Dollar bounces back amid rising risk aversion

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19 October 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.

Equities worldwide sold-off alongside credit while investors flocked back to the safe-havens, primarily the dollar, the japanese yen and the swiss franc.

hese moves were, however, modest in size and did not significantly change the trading patterns of the past few weeks. The euro is back in the middle of the trading range that it has held since August against the US dollar, bouncing around between the 1.16 and 1.19 levels. The biggest losers were Central European currencies, down on fears that those countries are being hit particularly hard by the second wave of the COVID pandemic.

Markets are increasingly focused on the US election in the first week of November. The consensus view seems to be that a Democratic sweep (taking the presidency and the Senate) would be a positive for risk assets and negative for the US dollar. Friday’s release of the Eurozone flash PMI indicators of business activity for October is the main data event of the week. The recent proliferation of local lockdowns introduces some downside risks here, and a serious disappointment could bring into focus further ECB easing measures.


As we expected, Brexit negotiations stalled last week but Boris Johnson backed away from his threat to walk away, although he did warn Britain to prepare for the possibility of a ‘no deal’ Brexit. Sterling moved largely in line with the euro, so markets clearly still expect some kind of modest deal to be reached, as do we.

Not a lot of marking moving data will be released this week, so expect the focus to remain on the UK COVID numbers and the possibility of a new lockdown, which could potentially hit the pound hard.


The deteriorating COVID numbers in most of the Eurozone and the reimposition of local lockdowns hurt euro sentiment last week.

The PMI numbers to be published Friday take on additional importance. They will be the first measure of the economic impact of these partial lockdowns and restrictive measures. A drop in the composite number below the 50 level that separates expansion from contraction would put added pressure on the ECB to prepare further easing measures, and we would expect the euro to sell-off in that context.

US Dollar slips ahead of key nonfarm payrolls report


US retail sales out last week were very strong, in spite of the fact that stimulus measures have yet to be renewed.

The US election in the first week of November is starting to overshadow economic data out of the US. The latter will be in short supply this week, at any rate. Polls are showing a larger and more stable lead for the Democrats than they did at this time in 2016, and risk assets should take comfort in that. The final presidential debate Thursday will provide the main focus for traders this week.