With apparently little substance or follow up to President Trump’s allegations of fraud and general dishonesty in the recent election, the markets turned their eyes back to the narratives of COVID-19 and Brexit and last week generally traded in a very narrow range. At present, there is a push/pull battle for risk sentiment with the damage being inflicted by COVID-19 fighting the positivity of the arrival of a vaccine. As risk sentiment moves, so do the beta currencies such as sterling although, of course, it has its own narrative as Brexit struggles on with the participants from both sides starting to look like punch drunk fighters entering the last round of a championship fight.
The week ahead looks no different to the last few, with the markets locked seemingly in a narrative purgatory with the same issues over COVID-19, stimulus packages and Brexit dominating currency movements. With America set to enjoy a shortened week with the national holiday of Thanksgiving Day on Thursday, it is likely that eyes will be focused on this side of the Atlantic and of the Brexit negotiations. The market is still confident of a successful outcome, but as time runs out the possibility of a temporary agreement grows.
Sterling has edged up slowly over the last week and ended slightly better against the euro at €1.1175 and also stronger against the dollar at $1.3279. These moves partly reflected optimism over the likelihood of a trade deal, but also the fact that it looks increasingly likely to be a “soft” agreement with elements possibly having to be agreed at a later date. The risk to sterling is now that an agreement is fully priced in at these levels, its potential for appreciation may be limited. Away from Brexit headlines, there is very little data out apart from the preliminary November sentiment indicators (PMI) today.
During the last week, frictions over the EU budget and the distribution of the recovery fund emerged, with Hungary and Poland playing hardball and stalling the process. This confrontation weighed on the euro, as did the threat of ECB verbal intervention as the single currency rises, but it still managed to close up on the week at $1.1880 against the dollar. It is likely that a compromise will be reached eventually, but in the meantime, it looks that the euro isn’t fully pricing in the risk of further disputes. As with sterling, there is only really one story, Brexit, which as we said earlier optimism now abounds for a satisfactory outcome to the trade negotiations. Today sees the release of preliminary sentiment indicators which are expected to be dismal as new containment measures take their toll. On Tuesday, the 3rd quarter GDP is released in Germany. After a busy week last week, Christine Lagarde is speaking again as is Isabel Schnabel.
The market looks set to continue trying to balance the dichotomy of COVID-19 still raging through the States against the optimism of the vaccine which will probably lead to the dollar staying in a relatively narrow range next week. With Thanksgiving at the end of the week followed by Black Friday, it’s unlikely that too much will unsettle the markets but the simmering row between Treasury Secretary Mnuchin and Federal Reserve Chairman Jerome Powell over the emergency lending programme may upset the apple cart. The Federal Reserve will have plenty of opportunities to voice its point of view this week with Mary Daly speaking Monday as well as John Williams and Richard Clarida on Tuesday. As with the rest of the world, PMI’s are released today and Wednesday. We have a busy week of data, with the release of Durable Goods, 3rd Quarter GDP and October’s Personal Consumption numbers. Finally, on Wednesday the minutes of the last Federal Open Market Committee meeting are released which we will study for any hints regarding further easing.
SEK was rangebound last week but this week may prove to be more volatile. The Riksbank is expected to leave rates unchanged on Thursday, but it is unlikely that is going to be a key driver for the currency. The markets will closely watch any change of tone to a more cautionary one given that tougher COVID-19 restrictions have been put in place by the government. We will also get an important Economic Tendency Survey on Thursday together with the latest PPI figures. On Friday we will see whether the Swedish consumer was out shopping in October as retails sales are published and the GDP figure is released. The latter is expected to have shrunk 3.6% on a year-by-year basis, but have shown growth of 4.3% quarter-on-quarter.
NOK also traded sideways throughout most of last week and this week’s only important data release is the unemployment rate out on Friday. It is expected to have increased slightly to 4.0%, up from 3.5%.
Danish authorities have confirmed that the COVID-19 mink variant now is ‘very likely extinct’. So far the mass killing has only impacted politics with the minister of food and agriculture, Mogens Jensen admitting that the government did not have the authority to order all minks dead, particularly the healthy ones. The EURDKK peg remains intact and the Danmark Nationalbank has not acted in anyway.
The aussie had a mixed week but finished generally stronger apart from against its closest rival the kiwi. At the moment the currency is driven by the simmering tensions with China and the Royal Bank of Australia’s policy and we will be listening for any clarification from Deputy Governor Lowe on Tuesday. The loonie is enjoying the relative stability in oil prices and positive domestic data and with little on the data docket next week this looks set to continue. Closer to home the Swiss Franc has been reacting to the ongoing spat over the euro recovery fund and as a safe haven currency, it will appreciate further if sentiment internally in Europe continues to worsen.