Sterling is among the worst performers against the US dollar over the 1-day window as markets fears of a protracted election are starting to be realised, resulting in a rebound in the dollar and an unwind in yesterday’s risk-on trading. Brexit headlines yesterday, despite being negative on net, did little to move the needle for the pound as the market started to bake in its expectations of a Biden clean sweep. Reports from the EU indicated that trade negotiations between the EU and UK are still stuck with regards to fisheries and a level playing field, while progress has been reported to be made in social security issues. With Brexit headlines still likely in the coming days, sterling’s volatility could outstrip that of other currencies in the G10, but in the interim, it is likely that the election news will continue to dominate G10 price action. One of the by-products of Brexit negotiations is that the pound is more sensitive to the global growth outlook, which has taken a hit on the election result, leading to sterling being more sensitive to the dollar move than its peers such as the euro and Japanese yen.
Despite the announcement of extended lockdown measures in the Netherlands and jumps in daily deaths in France and Italy by the most since April and May respectively, EURUSD remained supported up until midnight before the first election results came out. As chances of a blue sweep faded overnight, the dollar regained some of its strength with the euro’s losses being among the smallest across the G10 currency board. With the risk of a contested election now being greater after President Donald Trump’s remarks about disenfranchising absentee votes and taking the matter to the supreme court, European equities have the potential to turn lower. With the US elections taking the main stage this morning, the better-than-expected Purchasing Managers’ Index releases from October were tossed aside. The eurozone PMIs remained unchanged since the preliminary readings, while the German and French indices slightly rose. The flash readings from Spain printed higher than the consensus, while Italian figures remained largely unchanged.
The dollar saw wild swings along with other macro markets last night after Donald Trump’s unexpectedly strong performance in key swing states in yesterday’s Presidential election. Prior to the first results becoming available, markets were happily assuming that a clear Biden and Democrat win would lead to large stimulus spending, a higher path for inflation, and a weaker dollar. This narrative was blown to pieces by early results from Florida, causing the dollar to suddenly rally along with a sharp flattening in the US yield curve as investors hastily recalibrated their bets. Markets must now grapple with a close election and the prospect of sustained uncertainty stemming from long vote counts and an impending court battle over the validity of mail-in ballots. The results of yesterday’s Presidential election in the United States remain too close to call after Donald Trump once again beat predictions and opinion polls to take several key swing states, including Florida and Ohio. As of the time of writing, the Associated Press has predicted Joe Biden has already secured 238 of the required 270 electoral college votes to win the presidency, compared to Donald Trump’s 213. Wisconsin, Michigan, Pennsylvania and George will decide the remaining votes and the presidency, with vote counting expected to take up to several days. The outcome of the senate race and the trajectory of Donald Trump’s legal challenge to the validity of mail-in ballots will likely dictate the tone of dollar trading in the coming days. Caution should be taken in assuming last night’s price action will be indicative of how markets will trade future changes, however. A Biden White House without control of the Senate would be unable to pass sweeping fiscal stimulus – meaning last night’s reflationary expectations would not be revived. Equally, sustained uncertainty, particularly stemming from a protracted court battle, would likely begin to weigh on the dollar.
The Canadian dollar wasn’t immune to last night’s wild swings in markets as Donald Trump defied preliminary polls and started to take key swing states, leading to a bounceback in the dollar. USDCAD has already traded in a 1.56% range today at the time of writing, with its trading being driven by the broad USD move on the election outcome. This move comes in spite of the Canadian dollar’s tendency to trade inline with the broad USD move on election nights due to the highly integrated nature of their respective economies. The battle for the Presidency and the Senate isn’t over and could take weeks depending on how the landscape of the court rulings pans out. With the election result playing such a decisive role in how FX markets are trading in the short-term, the loonie is likely to continue tracking the broad G10 move against the dollar and continue trading in between higher beta currencies such as AUD and risk-averse currencies such as JPY – which is still trading 0.43% lower on the day. In this landscape, it’s unlikely the Canadian dollar will be moved much by any news out of Canada specifically as traders continue to analyse the likely outcomes of different scenarios playing out.