UK approaches another lockdown

GBP
UK approaches another lockdown

The UK is shortly to enter into another full-scale lockdown, supposedly until the 2nd of December. However, Michael Gove has already set the foundations for an extension. Gove told the UK media that coming out of the lockdown will be data driven and an extension could not be ruled out. This could potentially trigger a further economic downturn, compounding on the heavy economic toll from the first initial lockdown. This could push businesses that are already struggling to stay afloat to go under, with job losses to follow. GBP has already started the week on the back foot, consolidating against the EUR and USD.
 
On Thursday, the Bank of England will be meeting to discuss interest rates and Quantitative Easing (QE). Interest rates look stable for now but could potentially turn negative in the medium to long term. The consensus seems to be that more QE could be on the horizon as well.
 
All this negativity in the UK could take away the shine from a Brexit deal and potentially mute the Pounds gain if a deal is eventually done with Europe.

EUR
Eurozone lockdowns and a double dip recession is looming

We have seen increasing risk aversion in the past week, with stock markets falling back and safe haven bond markets rallying, as the second wave of coronavirus takes hold. A very sharp rise in the number of new cases has seen restrictions being re-imposed on social and economic activity. More and more European countries are going into lockdown, including France and Germany, the powerhouse nations of the EU economy. This has prompted the ECB to acknowledge that downside risks to growth have increased, despite the better than expected performance of the economy in the third quarter. It is expected that the ECB will respond with further policy loosening at its next policy meeting in December. The expectation now is that GDP will contract in Q4 in the Eurozone, a double dip recession. A very difficult winter lies ahead for Western economies as the weakening in activity could extend into the early part of next year.
 
Aside from Covid-19, there is a fairly quiet Eurozone economic diary over the coming days. Retail Sales data for September for the bloc and German Industrial Output for September are the main data highlights.

USD
Election week for the US

Last week, the Greenback continued to benefit from its safe haven appeal as coronavirus cases continued to rise, and global risk increased with the threat of further lockdowns around the world. With much of last week’s data being overshadowed by speculation of who will win the 2020 Presidential election, many more Americans have turned out to vote than expected. All eyes will now be on how the keys states, in particular Pennsylvania, can determine the election outcome.
 
Surveys at present show Biden leading marginally over Trump, an outcome that is likely to see the USD weaken, as Biden looks to increase taxes for higher earners and some businesses. We are unlikely to see a quick result on the election, with many postal votes likely to take time to be processed. There will no doubt be volatility in the next week or so, with many seeing this Presidential election as one of the most important and crucial ever seen in the US. With Barack Obama now joining the Biden campaign with a hope to gain key votes in some of swing states, the election pushes towards its final stages.
 
The US data will be overshadowed by the election fever, but we may still see some volatility with an expected uptick of US ISM Manufacturing and crucial Non-Farm Payroll figures on Friday.

AUD and NZD
Risk aversions weakens both AUS & NZ Dollar 

We have seen both the NZ and Australian Dollar weaken in recent trading sessions, as markets become a lot more risk averse and investors look for safe haven currencies, ahead of what is likely to be an important and volatile few weeks.

Whilst both Australia and New Zealand reported very little high tier economic data of note last week, the growing concerns surrounding the ongoing second outbreak of Covid-19 has led to flight to safety. This has weakened both currencies, despite both Australia and New Zealand handling the pandemic significantly better than the vast majority of other countries.
 
Immediate direction for both the Australian Dollar and New Zealand Dollar will be dictated by markets appetite for risk. Further lockdowns will surely weigh on the Australian and New Zealand Dollar as risk currencies bear the brunt of further uncertainty, whist the US election tomorrow will also add to what looks to be a highly volatile week for both.
 
The Australian Dollar has been boosted by the announcement that there have been no new local coronavirus cases for the first time in 5 months overnight. However, souring relations between Australia and China (Australia’s main trading partner) is likely to prove detrimental to the Australian Dollar. China are refusing to negotiate tariffs on Australian Barley exports, whilst placing a ban on Australian Timber. Further bans are set to be announced this week on Australian sugar and copper. This is clearly retaliation from China, with Australia standing firm in its insistence that an international probe should be launched into the origins of coronavirus (something which China is not happy about).

Tonight, the Reserve Bank of Australia announce their interest rate decision where it is likely to cut its headline interest rate to just 0.10% from 0.25%. Given the current climate, it is likely to have very little impact on the Australian Dollar unless significant economic stimulus is announced.

CAD
Interest rates unchanged in Canada

Last week, the Bank of Canada left interest rates at 0.25% and signalled that it expects monetary policy to remain unchanged until 2023. With monthly GDP coming in at a slightly better than expected 1.2%, the Canadian Dollar managed to stem the week’s losses against the US Dollar, closing the week just above 1.33 CAD/USD.
 
This week, our attention turns to the US elections and Friday’s IVY PMI figures. With the Loonie traditionally susceptible to stock market fluctuations, the Canadian Dollar could be in for a volatile week if the election negatively impacts risk sentiment.