The showdown continues

Oct 21, 2020
  • EUR/USD 1.1860
  • DOW JONES 28’308.79
  • USD/CHF 0.9045
  • SMI 10‘146.23
  • EUR/CHF 1.0730
  • CRUDE OIL 41.40
  • USD/RUB 77.20
  • XAU/USD 1’919.00
The dollar lost ground at the start of the week against the euro. After hovering between 1...

The dollar lost ground at the start of the week against the euro. After hovering between 1.1650 and 1.1820 throughout most of October, it seems the parity wants to break through the upper limit of the range. Negotiations on the new stimulus plan continue between Nancy Pelosi and Steven Mnuchin, but for now the two are struggling to find common ground. Nevertheless Ms. Pelosi said she hoped for a favourable outcome by the end of the week. The Trump administration has come to the table with an amount of $1.8 trillion, but Democrats are not budging and continue to demand $2.2 trillion. The differences remain, among other things, on the aid that the Democrats wish to provide to the most disadvantaged classes, aid to local communities for the protection of workers as well as subsidies for rental premises. Democrats want as large a stimulus as possible, but Republicans do not want to substantially increase federal debt.

As for talks between the European Union and the United Kingdom on Brexit, negotiations are still difficult…at an impasse, even. London declared it is open to more intense negotiations, but repeated that discussion only made sense if the Europeans changed position. In practice, this means neither side is budging and the showdown continues. Bank of England Governor Andrew Bailey has said he is in favour of strong action rather than adopting a cautious stance in view of the economic uncertainties the country faces. The UK economy shrank by 20% during the pandemic – the highest percentage among developed countries – and it expects a decline of around 10% this year. In light of this, the Governor says he is ready to deploy new measures, including negative rates if necessary. This difficult economic situation and uncertainties over Brexit have led Moody’s to downgrade the country’s rating from Aa2 to Aa3. The pound sterling lost some ground against the euro and the franc and is now trading at  0.9130 and 1.1750, respectively, but remained close to 1.3000 against the dollar following the decline of the latter at the start of the week.

The difficulties over these negotiations in the United States and in Europe as well as the evolution of the COVID-19 pandemic are  benefiting the franc even if Switzerland has not been spared. Investors are seeing the currency as a safe haven and testing whether the SNB is testing the 1.0700 mark against the euro. With European 10-year rates close to or lower than Swiss long rates – the Bund is at — 0.587% against Switzerland’s –0.565% – it seems the SNB will continue to support the franc.

Growth in China has picked up although it was slightly below expectations. GDP grew 2.7% in the third quarter, slightly below expectations of 3.3%. This is a 4.9% increase on an annualized basis. Imports soared in September by 13.2% year on year, posting their largest increase since the start of the year. At the same time, exports remained solid, increasing 9.9%. Industrial production rose 6.9% and retail sales by 3.3% in September. These figures tend to confirm that the country’s economic recovery is underway.  In any case, the director of the Central Bank of China is optimistic that the country will post positive growth for 2020 despite the pandemic, which would probably make it the only one of the main world economies to actually grow. As a result of this good performance, the Chinese currency is strengthening and reached CNH 6.6278 per dollar this morning – a level not seen since July 2018.

Oil prices are hovering around $40 a barrel after the monthly meeting of OPEC ministers and their allies. The cartel and its allies, including Russia, have confirmed that the current drop of 7.7 million barrels per day should be reduced to 5.8 million barrels by January 2021. A barrel of WTI crude for December delivery traded at $41.40 this morning and at $42.80 for Brent.