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Last week’s news

• As the US elections loom, Donald Trump trails Joe Biden by more than 9 points according to nationwide polls and a Financial Times analysis of data from Real Clear Politics. Mr Biden also leads in every swing state, and is close to Mr Trump in Texas, which has not voted for a Democratic presidential candidate since 1976. Markets seem to be also pricing a Biden win, at least considering the lower USD and expected volatility prices for the JPY on the day of the event.
• The UK economy grew less than expected in August despite the boost from the hospitality sector thanks to government schemes. UK GDP increased by 2.1% from July but fell short of the 4.6% expected by economists around the UK, adding pressure on policymakers to do more to support the economy. James Smith, Research Director at the Resolution Foundation, said the ‘disappointing’ figures confirmed that Britain had never been on course for a rapid V-shaped recovery. ‘Much more effort over the summer should have gone into planning for a second wave, rather than pinning hopes on a V’. Ruth Gregory, senior UK economists at Capital Economics added ‘With the government’s fiscal support unwinding, the next few months will almost certainly be worse.
• That’s why we think the BoE will yet expand QE by a further £250bn by the end of next year, with the next trance of £100bn coming this November.’
  Brussels is looking at how to compensate European fisherman as they begin to concede they may be one casualty from a possible Brexit deal. Michel Barnier, the EU’s chief negotiator, urged EU governments this week to moderate their demands for retaining existing fishing quotas in British waters, warning that they had to be realistic on what could be secured. However, diplomats said that Brussels could soften the blow by intelligently reallocating old British quota’s in the EU’S post Brexit exclusive fishing zone. Britain on the other hand, wants to ditch the old model for dividing up quotas and make access to its water’s conditional on successful annual negotiations in other areas.
• The US dollar and Japanese Yen fell strongly over the last week, after many days of FX whipsaws and false moves following a soap opera between democrats and republicans regarding the stimulus package. The AUDUSD pair increased 1.1% and the AUDJPY increased 1.38% over the last week following comments by White House Economic Adviser Kudlow, who said that U.S. President Trump approved a package, even though he had called off negotiations earlier in the week. Trump also said, “I would like to see a bigger stimulus package, frankly, than either the Democrats or the Republicans are offering.”.

Looking ahead

• There is no doubt that currency volatility has increased since July and August’s low, but it is very well below the March levels. FX volatility over the last week was subdued following the news of the potential “blue wave” in the US elections. Beyond the US polls this week, (FiveThirtyEight, a website focused on opinion polls is currently giving Biden a 86% probability of winning the election), earning season kicks off for big Financial institutions and we get to see RBA Governor Lowe speech plus Australian employment data on Thursday (big banks are currently pricing a cut for the November meeting). Also, October 15th is due, date signaled by Boris Johnson as a deadline for an agreement, which EU diplomats have dismissed as such.
• Over the longer term, resurgence in COVID-19 infections around the world, and specifically in Europe, might bring uncertainty, and the geography of the virus cycle suggests that the US could potentially have a second wave. Negative implications resulting from the virus, or further unexpected news could change the dynamics of the current FX volatility environment very quickly. If the risk-on music stops, currencies such as the Euro, Swiss Franc, Japanese Yen, and even the US dollar might perform better over the last 2 months of this year.
• Tens of thousands of UK businesses are still not prepared for the end of the Brexit transition period, civil servants warned last Thursday, amid growing concerns that the Calais-Dover crossing will be plunged into chaos next year. The latest government polling indicated that about one-third of businesses still believed that there would be an extension to the transition period. Alex Chisholm, permanent secretary of the Cabinet Office told the House of Commons public accounts committee, ‘I can understand why they may think that because of the learned behaviour of the previous administration… but there isn’t going to be an extension and they really need to be ready before the end of the calendar year.’
• A further rise in the euro would be a risk to both growth and inflation according to European Central Bank policymakers, who fear that eurozone inflation will remain in negative territory until the end of the year. The euro is up 10% against the dollar since March lows. The eurozone slid into deflation in August for the first time in 4 years; CPI was -0.3% in September. The ECB believe a weaker EUR will help them climb out of deflation in the medium term.

Key market events this week

• GBP Employment Change (Jul) – Tuesday
• EUR ZEW Economic Sentiment Index (Oct) – Tuesday
• USD Core Inflation Rate YoY (Sept) – Tuesday
• AUD Westpac Consumer Confidence Index (Oct) – Thursday
• AUD Unemployment Rate & Employment Change (Sept) – Thursday
• NZD Inflation Rate YoY (Q3) – Thursday
• EUR Core Inflation Rate YoY Final (Sept) – Friday
• USD Retail Sales MoM (Sept) – Friday
• USD Michigan Consumer Sentiment (Oct) – Friday