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FX Macro Themes for November

 Macro Themes for FX Majors:

EUR/USD: as many health experts expected the second wave of Covid 19 is here, France, Germany, and Belgium are in lockdowns, and more countries to join in the coming weeks, for me that means two things.
First, the fourth quarter growth will come below the expectations, and one of the factors behind the surge in the Euro from May is the better handling of Covid 19 from European countries especially Germany relative to the US, but now it's quite the opposite, Europe is in a lockdown and I don't think the US will go into that path, because their health system is in better shape and well prepared,
Second, more easing to come from the ECB in the next month, the market is expecting at least 500bn euro increase in the size of the PEPP program.


 I expect the Euro to trade lower going into that meeting and year-end, but it will eventually go higher against a structurally bearish US Dollar (Lower real yields, Reflation trade), and vaccines optimism at the end of the year will weigh on the greenback and boost the Euro.

GBP: the PM Boris Johnson has just announced this weekend a second lockdown for the UK, the key question is how the Bank of England will react, one of the reasons behind Sterling resilience lately is because the market no longer think that the BoE will go to negative interest rates in the first quarter of next year, having said that I still think Brexit is the main theme for the Pound right now, and the market believes that we're going close to a deal, for that I remain bullish on the GBP but if the BoE hints again on negative IR, that's will offset my outlook.

CAD: I've been bullish on the Loonie lately primary because there were a lot of negatives price in, but the economy was recovering at a faster pace than expected, but what's interesting with the Canadian dollar is its correlation with global risk rather than its domestic drivers, at the moment there is a low correlation between the CAD and Oil or US-Canada yield spread, that's why I think if we get a Biden win that's will boost inflation expectation and weigh on the Dollar, hence a higher CAD in the medium term.

 AUD: there is a lot of dynamics playing for the Aussie at the moment, first we have the RBA who's expected to cut interest rates from 0.25% to 0.10% in the next meeting and to maintain its YCC policy, but all of this is already priced in, but what will be more of a market moving is the upcoming US Election, if Biden wins that means less US-China tension which the Aussie is so sensitive to, and more stimulus which will boost Risk appetite, even if Trump got reelected we could see a little drop in the short term but it will be a buy the dip opportunity, the Australian dollar is correlated with global growth, but even though a second lockdown show has just begun I don't think we're going to see a market crash like back in March, the FED put is still there, China is doing fine, and hope for a vaccine will offset this pessimism, the best way to express this bullish view is through AUDNZD long which is undervalued relative to its yield spread.

Article by Halim Haddad,

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