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Currency Market Analysis

Nov 04, 2020 | Currency Market Analysis

Global Themes

The U.S. dollar squandered an overnight rally in election-driven trade. The buck overnight had cruised to July peaks against the euro and appreciated more than 3% against the Mexican peso after initial election results showed President Trump faring much better than expected and pitted in a tight race against challenger Joe Biden. By dawn the dollar had erased much of its gains against the euro, sterling and Canadian dollar. Still, currencies remained on a wavering path ahead of the final results of the election which could take hours, days or weeks. Meanwhile, prospects for bold stimulus appear more uncertain should Joe Biden ultimately prevail but the Republicans retain control of the Senate. Choppy, erratic currency trading appears on the cards with traders focused on election headlines and whether Trump or Biden would win crucial battleground states like Pennsylvania, Wisconsin and Michigan.


The euro steadied after an overnight plunge to late July lows. The euro tumbled after initial election results didn’t go as markets had scripted in recent days when polls anticipated a blue wave victory for Democrats taking both the presidency and control of the Senate. A longer wait to know the outcome of the election, coupled with increased uncertainty over stimulus, threatens to pressure risk asset and buoy safer plays like the greenback.


The U.S. dollar kept off its peaks after data offered fresh evidence of the recovery losing momentum. ADP reported that private employers added an underwhelming 365,000 jobs in October which was less than half the previous month’s increase of 749,000 and undershot forecasts of a gain of 650,000. The lackluster showing at the margin suggested a greater risk of nonfarm payrolls missing forecasts to the downside. October Nonfarm payrolls Friday are forecast to rise by 600,000 after netting 661,000 jobs in September. Knowing the outcome of jobs report before the election likely wouldn’t sit well in investors, a scenario that could support the greenback.


Sterling kept in the red after sinking overnight, a decline that gained traction from more evidence of a moderating U.K. economy. Growth in Britain’s economy-driving service sector was unexpectedly downgraded in October. The weaker shape for a sector that drives the majority of economic activity cemented expectations for the Bank of England Thursday to redouble monetary stimulus. The BOE is likely to increase its QE bond buying scheme by at least GBP100 billion to GBP845 billion. A dovish outcome that signals a step closer to the BOE deploying negative rates would bode bearishly for sterling.


Two days of outsized gains gave way to weaker loonie which slipped from two-week peaks. The still undecided state of America’s presidential election injected caution into the loonie, causing it to lose ground after it rallied nearly 1% Tuesday for its best daily performance in five months. It also didn’t help that Canada reported a far bigger than expected trade deficit of C$3.25 billion in September which could dampen optimism about third quarter growth.

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