FX Daily: Rushing to price in the post-Trump era

Markets were fully pricing in a Biden victory on Friday, so the confirmation over the weekend had limited market implications per se. What markets are now trying to assess is how much of the Trump agenda will be unwound by the incoming Democrat administration.

In this sense, an extensive USD/CNH drop keeps signalling high expectations around a less confrontational relationship with China. And in a broader sense, the initial market reaction to Biden’s win signals how investors are factoring in a Rest of the World rally with a key factor of uncertainty - Trump’s unpredictable foreign policy agenda and trade tensions - being taken out of the equation. Under this narrative and adding the lower-for-longer stance by the Fed, the USD still looks set to be a key underperformer.

Meanwhile, two election-related threads are still open: (a) the Senate race, with Democrats’ last hopes of a majority relying on the two Georgia races that are both heading to a run-off in January; (b) legal actions initiated by President Trump to challenge the electoral result, although markets are shrugging off any risk of legal complications for now.

The calendar this week looks quiet in the US, and we would expect markets to be mostly moved by President-elect Biden’s first steps in the transition phase, with a specific focus on (a) fiscal stimulus plans, (b) foreign policy, (c) approach to Covid-19 containment measures, and (d) tax and regulation.

We see the risk-on/USD-off narrative continuing this week, albeit at a slower pace.

With lockdowns around the EU denting recovery prospects and the ECB lingering rhetoric against a strong EUR, EUR/USD may struggle to break above 1.20.

This week, keep an eye on the German ZEW index and president Christine Lagarde’s speech on Thursday.

Another potential make-or-break week is starting for sterling ahead of the 15 November deadline for UK-EU trade negotiations.

We keep our view that the two parties will eventually come to an agreement, and the recent Conservative fall in opinion polls may be an incentive for prime minister Boris Johnson to strike a deal. We therefore lean in favour of a GBP-positive outcome, although the lack of short-term risk-premia or net-short positioning in GBP both highlight lingering complacency to no-deal risk and a magnified downside risk if negotiations collapse.

The Australian dollar has been the biggest beneficiary after the Norwegian krone of Joe Biden’s victory, and with the Reserve bank of Australia's rate cut now fully processed (along with the expectations that the central bank ran out of firepower), AUD may still enjoy good momentum.

While AUD’s exposure to China is a positive at a time when markets are pricing better US-China relations under a Biden presidency, Beijing’s trade spat with Australia is a major cause for concern after China banned imports of a wide range of Australian products on Friday.

For now, AUD is showing little reaction to this threat, but some signs of de-escalation may be needed this week to keep the AUD rally going