Dissensions between Republicans and Democrats

The EUR/USD parity saw no real change over the week. First of all, Monday was a public holiday in the United States – Columbus Day – and then we have a market that already seems to be awaiting the results of the American presidential election of November 3rd. Until then, all eyes are on the negotiations for the new stimulus package. The latter is stirring up dissension between Republicans and Democrats, and the Trump administration revised its proposed amount upwards to $1.8 trillion in aid. Republicans still considered it too generous even as Democrats considered it insufficient and rejected it. It remains a major issue for the Republican side in the presidential race but the market doubts a compromise can be found before November 3rd. As for the Fed, it continues to exert pressure in favour of action. The leaders of the US central bank believe it is imperative that additional government assistance to households and businesses be large enough so as not to hamper economic recovery. It’s not only Jerome Powell: Eric Rosengren and Robert Kaplan also returned to the charge. Rosengren is worried that many small and medium-sized businesses would be in danger, while for Kaplan, the Fed simply does not have the instruments to replace an ambitious stimulus package. Secretary of the Treasury Steven Mnuchin assured Nancy Pelosi, Speaker of the House of Representatives and Democratic heavyweight, of the President’s will to quickly reach an agreement. But for Mitch McConnell, the leader of the Republican majority in the Senate, the proximity of the presidential election means it will very difficult to reach such an agreement.

In the European Union too, the exception fiscal stimulus plan is struggling to materialise. The EU would like to make aid conditional on compliance with certain democratic rules by its member countries. This led to a particularly virulent attack by the leader of the Polish government party Jaroslaw Kaczynski, who is threatening to veto the adoption of the plan like Hungarian Prime Minister Viktor Orban. Mr Kaczynski said that at least Soviet Union granted some independence to Poland and its Catholic Church – the EU, on the other hand, is seeking to take the country’s sovereignty away. The time is also running for the EU-27 to approve the Union’s budget and the implementation of this plan of €750 billion that it wants to see come into force on 1 January 2021. But the EU-27 are also occupied on another front: Brexit talks. The heads of government will meet tomorrow in Brussels for a summit which should be heated. ‘France will always block any agreement rather than accept a bad agreement on fishing rights’, said one of its official representatives. Fishing is one of the main sticking points in the negotiations between Britain and the EU on their future post-Brexit trade relations, but it is not the only one, not by a long shot. And Boris Johnson has threatened to leave talks if he does not see the possibility of closing a deal soon. The return of volatility on the foreign exchange market could therefore come from the British currency. The pound has seen some rough days, but it has stabilised and even recovered, reaching 1.3083 against the dollar, a level not seen since September 8. It has also appreciated against the single currency and again approached 0.90 pounds per euro. The proximity of the Brussels summit and the probabilities of a no-deal Brexit have pushed it back again these last two days. It is thus back to 1.2900 against the dollar and 0.9100 against the euro.

The Swiss franc strengthened against the single currency after the publication of new Gross Domestic Product forecasts for Switzerland. GDP will shrink by 3.8% in 2020, the largest decline the country has experienced since 1975, according to indications provided by SECO on Monday. The new forecast for Switzerland is much better, however, than the outlook issued in June, which pointed to a decline of 6.2%. By way of comparison, the United States should see its GDP plunge by 4.2% this year, and the eurozone should fare even worse as its economy contracts by 8.1%. At CHF 1.0725, the single currency is at its lowest against the franc since the end of August. The 1.0700/1.0725 area is seen as the first level defended by the SNB.

Will New Zealand be the next country to experience negative interest rates? This is what a source from the central bank suggests. Christian Hawkesby, assistant governor of the latter, said the bank was actively working on new aid measures including negative interest rates as well as a programme to support the economy and that this was ‘not a game of bluff’.