FX Risk Rally Continues As Stimulus Prospects Grow

Risk appetite remains strong with equities and currencies extending their gains on Thursday. The growing prospect of a stimulus deal in the US and a Brexit agreement in the UK drove investors out of safe have currencies like the US dollar and Japanese Yen. High beta currencies took flight with strong gains in sterling, the New Zealand and Australian dollars. The greenback fell to fresh 2.5 year lows on the back of mostly weaker data. Although building permits rose strongly, housing starts grew at a slower pace, the Philadelphia Fed index tumbled to 11.1 from 26.3, a reading that was much weaker than anticipated. Most importantly, jobless claims continued to rise from 853K to 885K, reinforcing Fed Chairman Powell’s plans to keep interest rates at zero for the next few years.

10 and one 10 us dollar bill

Image Source: Unsplash

It's been eight months since the last US stimulus package and after lots of back and forth, a deal is finally in reach. The election in Georgia and control of the Senate is a powerful motivator and with McConnell and Pelosi telling lawmakers to stay in Washington, there’s a very good chance an agreement can be made by next week. At $900 billion it’s less than half of the package enacted in March but it includes more jobless benefits, rental assistance, and PPP funds for businesses. At this stage, anything is better than nothing.

The market still thinks a Brexit deal is possible. Yesterday European Commission President von der Leyen said a narrow path has opened. This morning, the EU’s Barnier said good progress has been made while the UK’s Gove said they would do everything to secure a deal. However later in the day, they appear to backpedal with von der Leyen talking about big divergencies on key issues like fisheries. All along, UK Prime Minister Johnson’s stance has been that no deal is “the most likely outcome” and today he reiterated that it looks very likely an agreement won’t be reached unless positions shift substantially. The Bank of England meeting was a non-event for the British pound. Their decision to leave interest rates unchanged was widely anticipated as there’s no point to changing monetary policy weeks before the Brexit deadline. Two weeks won’t make much of a difference and it's better to have all of the facts before recalibrating their asset purchase program. UK retail sales are due tomorrow and the November lockdown is expected to curtail spending with economists looking for -4.2% drop.

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