US dollar falls on election uncertainty

US dollar retreats as regular service resumes

The US dollar index finished just 0.12% lower at 93.44 yesterday, but that belied the volatile nature of election day trading. The G-10 currencies traded on large ranges across the session, but what was evident was that the global reflation trade had no longer left the building. Pro-cyclical like the AUD, NZD and CAD suffered heavy selling in the early part of the session but regained all of those losses to close slightly higher on the day. The story was much the same in emerging markets, with regional Asian currencies mostly near multi-month highs in Asia today.

The Mexican peso, with probably the largest beta to the US election, had a roller-coaster day. USD/MXN rose from 21.1200 to 22.0000 as Trump made early election gains, only to fall all the way to 21.1200 at the session’s end. The peso actually finishing the day 0.90% higher versus the greenback. The USD/MXN is now just above three-month support at 20.8300, a break of which opens more MXN gains to 18,500.

While yesterday’s dollar sell-off has left the G-10 complex mostly near the middle of their three-month ranges, in Asia it is an entirely different matter. With the global recovery/reflation trade returning with a vengeance, the Singapore dollar, Korean won, Thai baht, and Philippine peso all start the day at or near multi-month highs versus the greenback. Only the Malaysian ringgit and Indonesian rupiah lag although both also made substantial gains.

The Chinese yuan is at 18-month highs versus the dollar, at 6.6500 this morning. With the Federal Reserve likely to increase stimulus after the US election ensured a fiscal status quo, the US dollar debasement trade is set to resume in earnest. Given China’s economic performance and yield advantage, it is almost inevitable that more CNY strength lies ahead, initially targeting 6.6000 and then 6.4400.

The expected strength in CNY should green-light regional Asian currencies to continue appreciating as well. As long as everybody appreciates in lockstep with their dirty US dollar pegs, there should be no reason for anyone in the region to break ranks. Asia’s recovery will almost certainly lead recoveries in the US and especially Europe now, leading to more fund inflows. The expected appreciation in Asian currencies also gives regional central banks the room to ease policy more if needed, to assist in economic recoveries. Another feather in the cap.

The Australian and New Zealand dollars are also likely to appreciate, although both central banks remain very dovish and will probably roll out tools to make sure the rallies don’t get out of hand. Australian also faces its own “forgotten trade war” with China in 2021, and this will eventually limit gains in the lucky country.

Overall, though, even if President Trump was to reclaim the presidency miraculously, the die is cast, and the weak dollar trade is back.

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