Will increased US political uncertainty boost the dollar?

Investors predicting sharp declines in the dollar could be forced to alter course after US President Donald Trump’s coronavirus diagnosis last week muddied the outlook for the US election further and raised the prospect of a rebound in the currency.

On Friday, the dollar ticked higher against a basket of its peers and equity markets slipped after the news that Mr Trump and his wife Melania had tested positive for the virus. The dollar index is down 3.4 per cent this year.

Investors were already bracing for prolonged uncertainty around the November 3 election after Mr Trump repeatedly indicated he might not respect the results of the poll. Expectations for elevated volatility over the election period have helped to boost the dollar since the start of September.

Rising coronavirus infection rates and the possibility of tighter lockdowns in Europe could also add to investors’ reluctance to sell the dollar in favour of the euro, said Derek Halpenny, head of currency strategy at MUFG.

“That and the potential for building fears over a close election result will keep risk sentiment and dollar selling in check,” he added. Eva Szalay

Will Fed minutes give investors greater clarity?

Minutes from the Federal Reserve’s mid-September meeting on monetary policy will be released on Wednesday, giving investors greater insight into the US central bank’s latest approach to setting interest rates and supporting the economic recovery.

Last month members of the Federal Open Market Committee convened for the first time since Jay Powell, its chairman, revealed in August that the Fed would tolerate higher rates of inflation to balance out prolonged periods of undershooting its target of 2 per cent. 

According to the Fed’s latest guidance, it will not raise interest rates until it achieves full employment and inflation remains on track to “moderately exceed” its target “for some time”. 

Investors welcomed the additional details, but sought more clarity on how the Fed expected to get there. Some also anticipated the central bank being more explicit about its plans for its bond-buying programme, which involves snapping up a combined $120bn worth of US Treasuries and agency mortgage-backed securities each month.

Without more specifics, investors warn the latest framework will struggle to gain credibility, especially among market participants who are already deeply sceptical about the central bank’s inflation-generating capacity.

Mr Powell, it seems, is all too aware of the challenge ahead. “This is all about credibility, and we understand perfectly that we have to earn credibility,” he said at the end of his press conference last month. Colby Smith

How soon will Australia’s central bank cut rates?

Although economists broadly expect the Reserve Bank of Australia to keep rates on hold at its meeting on Tuesday, some suggest a cut could be on the way for the Covid-battered nation as soon as this week.

Treasurer Josh Frydenberg is set to hand down the country’s federal budget on the same day, and the conservative government is expected to reveal a substantial deficit as well as an array of stimulus measures.

“We expect the budget to contain billions in additional stimulus,” economists at Australian multinational banking group ANZ said last week.

The China-dependent Australian economy was initially hit by a slowdown due to the pandemic. More recently, it has been hurt by lockdowns in the state of Victoria to address another wave of virus cases.

An Australian Financial Review survey showed economists are expecting the cash rate to stay on hold in October at 0.25 per cent, a view echoed by the ANZ economists.

Others are keeping the door open to a move this week.

National Australia Bank’s Alan Oster said in a note that he was expecting the RBA to cut the cash rate to 0.10 per cent and also to announce quantitative easing measures at either its October or November meetings, with the latter more likely.

Based on recent statements by the central bank that it wished to support the country’s recovery, Westpac’s Bill Evans said the RBA would wait until November to reduce the cash rate to 0.10 per cent.

“I think it’s more likely the government would like clean air to sell their budget,” Mr Evans said. Primrose Riordan

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