FX Daily: The cross-asset sweet spot
Looking past the short-term uncertainty of a contested US election, markets appear to be taking the scenario of a Joe Biden presidency and Republican Senate as a cross-asset sweet spot
USD: Constrained Biden outcome still negative for medium-term USD outlook
Looking through the short-term uncertainty of the contested US election, markets appear to be taking the scenario of a Joe Biden presidency and Republican Senate as a cross-asset sweet spot as (a) there is clearly lower downside risk to bonds (vs the “blue wave” scenario given the likely smaller US fiscal stimulus); (b) there is still upside to equities (an albeit smaller US fiscal stimulus should still come; material tax hikes might be avoided, and there is likely to be an end to unpredictable trade wars); and (c) the outlook for cyclical FX remains constructive, both in emerging markets and the G10 FX space (for the same reasons as equities, with EM FX set to particularly benefit from the expected return of a rules-based system for international relations).
For sure, the scope for gains in cyclical FX and a more pronounced USD sell-off is now more limited vs the “blue wave” scenario but is still there nonetheless. We keep our bearish USD outlook for 2021 intact. In the near-term, if the election outcome is legally disputed, the associated period of uncertainty should pause gains in risk asset and introduce two-way volatility but if Biden is eventually confirmed (and Republicans retain the Senate), the outlook for 2021 (mainly from Q2 onwards, once through the winter months) for pro-risk currencies looks constructive.
The FOMC should not surprise today and should have a limited impact on USD.
EUR: Still constructive outlook
The ‘’constrained’’ Biden scenario is not inconsistent with constructive 2021 EUR/USD outlook (recall this was the second most negative outcome for USD, as per our scorecard) as factors such as less aggressive US international policy, some limited US fiscal stimulus and still behind the curve Fed point to higher EUR/USD next year. In Norway, the NB to keep interest rates unchanged with the scope for a dovish surprise limited. EUR/NOK to stay below the 11.00 level
GBP: Larger QE but limited hints of negative rates
While the Bank of England delivered a larger QE top-up than expected (GBP 150bn vs 100bn expectation), the limited new hints on the urgency for negative rates offset the larger QE in terms of the impact on GBP.
EUR/GBP to stay stable today
CZK: Less dovish bias from the central bank than some may expect
The Czech National bank will stay on-hold today.
The new interest rate forecast shouldn’t signal a rate cut to zero or to negative territory as (a) the latest downgrades to the Czech GDP outlook bring it back in line with the existing CNB forecast; (b) CPI is not expected to undershoot the 2% target.
With the market pricing in a partial rate cut, the cautious central bank stance should be positive for CZK today and help extend the recent CZK gains.
"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.
This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.
The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.
Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.
ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).