Post date: 08/10/2020 09:02
Most currencies’ sell-offs in the previous week were reversed in last week’s trading.
While risk sentiment was not a clear driver in either direction, the always unpredictable asset-rebalancing moves at the end of third quarter hurt the greenback this time. The news late-Friday that Trump had tested positive for COVID and had been hospitalised did not seem to have much impact on currency markets in early-Monday Asian trading. His doctors announced Sunday that Trump could be released as early as Monday, which buoyed risk sentiment modestly in the earliest stages of this week´s trading.
This week, markets will follow minute by minute the evolution of Trump’s health. In the absence of market moving data out of the major currency areas, we expect that the release of the minutes for the last meeting of the Federal Reserve (Wednesday) and the ECB (Thursday) will garner most of the attention. A confirmation of the recent boost in Biden’s lead in the polls over Trump could also boost sentiment as it diminishes somewhat the likelihood of a contested election in the US.
It appears that the Brexit negotiations will once again go down to the wire. Both sides appear to be getting closer, but significant hurdles remain, most notably in the issues of fishing quotas and the establishment of an enforceable mechanism for resolving disputes. The news that enough progress has been made for talks to be extended by a month is encouraging and suggests that a deal could now be struck in early-November, which would avoid the dreaded ‘no deal’ scenario.
With little data of note out this week, the headlines around the negotiations will likely dominate sterling trading. We see scope for continued modest gains in the pound against the US dollar as the likelihood of a ‘no deal’ Brexit has diminished in our view.
The key event last week in the Eurozone was the publication of yet another deflationary surprise in the flash inflation report. The key core inflation number that excludes volatile food and energy components collapsed for the second consecutive month to an all-time low, this time at 0.2% over the past 12 months.
The publication of the minutes from the ECB meeting takes on added importance, as the staff inflation forecasts published then look increasingly out of line with reality. Absent a serious rebound in the inflation numbers for October, we now expect to see some dovish signalling from the ECB at either the October meeting or the December meetings.
The payrolls report for September was expected to be the big event of the week for markets, but it was somewhat overshadowed by the news that Trump and a number of high-ranking members of his administration had tested positive and were headed either to the hospital or to isolation. As this is written, it appears likely that Trump will be released relatively soon, though the impact of the disease on his campaign schedule remains an open question.
As for the payrolls report, it was somewhat disappointing. The US created fewer jobs in September than expected. While unemployment dropped more than expected, this was mostly due to workers withdrawing from the labour force, which is not a particularly healthy development. However, there were positive revisions to the numbers of the previous two months, and the overall sense is still that of a rapidly recovering labour market, though starting from abysmal levels and having lost some of its momentum.