FX Talking: On a glide path to November?

We think a Democratic ‘Blue Wave’ would be good for risk and bad for the dollar in 2021 – but clearly many things have to fall into place, not least Covid-19 second waves remaining contained at local levels.

We favour a continued period of consolidation in FX markets over the next month. That should see EUR/USD trading in a 1.17-1.20 range. Thereafter our preference remains for a rally to 1.25 throughout 2021 as clarity emerges on a potential Biden White House and what it means for a return to a rules-based trading system. The ECB may not like the EUR/USD rally – but may have to accept it as part of the global reflation trade.

Our preference for benign outcomes is also premised on: (i) the UK and the EU securing a free trade deal (probably by the end of November) and (ii) the EU Recovery Fund continuing to progress and being implementable in early 2021. Within the bloc of European currencies, we would favour NOK, SEK and CZK outperformance, while GBP could secure a modest 2% rally on a Brexit deal.

Within the EM space, the apparent liberalisation of the Renminbi is dragging the commodity bloc with it. The MXN could continue to do well over the short term, even though its economy has been one of the worst hit. We suspect that the ZAR’s rally is built on weak foundations, while both the TRY and RUB will be sensitive to who occupies the White House in January.