Will FX Traders Care More About Election, Stimulus or PMIs?

In terms of economic data, Friday is the most important day. Markit Economics will be releasing PMI numbers for Australia, the Eurozone, the UK and the US. These are important reports because they measure the pace of growth in the service and manufacturing sectors and provide the most timely look at how these economies are doing. From these reports, we‘ll get to see how much did the virus cases rise and tighter restrictions in the Eurozone and UK curtailed the activities in the month of October. By the same token, we’ll also learn how relaxed restrictions in Australia supported the economy.

Yet, the real question forex traders should be asking is whether any of these economic reports matter because price action suggests that they don‘t. Virus cases have been soaring in Europe for weeks now, with Germany and France reporting record highs as recently as Thursday. However, the euro and sterling traders seem to be completely unfazed, with both currencies hitting one-month highs. Theoretically, PMIs are important enough to change the trend in currencies and, with the European Central Bank meeting held next week, the recent EZ PMI report may be hard for forex traders to ignore. The US election is important, along with any progress on US stimulus talks, but it's 12 days before the big event, and there’s still little chance of a clear resolution. The election will come down to the wire and may be beyond it if the results are contested or theres not enough mail-in ballots received for a majority in key states. A winner may not be declared until Dec. 14, the day electors meet in all 50 states to cast their ballots for President. Stocks are up because House Speaker Nancy Pelosi said they are “just about there” on a stimulus deal but, according to many insiders, a deal before the election is highly unlikely.

While it's true that it's only a matter of time before more stimulus is provided to Americans, the prospect of major election uncertainty should be enough of a reason for investors to reduce market exposure. The tipping point could happen soon, and when it does, profit-taking in stocks combined with weaker data could lead to significant declines in currencies. In other words, the election and stimulus are important but so is data, particularly for countries where a major stimulus package is not on the way.

For weeks now we‘ve been writing about how EUR/USD should be trading much closer to 1.16 than 1.19. If Friday’s Eurozone PMI numbers miss, EUR/USD could head towards 1.17 quickly and aggressively. The ECB is not expected to lower interest rates next week but it could signal intentions to do so. The fact that the ECB could take aggressive measures over the next two months, when no further action is expected from the Fed, should be reason alone to sell euros.

Brexit negotiations are going nowhere fast, and that reality also makes UK PMIs important. Manufacturing and service sector activity is expected to slow. If the declines are material enough, we could see GBP/USD slip below 1.30. The Australian and US PMI reports tend to be less market-moving but they can also provide valuable insight into how these economies are faring. The state of Victoria ended Melbournes nearly two-month lockdown a few weeks ago and continues to ease restrictions as the country successfully beats COVID-19 a second time (only 22 cases were reported yesterday). In contrast, US virus cases are headed towards record highs, but the reluctance to impose new restrictions keeps economic activity running. Low interest rates are also helping with existing home sales rising 9.4% in the month of September to a 14-year high. Reports like this helped to drive the US dollar higher against most of major currencies on Thursday.

The one exception was the New Zealand dollar, which hit a one-month high. Although the Reserve Bank of New Zealand talked openly about negative interest rates, the fact of the matter is data is improving. Thanks to stronger growth in the manufacturing and service sectors, business confidence is off its low. Consumer prices for the third quarter are scheduled for release tonight and, while we are bullish on NZD data in general, the RBNZs dovishness could be due to the concerns about low price pressures.