bounce across the board this week. The greenback is up 0.8%. However, rallies seem to have stalled by the negative unemployment claims which indicated that the economy is in need of more support to leverage post-lockdown recovery.
Meanwhile, AUD and NZD are the biggest movers this week. The commodity currencies collapsed with the stock market despite a better than expected (although a very bad figure) Aussie employment data. Pound Sterling maintains high volatility as Brexit remains a big concern. GBPUSD spiked up and down with headlines pointing in different directions. Gold is recovering much of the week’s losses although it seems to remain within the bearish territory. Oil remains volatile. The black gold’s current bullish momentum to break above a major resistance is quite insufficient.
Overall, Investors continue to weigh their options across all the markets in the face of uncertainties driven by Covid19 resurgence, US politics and Brexit. These have been the major market drivers this week.
Covid 19 Second Wave
It’s been risk-off all the way this week as Covid-19 cases hit fresh highs. Spread rate in some part of Europe is so alarming and now forcing leaders to impose fresh restrictions. As a result of this risk aversion, risk-off FX like USD, CHF and JPY made their way up while riskier FX like AUD, NZD and CAD were the worst performers this week so far. Economies are already feeling the heat. The recent data show lower employment change data and much slower economic activities in almost all the major economies. US core retails sales to be released today is expected to slide as well.
The market will look more into the impact of the virus next week. Can the second wave be managed? What has been the progress concerning vaccines? How large or/and near will the next stimulus packages be? Fed Chair and his British and European counterparts will speak at different events next week with the RBA policy meeting coming in between. Meanwhile, the new damage on the economies will be monitored with the US weekly unemployment claims, China’s GDP y/m, CAD CPI data and other data coming next week.
The US election is just nearly two weeks away. Biden still commands a convincing lead of over 9% at the polls. Trump has gained some momentum after recovering from Covid. However, market view seems to be divided. Trump’s relief package going forward seems to be less robust compared to Biden’s. However, Biden wants to tighten policies and cut down tax relief.
The Brexit drama is back this week as negotiators from the US and EU battle it out. The EU has insisted that it would not bend to the unofficial October 15 deadline set by the UK PM last month. The bloc insisted that it would give it an ample time to get a favorable deal before the December 31 official exit at its Thursday summit. Meanwhile, British Foreign Secretary Dominic Raab expressed disappointment at the group on Friday. He accused the union of setting up the British government to deal with all compromises. However, the deal is close and the two sides are optimistic. Raab said – ‘having said that, we are close …. with goodwill on both side we can get there”. GBP has now resumed the mid-week climb. More optimistic reports and eventually, a done deal should propel GBP pairs upside. Otherwise, a fast fall across the board is high on the cards.
What could happen next week?
Of course, anything is possible. USD might have completed the current bullish correction. However, more pessimism from the Covid front without any hawkish plan in terms of relief could spark risk aversion even more. USD can then rally further with the DXY hitting 94 and 94.2. Otherwise, USD outlook still paints a bearish picture from a technical perspective. The downside run has the potential of hitting below 93 next week. The inverse dollar-stock market relationship should continue next week. If the dollar returns downside, stock markets should bounce to fresh record highs. On the data front, China’s GDP release will come on Monday before the CAD inflation data.
As for Brexit and GBP, optimism in the former would propel the latter upside and vice versa. In addition, all GBP pairs are looking bullish. Oil and Gold are expected to flow with the general market risk. The commodity FX – AUD, NZD & CAD, can driven by Monday’s China’s GDP report, general market risk sentiment and the dollar performance.