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OCBC bullish on US Dollar recovery but contested elections could spoil the party

Ng Qi Siang
Ng Qi Siang • 4 min read
OCBC bullish on US Dollar recovery but contested elections could spoil the party
OCBC is negative on EUR-USD and GBP-USD and recommends USD-JPY as a hedge should the US election outcome be conteste
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OCBC FX strategist Terence Wu has reiterated the bank’s constructive outlook on the US Dollar as US equities firmed up on Friday (September 25).

“With the S&P500 off lows but not out of the woods and gold still heavy, the the correlation dynamics likely still favour the USD,” he writes in a daily market outlook report on September 28.

The broad US Dollar experienced a strengthened recovery though gains were limited as risk recovered during the New York session. With the overall FX Sentiment Index (FXSI) edging higher towards the risk neutral zone on September 28, Wu sees a risk-negative tilt still in play for currency markets going forward.

But there are significant political risks to FX in the weeks ahead. While the first televised US Presidential debates on September 29 are likely to sway markets, the impact of the two candidates’ policy platforms on FX rates is still a relatively marginal consideration. “It is the short term uncertainties associated with a very close campaign and potentially a contested outcome that focuses attention,” says Wu, who assures investors that this is not his base case scenario.

The US will also be releasing 2Q GDP Results, Personal Consumption Expenditure inflation rates and non-farm payrolls this week. The global Purchasing Managers Index to be announced on 1 October. The resumption of formal Brexit Talks will add significant uncertainty for the EUR, which has underperformed other G-10 currencies due to a resurgence in Covid-19 cases.

Wu is thus biased lower on EUR-USD - having breached the 1.1650 support, he argues, rates could reach the 1.160 area soon. “Expect downside momentum to continue, especially if the key ECB speakers like Lagarde and Lane continue to talk about EUR strength. Expect the weak short term implied valuations to apply an implicit pull lower as well,” he warns ahead of a central bankers panel led by European Central Bank President Christine Lagarde on September 28.

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While GBP has remained most resilient to a stronger greenback alongside the New Zealand Dollar, Wu is bearish on GBP-USD. Sterling has remained cautious as markets await the outcome of renewed Brexit talks with baited breath. “With global sentiment still very much in the risk-off zone and virus cases continuing to rise, we should expect the pair continuing its downward slide if no progress is seen in Tuesday’s talk, says the strategist.

There was some relief for the JPY however as the USD-JPY held itself above the 105.50 mark, underlining the toppish posture for the currency pair while suggesting that JPY’s downside has been exhausted. A broad sideways posture remains in place for now, says Wu, although this bias is still on the downside pending US election uncertainties.

Up to September 22 on the Commodity Futures Trading Commission (CFTC) front, short term, noncommercial accounts added to their net implied USD short positions w-o-w. Wu also observes that EUR and JPY longs were accumulated again, though this was before the greenback recovery had taken place. Long-term asset managers, he adds, also added marginally to their net implied short USD positions too.

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USD-CNH closed slightly more softly as the pair barely tested the 200-week MA despite avoiding the 6.8500 resistance. Wu predicts consolidation for Chinese currency, expecting to see USD-CNY entering a “long holiday” between 6.8100 and 6.8400. Meanwhile, the AUD saw its biggest loss in six months due to worse than expected economic data, suggesting a bearish trend given negative global risk sentiment and an impending rate cut from the Reserve Bank of Australia in 2020.

As for USD-SGD FX rates, the Singapore Dollar Nominal Effective Exchange Rate (S$NEER) - the currency band maintained by the Monetary Authority of Singapore to control the strength of the SGD - stands at perceived parity level of 1.3764 on 28 September after easing just below parity on the 24th. Wu is watching to see if the S$NEER moves sustainably to the bottom half of its tolerance band, though this is not his base case. He expects limited USD-SGD intraday without another run of USD strength.

According to EPFR data, implied equity outflows from Asia excluding Japan and China persisted over the past week despite slowing pace. Bond outflows, however, are understood to have picked up slightly.

“Overall, we stay negative on the EUR-USD and the cable (i.e. GBP-USD), as their underlying negatives are effectively unchanged. We look to potentially go negative with the USD-JPY as a hedge, especially if the odds of a contested US election outcome continues to firm up,” Wu recommends.

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