America facing electoral suspense

The EUR/USD parity was not disrupted during Election Day on November 3. The dollar initially strengthened but once again failed to break the support at 1.1600. It thus remains within the same range since September 1 when it tried to go above 1.2000. As might be expected, the outcome of the US presidential election will be extremely tight. As of this morning Joe Biden has 253 electoral votes out of the 270 needed, against 213 for Donald Trump. If Mr Biden wins Arizona (11) and Nevada (6) he will enter the White House. But Donald Trump will not abdicate so quickly and we could find a scenario similar to that of the 2000 election where it took a month and the intervention of the Supreme Court to officially proclaim George Bush the winner against Al Gore. It is therefore not surprising to see the dollar treading water, and this morning it opened at the same level it closed on Monday evening. Faced with the current uncertainty, the traditional safe havens of the Swiss franc, the yen and gold are on the rise.

Moving to the economic front, in the United States the economy has rebounded strongly as expected. US Gross Domestic Product grew by 33.1% year-on-year in the 3rd quarter, supported by the end of the lockdown and the economic recovery plan. Personal spending by Americans jumped 40.7% during the period. The gradual reopening of shops and businesses has facilitated the upturn in consumption and boosted private investment. In contrast, after a rebound of 12.7% (against 9.4% expected), the eurozone economy could fall back into recession in the fourth quarter, given the ‘lockdown light’ measures implement to contain the second wave of COVID-19 and the more modest stimulus packages compared to the United States. Last Thursday, the ECB made no changes to its still accommodative monetary policy despite the return of the economic crisis. Christine Lagarde nevertheless clearly indicated that new measures would be announced at the next monetary policy meeting on December 10. The institution, however, is awaiting new economic projections which should be published on this occasion. The ECB talks about ‘recalibrating’ the current instruments to counter the consequences of the new wave. And among these measures, analysts are clearly envisaging a 0.10% cut in the base rate as well as an increase in asset buybacks. From Ms Lagarde’s remarks, we will particularly note those made on single currency’s performance on the foreign exchange market. When asked by a journalist, she replied that the level of the EUR/USD parity was not at all a source of concern for the central bank.  This contradicts her own statements and those of chief economist Philippe Lane when the parity tested the 1.2000 in September.

The Swiss franc remains in demand during this turbulent period, which is reflected once again in the increase in sight deposits with the SNB. With an increase of CHF 623 million these have now grown for three weeks in a row. The SNB seemed to defend the level of 1.0700 against the euro for a few weeks but the new lockdown decided in France and in Germany is weighing on the single currency. The KOF Economic Barometer shows that the recovery weakened in October. The sectors most affected are services, hotels, restaurants, foreign demand and the situation is set to worsen further in November. The measures taken in several Swiss cantons have failed to steady the balance for the franc, which remains a safe haven.

The Central Bank of Australia cut its base rate from 0.25% to 0.10%. It also announced that it would proceed to buy back government bonds for 100 billion Australian dollars with maturities of 5 to 10 years over the next six months. When asked about possible negative rates, Governor Philip Lowe said such a policy was “extraordinarily unlikely”, but conceded that in the current environment it cannot be ruled out: “If we saw the biggest central banks in the world doing that then we would have to consider that”.

The Bank of Japan kept monetary policy unchanged last week, but reduced growth to –5.5% and inflation to –0.6% for 2020. Its key rate remains at –0.10% and it has a target yield for the 10-year government bond of 0%. It, too, has declared itself ready for additional monetary measures if the pandemic should further impact the economy. Like the SNB, the Bank of Japan has to face the strengthening of its currency, which is also a safe haven in times of turbulence.

Finally, the Bank of England announced this morning its monetary policy decisions in a context of economic difficulties linked to the second wave of COVID-19. It will increase its asset repurchases from £150 billion to £875 billion pounds and keep its key interest rate at 0.10% while repeating that it stands ready to act again if the UK and the European Union are unable to strike a deal on Brexit.

On the agenda we have, of course, the Fed meeting today, which is the main event. Analysts are broadly expecting the status quo, and even the press conference with Jerome Powell that will follow should not deal with important developments in this presidential election period.