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Dollar retreats further amid relentless risk-on rally

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30 November 2020

Written by
Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.

Stocks, commodities and credit worldwide continued their scorching rally into the end of November.

O
ptimism about COVID vaccines, fading fears about the transition of power to President-elect Biden, and confidence that monetary and fiscal policy worldwide will remain extremely accommodative throughout means investors are reaching out for the riskiest securities. Amid the near-euphoria, safe-havens like the dollar and the Japanese yen are falling and most emerging market currencies are surging.

After the Thanksgiving holidays in the US, focus returns to macroeconomic data. Two releases are key this week. In the Eurozone, the flash inflation report for the month of November will be published Tuesday. Then, on Friday, perhaps the most important monthly economic report worldwide comes out, the non-farm payrolls report for November. We will be watching closely to see if the loss of job market momentum seen in the last couple of weekly jobless reports is confirmed.

Remote working

GBP

Negotiations on Brexit continue to make progress, save for the standoff over fishing rights. Newspaper reports over the weekend suggested that a breakthrough was close, which should pave the way for a modest EU-UK post-Brexit trade agreement that is largely reflected in the pound current trading levels.

The PMI numbers were not as bad as feared, though the composite index still fell to 47.4, indicating a contracting economy in the month of November. With no key releases this week out of the UK, Brexit headlines will dominate sterling trading. We still expect a modest pop in the currency once the deal is announced, mostly against the euro.

EUR

The Eurozone PMIs of business activity for November out last week made for some grim reading. Manufacturing held up well, continuing to expand throughout the month. However, service industries were slammed by the renewed lockdowns in the continent and fell to a sharply contractionary level. That being said, markets chose to look forward and focus on the increasing prospects for the distribution of a COVID vaccine early in 2021.

We now turn our focus to the November flash inflation release on Tuesday. Any rebound from the record low of 0.2% in the core number (which excludes volatile food and energy components) will be key to allaying deflationary fears and could boost the Euro. At levels close to 1.20 to the dollar, one could argue a lot of positive news is already priced into the common currency for the short-term at least.

USD

The PMIs in the US came out much better-than-expected, and they showed a clear gap with those in Europe, remaining in strongly expansionary territory. Markets are, however, looking past indicators of economic activity and into the release of the COVID vaccines in 2021, with the US dollar suffering amid the risk on mood.

We now turn our attention to the November payrolls report, which is the last key data point before the December meeting of the Federal Reserve. Until then, we would pay close attention to see if the negative correlation between market optimism and the US dollar that has held for the last few weeks reverses.

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