No blue wave or red wave, but a likely purple tide and heightened hope of a liquidity wave that could yet send the USD even lower. USD is inching closer to the end of a two-month consolidation. But a resumption of its downtrend will also require the resolution of other near-term risks such as a new wave of Covid-19 in Europe and the US, and Brexit.
Purple tide and hope of a liquidity wave could yet send the USD even lower
Source: Bloomberg, Bank of Singapore
A divided government -- a Biden victory with a Republican Senate – is seemingly the most likely outcome of the US election. Legal challenges to the election result remain a risk.
A divided government is still likely to see a lower USD. But the pace of USD weakening will likely be more moderate without the reflation hope of a big fiscal stimulus under a Democratic sweep scenario.
First, prospects of calmer geopolitics should translate into a peace dividend of weaker USD against Asian and other EM currencies. We continue to forecast USDCNY at 6.55 and USDSGD at 1.32 in a year’s time.
The White House, not the Congress, sets the tone on foreign policy. A Biden administration would focus on repairing relations with traditional allies and a more multilateralist approach. A shift away from an aggressive trade policy represented by Trump’s 'big stick, shopping list' approach in favour of ‘America in Alliance’ strategy is likely.
There will be competition but also collaboration with China on fighting the global pandemic and addressing climate change.
The case of a weaker USD against Asian currencies could also benefit from the possibility that tariffs could eventually be reduced, perhaps after the first year of the Biden administration in exchange for greater market access.
Second, a gridlocked government means little room for dramatic fiscal expansion or reforms in healthcare, green energy or infrastructure. More, not less, stimulus is needed amid mounting Covid cases that are likely to stall efforts to re-open the US economy. That just places even more emphasis on the Fed to deliver more stimulus.
Prospects of another Fed-driven liquidity wave is a reason why the USD decline still has legs.
Just as the European Central Bank (ECB) earlier demonstrated that it can be done, the Fed, too, has successfully managed the difficult task of signalling a willingness to act without actually acting at the November meeting.
Chairman Powell did signal bond buying could be raised at the next meeting in December.
Third, relief over no tax hike and tech regulation in a gridlock scenario led to 'risk on, weaker USD'. However, we are less convinced of regulatory relief as a driver of weaker USD in the medium term, as tech’s valuation remains a concern.
Amid dark clouds domestically for the Eurozone, EURUSD consolidation since August within a 1.16-1.20 range is likely to prevail over the next few months even as we still expect EURUSD to appreciate to 1.25 in a year’s time.
Most of Europe has just moved to a second lockdown. Although in most cases it is not as strict as the first one, it does suggest double-dip growth risks are rising in Europe. The ECB signalled the possibility of fresh easing in December, but it is unlikely to cut interest rates and significantly undermine the EUR.
Brexit is another near-term risk. Our base case is for a ‘skinny’ Brexit deal but whether one is possible is still a close call. An ambitious trade deal would make GBP great again but looks virtually out of reach.Disclaimer applicable to recommendation
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