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On Monday, equity markets suffered big declines – the DAX was down 3.7% and the Euro Stoxx 600 fell 1.9% while the S&P 500 closed 1.9%, the biggest drop since the index corrected in September. But what was notable was the lack of volatility in the FX markets to coincide with the sharp falls in global equity markets. EUR/USD is now a mere 0.2% lower from Friday’s close while the high-beta G10 currencies NOK and SEK are this morning stronger than Friday’s close with most other currencies only modestly stronger. The FX market is looking beyond 2021 as USD fails to follow risk-off, economists at MUFG Bank brief.

Key quotes

“Around 440K new COVID-19 cases were reported last week in the US and there is evidence of infections spreading back to urban areas like New York. Restrictions remain more sporadic in the US than in Europe but at the current pace, tighter restrictions are inevitable which will reinforce a worsening economic outlook. US Q3 real GDP is likely to expand by over 30.0% on a SAAR Q/Q basis but if COVID-19 fuels more restrictions then the slowdown in Q4 will take GDP back down close to 1-2%. You then add to that the failure to reach a stimulus deal between Congress and the White House and investors’ desire to reduce exposure to equities is understandable.” 

“Whoever wins the election next week, a large fiscal stimulus is coming and coupled with that we believe the Fed will persist with an aggressive easing stance for longer than is usual for the Fed.”

“We believe the consequences of a Biden victory for the equity markets are less clear than the consequences for the US dollar. Biden continues to hold onto his substantial lead with Real Clear Politics showing a national lead on average of 7.8ppts.”

“Time looks to be running out for Trump with no evidence of yet of any final surge in polls like what took place in 2016. Trump’s surge had started four years ago as is evident by the comparison between Trump v Clinton four years ago to the day versus Trump v Biden now. Biden is 4.1ppts ahead in six key swing states whereas Clinton was only 2.8ppts ahead exactly four years ago. We see a weaker USD in 2021 no matter who wins but we are more confident of that under a Biden presidency.”