The upheaval caused by the US presidential election has ultimately exerted a lesser influence on the EUR/USD pair than anticipated. In terms of pricing, the forex market had already factored in the eventuality of a disputed election. Even if the resulting legal battle between Republicans and Democrats will continue for some time, the scenario unfolding, with Biden in the White House and Congress divided, seems to have garnered a favourable reaction from market players, which explains the risk appetite observed over the past few sessions.
As for central bank activity, there is nothing to report. All activity in this area will take place in December. The ECB has clearly indicated that renewed measures will be taken at that time, and that all potential instruments may be deployed in order to mitigate the economic fallout of Europe’s new lockdown measures. For the Federal Reserve, the situation is less urgent, but if congressional agreement on a stimulus package isn’t reached quickly, central bank intervention seems likely, with the goal of supporting economic recovery by ensuring lending conditions remain as affordable as possible.
The EUR/GBP pair’s fluctuation range remains low, at around 150 pips, despite turbulent current events over the past few weeks. The market no longer seems to be paying a great deal of attention to the latest Brexit-related developments, relying on the prospect of a last-minute deal being struck. As was the case a month ago, the issue of fishing quotas remains one of the main sticking points. At this stage, a political intervention seems to be the only means of overcoming this major stumbling block between London and Paris. We will have to wait until the next European Council on 19 November to see if German chancellor Angela Merkel and French president Emmanuel Macron can secure any concessions on this matter.
That said, even if an agreement is reached, 2021 will be a challenging year for the UK economy, which could lead to renewed volatility in the EUR/GBP pair. According to the Bank of England’s latest forecasts, this year’s recession should amount to around -11%, while next year’s economic upswing should reach approximately +7.25% (versus an initial estimation of +9%). This reduced scope in terms of economic recovery may be directly explained by the UK’s departure from the European Union and the transition to a free trade agreement.
The yen (JPY) has definitely fulfilled its role as a safe-haven currency over the past few weeks, notably when it comes to institutional investors, who have sought to hedge against inherent risk linked to the US presidential election. This is one of the major factors explaining the Japanese currency’s movements since the beginning of October. In addition, an upsurge of the pandemic in Europe, coupled to the negative economic impact of new lockdown measures, have depreciated the value of the single currency against the yen. Given the gloomy economic outlook, the yen is likely to continue its solid performance in the short term.
Though the Swiss National Bank (SNB) has substantially decreased its level of currency market intervention since August, it remains vigilant, as risk-aversion factors will continue to be considerable over the coming months. Aside from the US presidential election, which has been on everyone’s mind lately, other factors will contribute to the Swiss franc maintaining a high value until the end of the year, with this likely to continue well into 2021 as well. These include the risk of a new US “shutdown” (whereby governmental operations are suspended following a failure by Congress and the president to reach a budget agreement) in December, further setbacks in Brexit negotiations and a marked economic decline in the eurozone, in light of the pandemic’s latest effects. At this stage, there are not enough positive developments to suggest a sustained depreciation of the Swiss franc against the euro over the coming months.
Volatility has certainly been noticeable in the EUR/CAD pair over the past few weeks, due in part to tensions surrounding the US presidential election. In terms of monthly variation, the EUR/CAD continues to contract, as was the case in September. Given the marked economic slowdown in Canada, the Bank of Canada (BoC) surprised the foreign exchange market by announcing changes to its asset repurchasing programme (also referred to as quantitative easing or QE). Two major modifications to the scheme have been made. The first stipulates that asset repurchasing will primarily focus on bonds with longer maturities, in a bid to lower borrowing costs for both businesses and households. The second change is made to the level of asset repurchasing, to be slightly reduced, going from 5 to 4 billion Canadian dollars per week. This latest measure aims to avoid a situation whereby the central bank remains the sole buyer on the Canadian sovereign debt market, with a balance sheet too heavily exposed to public debt.
Over the last few weeks, a great deal of volatility has been observed in the EUR/AUD pair, which may be partially explained by the Reserve Bank of Australia’s (RBA) surprise decision to reduce its key interest rate to a historically low level. While in January the rate stood at 0.75%, it has now been reduced to 0.10%, representing a decrease of 65 bps. This third drop in the key interest rate since the beginning of the year aims to stimulate an Australian economy in stagnation due to some of the strictest lockdown measures taken by any developed country. That said, economic recovery should gain momentum in 2021, as the country stands to indirectly benefit from an almost fully realised V-shaped Chinese economic recovery, China being one of Australia’s main trading partners.
Over the past month, the EUR/CNH pair has exhibited a sharp downturn. The economic differential between Europe and China remains one of the most important markers relating to this currency pair. While China is experiencing a V-shaped economic recovery, largely stimulated by an increase in public investment and an influx of foreign capital on the local stocks and bonds market, Europe is recoiling due to the pandemic's heightened spread on the continent.
Another European recession is no longer out of the question. A depreciation of the euro against the offshore yuan (CNH) over the coming months is therefore highly likely. This would essentially reflect the economic differential previously mentioned, which should intensify in the short term at the very least. Indeed, China is likely to recover its pre-crisis levels of activity by the beginning of next year, whereas the eurozone will have to wait until the beginning of 2022 for this to occur.