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Equities rise again, capping off strong week, as market warms up to Biden win. USD falls to a near 2½-year low. NZD rebounds strongly on Friday. PBOC changes rules on FX forwards, making it less expensive to short CNY

Currencies
Equities rise again, capping off strong week, as market warms up to Biden win. USD falls to a near 2½-year low. NZD rebounds strongly on Friday. PBOC changes rules on FX forwards, making it less expensive to short CNY

Markets ended last week on a positive note as investors warmed to the prospect of a clear Biden win at the election and Democrats and the White House resumed fiscal stimulus talks.  Equities increased again, capping off a strong week, while the USD fell sharply to near a 2½ -year low.  The NZD appreciated over 1% on firmer risk appetite.  The PBOC has made a rule change over the weekend, making it less expensive to short the CNY.

Markets continue to trade with a risk-on tone, with the S&P500 gaining a further 0.9% on Friday and the NASDAQ up 1.4%.  The two benchmarks were up 3.8% and 4.6% respectively last week while the small-cap Russell 2000 index was up over 6%, suggestive of growing investor confidence in the domestic US economic outlook.

The key theme driving markets at present is growing conviction that Biden will win by a clear margin at the US Presidential election, reducing the risk of a messy contested result, and Democrats will win back the Senate, enabling the party to implement aggressive fiscal stimulus.  FiveThirtyEight, the closely-watched prediction site that uses statistical methods to generate probabilities for political (and other) events, puts the odds on a Biden presidential victory at a new high of 86%.  Betting market odds for a Democrat ‘clean sweep’ of the presidency and both houses of legisature remain around 60%.

Sentiment was also boosted on Friday on news that the White House had increased its fiscal stimulus offer to $1.8 trillion, only days after Trump said he had called off pre-election talks.  The odds of a pre-election deal still look slim, with Democrat leader of the House Pelosi rejecting the improved offer over the weekend and time fast running out to pass legislation before the 3rd November election date.  Republican Senate leader McConnell said a deal was “unlikely” before the election, adding that the priority for Senate Republicans was confirming Supreme Court nominee Barrett.

The USD experienced a large, broad-based, depreciation on Friday as risk appetite firmed.  The Bloomberg USD index fell 0.7%, its biggest one-day decline in late-August, to what is now close to a 2½-year low.  An undisputed Biden win and a Democrat ‘clean sweep’ is widely expected to result in renewed weakening in the USD.  First, markets will breathe a sigh of relief if Trump doesn’t contest the result; less uncertainty and greater risk appetite are usually USD-negative factors.  Second, the Democrats have much more ambitious fiscal spending plans which would be expected to raise inflation expectations and, given the Fed is unlikely to raise rates for several years at least, may reduce real interest rates.  Lower US real interest rates have been a key driver of the USD decline since March.  Finally, the Democrat's aggressive fiscal spending plans may rekindle investors’ attention on the US twin deficits, which is a structural headwind for the USD.  The USD fell against all the G-10 currencies on Friday, by between 0.4% and 1.4%.

The NZD was the top-performing currency on Friday, rising 1.4% to around 0.6670, its highest level in over two weeks.  Better risk appetite, a strengthening CNY (which is close to a 2½ year high), and some reversal of the previous day’s underperformance were all behind the strong rise in the NZD.   On the week, the NZD’s performance was more modest (+0.4%) and it remains contained within its broader 0.64 – 0.68 trading range.  A rule change over the weekend by the PBOC (see below), which will make it less expensive to short the CNY, may put some downward pressure on the CNY today and, possibly too, the NZD.

The AUD was also up smartly on Friday (+1%), but not by as much as the NZD, seeing the NZD/AUD cross tick back up above 0.92.  The rise in the cross effectively reverses the fall on Thursday in the wake of dovish comments from the RBNZ.

Global rates were little changed on Friday night, despite the move higher in equities and broader risk-on tone to markets.  The US 10-year rate spiked 3bps higher on headlines that Trump had okayed a larger fiscal stimulus package, but the move didn’t last.  The US 10-year rate ended 1bp lower on Friday, at 0.77%, but it was still 7bps higher on the week.  Expectations for more aggressive fiscal stimulus should put steepening pressure on the US curve given the read-across to the growth and inflation outlooks as well as (greater) bond supply.

The NZ swaps curve flattened on Friday, unwinding some of its move from the previous day in the wake of dovish comments by RBNZ Assistant Governor Hawkesby and Chief Economist Ha.  The 2-year rate was unchanged, at 0.03%, but the 10-year rate fell 2bps to 0.5%.  the RBNZ reduced its planned bond buying for this week, taking nominal government bonds down from $960m to $920m, inflation-indexed bonds from $90m to $40m and LGFA bonds from $30m to $20m.  While this was the third consecutive week the RBNZ has reduced its bond buying pace, its planned nominal government bond purchases for this week still exceed tender issuance by a hefty $320m.  The 10-year government bond yield was unchanged on Friday, at 0.54%, underperforming swaps.

In weekend news, China’s central bank, the PBOC, has eased some rules on using FX forwards to sell CNY, signalling that it has become less concerned about currency weakness.  Banks had previously been required to put aside 20% of the notional value of certain FX forwards as reserves with the PBOC which, in effect, made it more expensive to short the CNY.  The rule change comes amid an appreciation in the CNY towards a 2½ year high.  The CNY fell by around 2.5% over a three-week period when the PBOC last made such a change, in September 2017.

Elsewhere, ECB Chief Economist Lane told the WSJ that the European inflation outlook was unsatisfactory, and the central bank would evaluate the need for more stimulus on a “meeting by meeting” basis.  The market had expected the ECB to wait until the December meeting, when new economic projections are released, to increase its bond buying, but Lane’s comments point to the risk that the ECB could ease at the end of the month.

It’s a relatively quiet week in terms of scheduled events, with market sentiment likely to be dominated by expectations for the upcoming US presidential election.  The EU Summit, which UK PM Johnson had previously marked out as a deadline to agree the contours of a trade deal, will be a key focus, especially for the GBP.  Elsewhere, RBA Governor Lowe speaks on Thursday, where he is expected to cement market expectations for a series of incremental easing steps next month.  There is only second-tier economic data in NZ this week.  

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Source: CoinDesk

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1 Comments

Of course the NZD performed well. It bounced off a considerable with little support for a higher price.

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