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FUNDAMENTAL OUTLOOK: BULLISH

• US Dollar may be at the mercy of political volatility from presidential debate and stimulus talks.
• Greater election-related uncertainty and concern about timely aid package could hurt sentiment.
• Slew of key employment data could dampen outlook for economy despite signs of a recovery.

FIRST PRESIDENTIAL DEBATE

Politically-induced volatility from the first 2020 US presidential debate between incumbent Donald Trump and Democratic nominee Joe Biden may spur demand for haven-linked assets like the Greenback. As mentioned in my article previewing the debate, while debates have not overwhelmingly influenced voter intention, the unique circumstances of this election – and all that is at stake – may prove differently this time.

If the debate causes a reversal in polling data – in this case, Biden losing his lead or having it significantly narrowed – traders may consider repositioning themselves. This reshuffling of capital to optimize their performance in the new political landscape could push the US Dollar higher if a premium is put on liquidity over returns.

US FISCAL STIMULUS TALKS

This risk-off dynamic may be amplified if policymakers are unable to find a middle ground and pass a coordinated fiscal stimulus package. Last week at a congressional testimony, Fed Chairman Jerome Powell warned that the downside risk of no further action may result in reduced spending and the possibility of people losing their homes. The prospect of this gloomy outcome may amplify losses in equity markets.

USD GAINING VS AUD, EUR, AND S&P 500 FUTURES AS STIMULUS TALKS BREAK DOWN, COVID-19 CASES RISE

EUR/USD chart created using TradingView

Having said that, Democrats are drafting a $2.4 trillion stimulus package – slightly less than the $3.4 trillion aid passed earlier this year – and are aiming to pass it in the House by this week. Optimism about some form of compromise could uplift sentiment and punish USD, though the ongoing debate about the Supreme Court vacancy may derail bipartisan talks. In that scenario, the risk-off tilt may be amplified and boost the Dollar.

NFPS, INITIAL JOBLESS CLAIMS, UNEMPLOYMENT DATA

A slew of job-related data will be released this week, most notably nonfarm payroll data, initial jobless claims, and the unemployment rate for September. The latter is anticipated to shrink to 8.2%, slightly better than the prior 8.4% print, while NFP stats are anticipated to show 865 thousand jobs added for September. While positive, it is far smaller than the previous 1371 thousand figure.

If the statistics point to signs of improvement, then demand for returns over liquidity may hurt the negative-yielding US Dollar and help stocks nurse their losses. Having said that, the recent trend in economic data points to what I characterized as a period of “economic recalibration”. This involves economists and analysts gauging the outlook for the economy going forward with greater accuracy.

HOW WILL DATA PERFORM NOW?

Source: Bloomberg

Without the help of additional stimulus giving Americans a spending boost – thereby driving the consumed-based US economy – data may start to underperform. Combined with rising COVID-19 cases and greater pressure for cracking down on outdoor activity, economic vitality may begin to lose its strength and create a deeper sense of uncertainty.