FX November 06, 2020 / 10:04 am UTC

FX Daily Outlook & Strategy, North America November 6th

By Adrian Schmidt

USD weakness may be due a pause

COVID concerns are still with us

GBP vulnerable

US employment report seen marginally on the softer side

USD weakness may be due a pause

COVID concerns are still with us

GBP vulnerable

US employment report seen marginally on the softer side


The USD continued to weaken across the board on Thursday and broke to new post-March lows against the JPY, though it remains some way short of its end-August lows against the other G10 currencies. While the JPY hasn’t gained ground on the crosses in the last few days, this underlines that the USD’s trend weakness has been more notable against the JPY in the last few weeks than against the more risk positive currencies. However, the USD/JPY move has hit a big technical support area at 103.50-70, and we would expect some sort of pause here. While we remain USD negative we feel the political situation is too uncertain to be over committal on USD weakness, with much of the decline this week likely to relate to the decline in yields, which we doubt has a lot further to run. 


The decline in yields has also supported equities, which may also have been helped by the likely Republican control of the Senate because fears of Biden increasing regulation on tech companies have been reduced. But with fiscal spending likely to be much more modest in this scenario, we would be wary of assuming extended equity gains. In addition, the decline in equities ahead of the election was based in large part on downgrades in European growth expectations as European countries instituted new lockdowns. Despite some evidence of slowing infection rates in Europe, this hasn’t gone away, and the market may yet have to deal with a big second (third, in some views) wave in the US, which might lead to growth downgrades there as well. We would consequently not get carried away by equity strength and USD weakness here, and while the JPY should hold on to most of its gains, we would be more concerned about the risk positive currencies.

GBP may be the most vulnerable of all, as Thursday’s Bank of England Monetary Policy Report made it clear that the BoE expects UK growth underperformance to continue, with risks from Brexit in January compounding the impact of the lockdown. While markets at the moment are not tending to trade on the basis of relative growth performances, UK weakness combined with equity weakness would not be a good combination for GBP. GBP/USD has, unlike most of the major currencies, still not risen above last year’s December highs, and we would see little reason to expect these to be broken at this stage, even if the UK reaches a trade deal with the EU. This is mostly in the market, and while an announcement of a deal would likely push GBP higher short term, the impact of “no deal” on the downside would be much greater.


For Friday, the US employment report will be a focus, but obviously less of one than usual given everything that is going on. We expect October’s non-farm payroll to increase by 500k, slightly below market expectations, with a 650k rise in the private sector, government restrained by the layoff of temporary census workers. We expect a modest fall in unemployment to 7.7% from 7.9% and a 0.2% increase in average hourly earnings. This might take the shine off equities and help give the USD some support. 


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