News & Analysis

As of the time of writing, the outcome of the US Presidential and Senate elections remains too close to call, although Joe Biden enjoys a lead in vote counting in crucial swing states and short odds in betting markets. It is also probably too early to fit a clear narrative to the market reaction, given that uncertainty about the ultimate outcome remains very high. The dollar sold-off in tandem with treasuries in the hours before results became clear, only to rally after initial results showed a far closer race than prediction models from polling data suggested. One possible interpretation of this price action is that the possibility of a comfortable win for Democrats in the White House and Senate would lead to large fiscal stimulus, and therefore reflation – the close race undid this trade and caused a dollar bid throughout Wednesday night. Since then, the dollar has found itself on the back foot again, although treasury yields remain low and equities are still currently above levels from earlier in the week.


US dollar under pressure while Treasury yields fall

Although care should be taken in fitting a narrative to this price action before the full picture is known, two factors are likely driving the current defensive tone in the dollar. Firstly, the likelihood of a “Blue Sweep” and rapid fiscal expansion has been greatly diminished, and as such, the US economy is likely to be more reliant on low rates and quantitative easing from the Federal Reserve. Secondly, the risk of a disputed election and sustained uncertainty, or even civil unrest and a constitutional crisis is likely proving to be a further drag on the dollar – even if equities remain buoyant.

Looking ahead, the outlook for markets remains as murky as the US electoral outcome. Several avenues of uncertainty will be closely watched in the near future by markets:

  • The Trump campaign has promised to contest the apparent result of the election in courts, and has already begun to do so with a range of motions aimed at either halting vote-counting, commencing recounts, or invalidating late-received ballots. The early results of these attempts are not encouraging for the President. A suit in Philadelphia was settled with a compromise over the number of electoral observers at the urging of Bush-appointed U.S, District Court Judge Paul Diamond. An attempt in Michigan for greater poll-watching was dismissed without a hearing due to a lack of evidence. However, several suits and requests for recounts remain outstanding, raising the prospect of a protected series of court battles and recounts.
  • The margin of any prospective Biden victory in Nevada, Georgia, or Pennsylvania will be key for judging if the invalidation of any late-received ballots will be sufficient to tip the scales in Donald Trump’s favor. Wide margins in favor of Biden in any one of these states will make an electoral college victory highly likely, and narrow the scope for any contest by Trump.
  • The outcome of Georgia’s primary Senate race between David Perdue and Jon Ossoff may also prove to be crucial for markets. As of writing, Perdue’s 49.8% of the vote total is below the 50% threshold for avoiding a runoff race in January. With George’s other Senate seat also set for a runoff, the two races could determine control of the Senate and reignite prospects for expansive fiscal policy.



Next week’s calendar offers several points of note – and we also provide a recap of this week’s central banking developments.

Monday 9th

German trade data for September is scheduled at 07:00 GMT but is likely to fall out of focus given the lagged nature and the fact that major global economies, including mainland Europe, re-enter stricter lockdown measures. Monday will instead focus on the outcome of the US election and whether substantial progress is made over the weekend, while Brexit talks continue in London. In lieu of major economic data, investors will pay increased attention to Bank of England Governor Andrew Bailey and Chief Economist Andrew Haldane, with both speaking at separate events.

Tuesday 10th

Markets begin the Tuesday session with a deluge of data at 07:00 GMT. Norwegian CPI data for October is expected to come in flat at 1.6% YoY. UK labour market data for October is also due. The official unemployment rate sat at 7.6% in September after data started to show the true level of damage caused by the pandemic as businesses started to adjust to the end of the furlough scheme. While the unemployment rate is likely to continue being underreported due to this dynamic, the extension of the furlough scheme means it may be the last representative flash point of the true level of unemployment in the UK until the end of Q1 2021. Rounding off the 07:00 am deluge, the Turkish unemployment rate is due for August with July’s level sitting at 13.4%. The German ZEW Survey is then due at 10:00 GMT for November. The ZEW survey slipped back in October amid concerns of resurging Covid-19 cases, which is likely to be evident in Tuesday’s data point. The usual caveats of diffusion indices capturing the breadth of downturns and upturns but not the extent of the damage applies.

Wednesday 11th

 The RBNZ official cash rate is released at 01:00 GMT on Wednesday (more on this below). Besides this, Wednesday is a quiet day on the data front.

Thursday 12th

Norway’s Q3 GDP reading at 07:00 GMT marks the beginning of the GDP data readings out of Europe this week. The mainland economy is expected to have rebounded by 5.2% QoQ in Q3 after a 6.3% contraction in Q2, which the central bank labelled as “surprisingly fast” when referencing the Q3 bounce back during their September forecasts. The focus at 07:00 GMT will also be on the UK, which is also set to release its Q3 GDP data.

Expectations suggest the UK economy expanded by 15.6% QoQ in Q3, following the 19.8% contraction in Q2, but the record pace of growth will still leave the economy some 9.5% below its pre-crisis peak in Q4 2019.

The market impact may be muted for this release, however, as last quarter’s data, specifically September’s data which markets haven’t received yet, doesn’t represent the current economic conditions. With the UK entering a national lockdown this week and localised measures ramped up in much of October, the economy is likely to contract again in Q4, offsetting any gains made in the Q3 data. The ECB is set to publish its economic bulletin at 09:00 GMT with industrial production data for September due at 10:00 GMT. At 16:00 GMT, Russian GDP for Q3 is due and is likely to show progress towards a recovery after a smaller than expected contraction in Q2. While a resurgence in the virus weights on activity and oil prices in Q4 and will likely see another quarter of contraction, the Q3 data is expected to print at -3.8% YoY – around 5% QoQ seasonally adjusted. This would see Russia’s economy regain around half of the output lost in Q2. Outside of GDP data, central banker heads Christine Lagarde (ECB), Andrew Bailey (BoE) and Jerome Powell are expected to speak at an online ECB Forum entitled Central Banks in a Shifting World at 16:45 GMT – more on this below. In Canada, the sole economic event comes in the form of a speech by Senior Deputy Governor Carolyn Wilkins entitled Exploring Life Post-COVID. To finish off the day, Banxico are set to release their latest policy decision at 19:00 GMT (more on that below).

Friday 13th:

Final CPI readings from France and Spain for October preclude the eurozone Q3 GDP second reading at 10:00 GMT. Expectations suggest no change from the flash reading of 12.7% QoQ, which left Germany, Italy and France all between 4% and 5% of Q4 2019 activity.

Questions still remain about how Q4 will pan out given the latest national measures imposed to flatten the Covid-19 curve.

Central banks

With the election sitting front and center of market participant’s minds this week, meetings by the Reserve Bank of Australia, Bank of England, Norges Bank and Federal Reserve didn’t receive as much attention as they normally would have. For this reason, we briefly recap the meetings below.

  • Reserve Bank of Australia (3rd November) – dropped the cash rate 15bps to 0.1%, increased QE by A$100bn. The RBA opted to drop its cash rate further to its effective lower bound on Tuesday to reflect the current environment, but noted that negative rates offer little benefits and “continues to view a negative policy rate as extraordinarily unlikely”. The RBA also committed to buy A$100bn of longer-dated bonds over the next six months, with the expectations that fiscal stimulus will help drive the recovery in that period. With negative rates practically ruled out, the emphasis will be on the RBA’s bond buying programme and whether additional purchases will be scheduled for the second half of 2021.
  • Bank of England (5th November) – increased QE by £150bn and to be completed by the end of 2021, with gilt purchases to be more supportive in the near-term and slowly taper. The Bank of England’s meeting at 07:00GMT on Wednesday was contentious for two reasons. Firstly, leaks of the increase to the QE programme undermined the Bank’s credibility somewhat. This was only doubled down by a choice tweet from the BoE’s twitter account with a graph clearly showing the projected Bank rate dipping into negative territory. Speculation aside, the joint response by the BoE and the Treasury – which extended the furlough scheme until March 2021 – reduces some of the risk of negative rates in response to the latest lockdown measures. The MPC also stated “if needed, there was scope for the Bank of England to re-evaluate the existing technical parameters of the gilt purchase programme”.
  • Norges Bank (5th November) – kept policy at 0.00% and said the economy has evolved in line with September’s projections, latest restrictions pose risk to recovery. The Norges Bank kept rates on hold at 0.00% and signaled this stance was likely to remain unchanged for some time ahead. The resurgence in the domestic outbreak, and in its largest trading partners in mainland Europe, poses a major risk, as does a lower oil price. The meeting was more of a place holder with the imposition of recent lockdown measures too premature to warrant further action, meaning the next meeting on December 17th where fresh projections are released will be more telling of the Norges Bank’s stance.
  • Federal Reserve (5th November) Summary of Economic Projections to include two new graphs on level of uncertainty and balance of risks, rates held and QE pace stable. The November Fed meeting was never expected to be much of a game changer for markets as the US election remained undecided. The reduced possibility of broad fiscal stimulus being passed due the dynamics of the election result has thrust the Fed into spotlight and may force them to shoulder the responsibility of navigating the US economy through the pandemic. With this in mind, the Fed opted to maintain its pace of asset purchases at $120bn a month and keep interest rates near 0%. In response to the growing level of uncertainty, the FOMC Summary of Economic Projections will now be released at the same time the FOMC statement is released, including the full distribution of participant forecasts that was previously released with the meeting minutes. The SEP will now include two new graphs to show how the balance of risks and the level of uncertainty have evolved over time. The change likely concludes the Fed’s framework review that saw them shift to an average inflation target (AIT). With regards to QE, the Fed didn’t make explicit that the average maturity of purchases will be extended – something that has been seen across other G10 central banks such as the RBA and Bank of Canada. Chairperson Powell noted that the FOMC could “shift the composition, the duration, the size, and the life cycle of the programme” in response to a change in economic conditions, and the mechanics of such were discussed by the committee at the November meeting.




With New Zealand’s strict “elimination” strategy once again delivering a broad economic re-opening and house prices rising steadily, the RBNZ has no reason to change the settings of its asset purchase program or interest rates. However, the murky global outlook and ongoing risk of further lockdowns in the event of another Covid-19 outbreak will keep the central bank’s stance dovish at Wednesday’s meeting, and a new Funding for Lending Program is likely to be announced. The scheme is likely to provide lending at the OCR rate for up to 2-3 years for banks, in an effort to improve policy transmission and increase lending, while supporting Bank margins and paving the way to possible negative interest rates in 2021. The equivalent Reserve Bank of Australia scheme, the Term Funding facility, had already offered $83bn in funding to eligible institutions by November 3rd, or some 4% of 2019 GDP. Back-of-the-envelope calculations suggest that the initial size of the RBNZ facility is therefore likely to be announced at well upwards of $10bn NZD, and may potentially be much larger. The introduction of the FLP is a key step towards negative interest rates. As the RBNZ explained in August that lowering longer-term funding rates for banks would help lending rates remain sensitive to additional cuts to the Official Cash Rate – possibly into negative territory. With momentous changes occurring in risk appetite and the wider global outlook due to the US election, the RBNZ will at best be able to provide either tail or headwinds to NZD price action next week. However, a particularly pessimistic outlook on the global economy, or on the chances of a vaccine, could further play into market expectations for negative interest rates.


New Zealand leads bets on negative rates




Next week’s European Central Bank Forum is likely to provide insightful information on the ECB, Federal and BoE’s latest views on the global recovery and their local economic developments. For the eurozone, the economic outlook has been darkened by the latest virus developments and renewed lockdown measures imposed by ten different euro area countries, including its largest economies. This has put increasing pressure on the ECB to keep borrowing costs low and maintain or increase its asset purchase programme.  At its latest meeting, while the ECB did not alter any policies, it provided the clearest message to markets yet that further stimulus is on the way. ECB President Christine Lagarde stated that there is “little doubt” policy makers will agree to provide more stimulus to the economy at the next policy meeting as Covid-19 infections and containment measures accelerate across the euro area.

The forum kicks off with an introductory speech by Ms. Lagarde, and will then follow with two sessions spread out over Wednesday and Thursday before a panel discussion concludes each session. The panel discussion on Thursday will be of interest for markets, as the heads of the ECB, Fed, and BoE will all take part. Below are some of the key points to watch per speaker.

  • ECB President Christine Lagarde already communicated to markets that the ECB will ramp up stimulus during the next meeting, but in terms of what the ECB will do and by how much, the policy makers have not given much away yet. ECB’s Vice President Luis de Guindos said that stagnation or even contraction cannot be ruled out in Q4. While we know that stimulus is coming in December, Lagarde’s speech will be closely monitored for hints on whether the central bank intends to look at all of its tools or specific branches. Lagarde may also address what the recent virus and lockdown developments have changed in regards to the inflation and growth outlook, and if there is any chance the ECB will opt for a deposit rate cut – although the latter seems unlikely.
  • Fed Chair Jerome Powell kept policies unchanged at Thursday’s meeting, but opened the door to a possible shift in the Fed’s bond purchases in the coming months. For the Fed, markets will watch to what extent the virus developments will move the needle for the central bank to adjust the parameters of the current bond buying programme. Additionally, whether or not there will be more certainty about the US elections by then, Powell will likely comment on further fiscal aid essential to help the US economy recover from the virus blow.
  • For BoE Governor Andrew Bailey, bond purchases will likely take the main focus after the last Bank of England policy meeting. However, markets will also keep a close eye on the Bank’s stance on negative interest rates, especially after the tweet on Thursday that was sent out and immediately deleted. The tweet contained a chart that appeared to show interest rates going negative, and while the tweet certainly did not go unnoticed, the Bank has not yet commented on it. Bailey probably will not either, but a general remark on negative rates may be on the agenda.


Germany’s 5-Year, 5-Year Forward Inflation Expectation Rate falls after euro area lockdowns darken economic outlook


Banxico Primer


The Mexican economy is faced with unprecedented risks to its growth outlook, while the risks to inflation remain mixed and uncertain. After five consecutive half-point rate cuts since the outbreak of the pandemic, the Bank of Mexico slowed the pace of monetary easing in the September meeting with a 25 basis points cut, hinting at the likely end of the loosening cycle in the upcoming meetings. With the overnight interest rate sitting at 4.25% currently, the policy stance lays in marginally restrictive territory as per the central bank own estimates. However, the latest policy meeting minutes revealed a broad consensus on the necessary caution looking ahead, considering both the dynamics at play in the inflation outlook and the stability of financial markets.

While there are sound arguments for Banxico to hold off on additional rate cuts at this stage and save the little extra easing room for 2021, we believe the Bank is likely to complete its stimulus efforts at this early stage of the recession rather than later on.

Falling inflation expectations underline this view, as the recessionary effects from the pandemic and a stringent fiscal policy stance weigh on the inflation outlook. Economists’ surveys have slightly downgraded growth projections for next year as well, while the potential effects of a second wave of Covid infections are looming in the short-term. A policy rate cut at this point would, therefore, pre-empt any likely expectations of financial stress under the prospects of further restrictions to economic activity.

The likely scenario of a Biden presidency along with a Republican Senate in the US political landscape neutralises the undesired effects of lower policy rates in domestic financial markets – one of which being further currency weakness. A divided government in the US has two main implications for Mexican economic policy in this regard. On one hand, a Biden-led White House will likely print a multilateral approach to foreign trade US policy, bringing forward a reduction of risk premium to EM assets; hence, encouraging yield-seeking behavior in global financial markets. At historically low 4% interest rate (lowest since 2016), Mexican assets would still be among the most attractive carry trades in the market, which would limit the likelihood of substantial capital outflows on further rate cuts. On the other hand, a republican mandate in Congress represents a negative fiscal impulse for the US relative to the ‘Blue sweep’ counterfactual scenario. This means that: i) Mexican monetary policy holds the burden of stimulating the economy as per the limited imported growth and the already austere domestic fiscal response, and ii) prospects for US yield curve steepening become more protracted in time. This leaves more room to maneuver for Banxico, while lessens the risks of credit strain and debt growth via currency depreciation.

Risks to our view remain high on the grounds of the Banxico’s conservative stance and the broad uncertainty surrounding the future evolution of inflation.

The lower marginal effect of additional rate cuts also compete with the potential risks of a constitutional crisis in the US in terms of likely risk-off moves. Markets are tilted toward a likely halt of monetary easing, with no rate cuts priced in at the moment for next week. Although confirmation of a Biden win could move market policy expectations in this direction, we see this as unlikely. This means that the bar for surprises in the next policy meeting is relatively high. Regardless, we believe that the currency impact of a surprising rate cut could be moderate, although this is highly contingent in developments in the US elections in the upcoming days.


Bar for Banxico surprises is relatively high with no rate cuts priced in by markets


Ranko Berich, Head of Market Analysis
Simon Harvey, FX Market Analyst
Olivia Alvarez Mendez, FX Market Analyst
Ima Sammani, FX Market Analyst



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