Trading Currencies: One Down, One Still Very Much Standing

The 2 major risk events of the past 9 months continue to be the key drivers of FX risk trading.

  1. Caseloads of COVID-19 and a possible vaccine to it.
  2. The US presidential election.

The second point has now officially been ‘declared’ with President Trump finally allowing a transition process to President-Elect Biden to begin. This was probably seen as an ‘unexpected’ outcome considering the Trump team is still pursuing legal challenges in several of the swing states yet to official declare.

However, with Georgia officials declaring this week if there will be any legal challenge remaining, that could, in theory, be successful in the remaining states. Yet, it would still not be enough to get Trump to 270 electoral colleague votes that are needed to be re-elected. This ‘risk event’ is now officially over. However, the Trump presidency is not – that is still official until January 19 and there are still some risks here.

Is it time to go for risk-on markets?

The reaction to Trump’s concession was one of risk-on, the equity market made record highs in the US and the USD fell against all G10 currencies on the news, with risk currencies in the form of the AUD, NOK and SEK being the biggest movers.

AUD/USD is again through $0.73. While FX strategists at UOB group predicts that the pair may break above 0.7400 in 1-3 weeks’ time, the question for it over the final week of 2020 is will the risk levers continue to push it higher? And, will that mean a year-end target of $0.75 is still possible? The macrothematics suggest yes, but real events could still be a headwind.

Namely COVID-19 cases.

That first point is really the major catalyst now for further risk rallies or pull backs, and as discussed in last week’s note caseloads are still growing almost exponentially in the US and Europe, not to mention that global cases have already surged past 60 million, which is weighing on short-term confidence.

Beware of short-term risks

Case-in-point: the US consumer confidence fell to back into pessimism in November to 96.1 from 101.4 (100 is equilibrium). Future expectations deteriorated (fell to 89.5 from 98.2) specifically due to a resurgence in COVID cases and the subsequent restrictions. The Richmond Fed manufacturing survey for November fell more than expected, to 15 versus estimates of 20 and well down on last month’s record high of 29, most components slipped and the most notable was new orders down to 12 from 32.

This must be seen as a short-term risk for FX. Watch for possible switching to the JPY and CHF as traders cover possible volatility to end the year.

Key dates before the end of 2021

Major events that can bring volatility to the markets in the remaining weeks of this year:

  • December 10 – Vaccine Development: Some sources suggest that Emergency Use Authorization for both Pfizer and Moderna vaccines may potentially be approved on this date
  • December 14 – US Presidential Election: Members of the Electoral College will meet and cast their ballots for president and vice president
  • December 31 – Brexit: End of the transition period

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.