Asia's FX markets can provide a significant first-pass reaction to incoming US election results during Wednesday's Asia session. USDCNH is a considerable focus with overnight (23.3) and 1-week (13.7) implied vols at all-time highs.
USDCNH, or the offshore yuan, is the cleanest directional Asia FX expression in differentiating between a Biden presidency (USDCNH lower on more predictable foreign policy vis-à-vis China) and the Trump status quo (USDCNH higher on short-covering anticipating more hawkish foreign policy).
The US relationship with China becomes much more relevant again if President Trump is re-elected, driving USDCNH upside that would have greater scope to rally after the PBoC announced it would remove a counter-cyclical factor in its daily USDCNY fixings on Oct. 27.
Meanwhile, tightening social-distancing measures in Europe and lower oil prices over the past week are significant headwinds for EM currencies more broadly. But with oil prices rising on the possibility of Russia agreeing to extend the current production quota, especially with the ruble scraping the bottom of the petrodollar barrel, EM FX, currencies of economies with a significant oil export quotient (e.g., RUB, BRL, MXN, COP and MYR) are trading more favorably.
And while those same economies are concerned about Joe Biden's energy policies after he called for a transition away from oil and gas there is sufficient ambiguity around a plan that aims for net-zero emissions by 2050; recent oil price declines likely reflect global-demand concerns more than a Biden presidency.
AUD Vulnerable Post-RBA
China's bans on imported timber and barley from Australia are linked to suspected pests. China suspended barley imports from Australia for similar reasons in September. Reports on banning copper imports from Australia have not been confirmed but leave AUDUSD vulnerable ahead after today's RBA meeting. The board is expected to cut the main policy tools (cash rate, YCC target, TFF) by 15bp to 0.10%.
Copper is Australia's fifth-largest export, representing 1.9% of total shipments, behind coal, iron ore, gas, and crude oil. Beef, coal, and cotton exports were also subject to China's anti-dumping investigations earlier in the year.
Overnight Recap
US equities were stronger Monday, S&P 500 up more than 1%. Europe is also more robust. US10Y yields down 3bps to 0.85%. Oil up 2%. Better sentiment on the eve of election day, where national polls continue to point to a Biden victory in what appears likely to be a record turnout, but a close race nonetheless in crucial battleground states.
Sentiment overnight was likely helped by a big beat on the US manufacturing ISM for October, rising 3.9pts to 59.3. Strongest since September 2018, with new orders at their highest since 2004. Encouragingly, the employment index lifted above 50 as well. If there was a wrinkle somewhere in the report, it might be this: food manufacturers reported: "increased production due to stores stocking up for the second wave of COVID-19."
The US election will capture the worlds attention and most of all for the markets indulgent concerns, the imagination of financial centers around the world that are set to roll out their election playbooks, with many expecting a Democratic sweep, which is the key to unlocking Congresses ability to deliver significant fiscal simuls and benefit the US and global markets at a time of need.
Gold's Next Move Rests On US Fiscal Stimulus
Gold is down over the last two weeks, which is understandable, as the COVID-19 outbreak is getting progressively worse in Europe and most of the world, leading to renewed lockdowns. It seems this is now somewhat priced into European equities, and there does not seem to be much more room for risk reduction ahead of the week's US elections. The potential unlocking of another US fiscal stimulus package would be most flattering for gold.
With the blue wave impulse kicking in, gold remains in demand, supported by hopes for a stimulus deluge that could trigger the elusive inflationary surge. OIl is higher, the dollar is slightly lower, and that also helps.