FX: What To Expect Next Week

With less than four weeks before the Nov. 3 U.S. Presidential Election, it has become very clear that investors believe that regardless of who wins, the economy will do better in 2021 than 2020, barring another full U.S. lockdown this is almost a certainty. Looking back, 2020 will be one of the darkest times in recent history, but medical advances over the past year will make 2021 a year of recovery. More importantly President Donald Trump and Democratic candidate Joe Biden are prepared to pump the economy with major stimulus in the new year. Even so, in the next few weeks volatility should increase with bigger trading ranges and wild swings in currencies and equities. U.S. fiscal stimulus talks and Brexit negotiations are still in start-stop mode and until an agreement is reached, headlines are the greatest risk. A vaccine is also around the corner but a pre-election vaccine announcement is still on the table.

In the coming week, aside from stimulus headlines and any other left-field tweets from Trump, our focus will be on how the U.S. recovery is faring. Retail sales are scheduled for release along with the Empire State and Philadelphia manufacturing surveys. Many Americans received fewer jobless benefits in the month of September, so it will be important to see how that impacted spending. Chances are, consumption declined, especially with equity market and election volatility. The manufacturing surveys will also provide an important look at the momentum of the economy, but in many ways, the University of Michigan’s consumer sentiment index will be the most telling with regards to how Americans feel. Inflation numbers are also scheduled for release, but the Fed has made it clear that inflation is too low and the latest data should reflect that. The U.S. dollar fell against most of the major currencies on Friday, and while it may strengthen on safe-haven flows next week, USD/JPY and USD/CHF are prime for losses.

As we wrote on Thursday, the euro should be trading much lower, and next week’s German ZEW survey could be the perfect catalyst for the move. Virus cases are rising across Europe, forcing governments to announce fresh restrictions that will take a big bite out of the region’s second-half recovery. Considering that the ZEW survey measures investor sentiment, a significant deterioration would not be surprising, but it is the growing restrictions and increasing concern by the central bank and regional governments that could drive investors out of euros.

Sterling will be at the whim of Brexit talks, which will continue next week. The EU Summit on Oct. 15 has been the deadline set by the UK to agree on a Brexit deal and Prime Minister Boris Johnson feels that both sides should “move on” if there is no agreement by then. Unfortunately, a deal is looking elusive as Michel Barnier, the European Commission's head of the Task Force for Relations with the United Kingdom, left talks early for Brussels on Friday. Downing Street described their last meeting as useful, but as we previously noted, most of the positive headlines have come from the UK and most of the negative ones from the EU. Aside from Brexit talks, UK labor market numbers are also due next week. Sterling came under selling pressure on Friday on the back of weaker GDP, industrial production and trade data.

All three of the commodity currencies traded higher on Friday. Home loans from Australia was strong, but the big surprise came from Canada, which reported stunning jobs data. Economists had been looking for weaker job growth but more than 378,000 people found new jobs in the month of September, which was more than double expectations. The unemployment rate also dropped to 9% from 10.2%, but the best part of the report was the fact that nearly all of the jobs created were full time. No major Canadian economic reports are scheduled for release next week but Australia will release its labor market report and New Zealand has PMI.