Published: October 16th, 2020
The dollar slumped to its lowest in almost three weeks on Friday, October 9, closing with a second consecutive weekly losing streak. The losses follow growing expectations that Democrat Joe Biden would beat Donald Trump and offer a fiscal stimulus.
The dollar closed the week ending October 10 on a three-week low and two weeks of consecutive slumping following hopes that Joe Biden would win the November elections. The losses incurred by the dollar come on the backdrop of the hope that the Democrat would offer a bigger fiscal stimulus upon becoming the president.
Many Wall Street banks foresee a stimulus package regardless of which candidate carries the day. However, almost all of them said that a Biden presidency, especially if Democrats regain control of the Senate, will offer a bigger package. UBS Asset Management has bet 75% on Biden winning the State House.
Also, Brown Brothers Harriman strategists said that aside from losing the presidency, Republicans may give up control of the Senate. They added that the betting odds put the Democrats at almost 70% chance of getting both the presidency and the Senate.
A Reuters/IPSOS poll in the week ending October 10, put Biden ahead on Trump in five battleground states of Wisconsin, Pennsylvania, Florida, Michigan, and Arizona. The growing expectations of Biden winning the elections have calmed the market volatility and increased the appetite for currencies injured by the Sino-U.S. trade wars.
There is increasing anticipation that a stimulus spending and this hope is not a function of who wins the race. This sentiment is weakening the dollar in the short-term. By doing so, it is boosting the investors’ mood and improving their willingness to dash for stocks, commodity currencies, and other riskier assets.
Rodrigo Catril, the senior FX strategist at National Australia Bank in Sydney, said the agreement of a stimulus is more of an issue of when. However, chances are, if it happens after the elections, the package will most likely be huge.
The negotiations between Steven Mnuchin, the Treasury Secretary, and House Speaker Nancy Pelosi, that President Trump stopped a few days ago are back on course. The coronavirus aid plan can materialize at any time. However, if it falls on the laps of the Democrats to see it through, many experts foresee it would be bigger than whatever is currently proposed.
The head of investment research at BDSwiss Group, Marshall Gittler, said that as a result of the anticipation, there is an evident drop in implied volatility as the election date approaches.
The dollar bled some 0.3% for the day against the basket of currencies on Friday, October 9, settling at 93.30 at the close of the week and 0.8% down overall. The greenback has slid by a similar margin the previous week, diving from a two-month high of 94.75 that it recorded in late September.
The Chinese currency became the biggest beneficiary of the surging hopes of a Biden win. The yuan recorded the largest daily rise in four years. However, the entire gain is not attributable to the Biden win; rather, on the part of the currency finally catching up after an extended hiatus.
The setting of the Chinese currency’s trading band, which is higher than expected, indicates that policymakers in Beijing do not mind the surge.
The chief Asian FX strategist at Mizuho Bank in Hong Kong, Ken Cheung, said the main message that the People’s Bank of China is sending out is that it does not mind the Renminbi appreciating at this level. As such, the markets are positioning for a rally of the currency, he added.
Besides, Biden’s lead in the opinion polls is pushing up bets on steady and more balanced relations between the U.S. and China. The yuan closed the week up 1.2%, inking 6.7112 for every dollar in onshore trade and about 0.5% to 6.7024 per dollar in offshore trading.
The Australian dollar, the most risk-sensitive of the major currencies, rose by 0.2% to stand at $0.7186. The rise put it a fraction higher for the week. The impressive performance of the three currencies comes despite analysts reading the central bank statement released on Tuesday, October 6, to mean that more monetary easing is looming.
The yuan’s rise had little if any impact on both the pound and the euro which are influenced by the Brexit negotiation ongoing in Europe this week. The euro shot up 0.1% to stand at $1.1776 while the pound added some 0.2% to ink $1.2961.
The sterling managed to hold firm to the gains with the prospects of a Brexit deal improving with each day.
Like the three top gainers, the New Zealand dollar also closed the day on a high, recouping the losses incurred the previous day after the Reserve Bank of New Zealand sent out dovish signals. The Kiwi closed trading on Friday, October 9 at $0.6603, a record 0.4% climb.
The Japanese yen, a safe-haven currency, which had an oversubscribed demand due to the upbeat mood, climbed slightly higher, settling at 105.85 for every dollar on Friday, October 9. Overall, the currency underperformed compared to the previous week, recording a 0.5%.
The Canadian dollar also etched its best weekly rise in more than 8 weeks, adding 0.9% to end the week at C$1.3186 per dollar.
Seemingly, a Biden presidency is great for everyone and all currencies. The Russian ruble also climbed by 1% for the week.
Even oil prices surged some 10% on the hopes of an impending stimulus. However, the rise in oil prices is not only because of political sentiment. Rather, they are reacting to the supply disruptions due to the storms hitting the Gulf of Mexico and the strike in Norway.
The hopes of a Biden presidency are spelling doom for the dollar. The greenback receded almost 1% for two consecutive weeks while all other major currencies rose. Markets’ expectation of a Democrats’ win comes with hopes of a bigger stimulus package, and the resulting sentiment is building an appetite for riskier assets.