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Yen up on vaccine worries, tech selloff By Reuters



© Reuters. Ilustration photo of U.S. dollar and Japan Yen notes

By Olga Cotaga

LONDON (Reuters) – A stronger Japanese yen was the product of a build-up of worries in financial markets on Wednesday, after U.S. tech stocks sold off the previous day and a leading coronavirus vaccine candidate faced delay.

The U.S. dollar also found some support as the stock market slide spooked investors into selling riskier currencies, while worries about the fate of Brexit talks pushed the pound down to a new six-week low.

In the early European session the dollar was mostly steady, pulling back from early gains against most majors as U.S. equity futures pared losses – with Nasdaq 100 futures () swinging to trade 0.4% higher and S&P 500 futures () rising 0.6%.

AstraZeneca Plc (L:) said it had paused global trials, including large late-stage trials, of its experimental coronavirus vaccine due to an unexplained illness in a study participant.

Roll-out of an effective vaccine is seen as key for economies to overcome the effects of the pandemic.

“Positioning in FX and other asset classes had been biased towards ‘risk on’, higher equity prices, steeper yield curves and a weaker dollar.  A lot of that positioning is now simply getting walked back and tweaked as we enter the ‘autumn crunch’,” said Stephen Gallo, currency analyst at BMO Capital Markets.

Traders, returning from summer holidays, are faced with a bouquet of risk factors as they enter the autumn period of trading – the U.S. election in November, Brexit, U.S.-China trade tensions, central bank policy decisions, rising cases of the coronavirus – many of which would dent the appetite for riskier assets and inject strength into safe-havens.

Gallo, however, does not “yet think this move lower in the dollar is a complete shift in the downward trend, but we will continue to watch it very closely,” he said. The dollar has been sliding since March.

Euro/dollar was last trading steady at $1.1772 (), having fallen earlier to a near three-week low of $1.1757 as the dollar rose.

Dollar/Japanese yen fell 0.1% at 105.92 after touching an eight-day low of 105.78.

Investors await Thursday’s European Central Bank meeting with some trepidation.

The common currency has lost about 2% since posting a 28-month high above $1.20 on Sept. 1, spurred lower by comments from ECB chief economist Philip Lane who said the exchange rate mattered to monetary policy.

Any hint of concern at the currency’s rise, or that low inflation will require ultra-easy policy for a very long time could whack the euro lower again and boost the dollar.

“Lane appears to have succeeded in drawing a line in the sand at $1.20 at least for the time being,” said Rabobank senior FX strategist Jane Foley. “We see scope that euro/dollar could dip further towards the $1.17 level on a one-month view.”

An overnight slump in the oil price dragged down oil exporters’ currencies. The Norwegian crown extended an overnight fall to hit a more than six-week low of 9.1810 per dollar and was last down 0.3% at 9.1205.

The Canadian dollar dropped to a three-week low, though steadied in European trading ahead of a Bank of Canada policy decision due at 1400 GMT. Investors expect no changes to interest rates and will focus on the tone around the outlook.

Sterling was unable to shake pressure as fears grow that Britain is preparing to undercut its Brexit divorce treaty. It dipped 0.3% to $1.2948 , after touching its lowest since July 29. The pound also languished at a six-week low of 91.06 pence against the euro ().

Britain will set out its blueprint for life outside the European Union on Wednesday, publishing legislation a government minister acknowledged would break international law in a “limited way”.

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How to Trade the Impact of Politics on Global Financial Markets





  • The global economy is showing increasing weakness and fragility
  • Eroding economic fortitude exposes markets to geopolitical risks
  • Examples of political threats in Asia, Latin America and Europe

See our free guide to learn how to use economic news in your trading strategy!


Against the backdrop of eroding fundamentals, markets become increasingly sensitive to political risks as their capacity for inducing market-wide volatility is amplified. When liberal-oriented ideologies – that is, those favoring free trade and integrated capital markets – are being assaulted on a global scale by nationalist and populist movements, uncertainty-driven volatility is the frequent result.

What makes political risk so dangerous and elusive is the limited ability investors have for pricing it in. Traders may therefore find themselves hot under the collar as the global political landscape continues to develop unpredictably. Furthermore, much like the spread of the coronavirus in 2020, political pathogens can have a similar contagion effect.

Generally speaking, markets do not really care about political categorizations but are more concerned with the economic policies embedded in the agenda of whoever holds the reigns of the sovereign. Policies that stimulate economic growth typically act as a magnet for investors looking to park capital where it will garner the highest yield.

These include the implementation of fiscal stimulus plans, fortifying property rights, allowing for goods and capital to flow freely and dissolving growth-sapping regulations. If these policies create adequate inflationary pressure, the central bank may raise interest rates in response. That boosts the underlying return on local assets, reeling in investors and lifting the currency.

Conversely, a government whose underlying ideological predilections go against the gradient of globalization may cause capital flight. Regimes that seek to rip out the threads that have sown economic and political integration usually create a moat of uncertainty that investors do not want to traverse. Themes of ultra-nationalism, protectionism and populism have been frequently shown to have market-disrupting effects.

If a state undergoes an ideological realignment,traders will assess the situation to see if it radically alters their risk-reward set up. If so, they may then reallocate their capital and re-formulate their trading strategies to tilt the balance of risk to reward in their favor. Volatility is stoked in doing so however as reformulated trading strategies are reflected in the market-wide redistribution of capital across various assets.

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In Italy, the 2018 election roiled regional markets and eventually rippled through virtually the entire financial system. The ascendancy of the anti-establishment right-wing Lega Nord and ideologically-ambivalent 5 Star Movement was founded on a campaign of populism with a built-in rejection of the status quo. The uncertainty accompanying this new regime was then promptly priced in and resulted in significantly volatility.

The risk premium for holding Italy’s assets rose and was reflected in an over-100 percent spike in Italian 10-year bond yields. That showed investors demanding a higher return for tolerating what they perceived to be a higher level of risk. This was also reflected in the dramatic widening of the spread on credit default swaps on Italian sovereign debt amid increased fears that Italy could be the epicenter of another EU debt crisis.

EUR/USD, EUR/CHF Plummeted as Mediterranean Sovereign Bond Yields Spiked Amid Fears of Another Eurozone Debt Crisis

Chart showing EUR/USD, EUR/CHF

Source: TradingView

The US Dollar, Japanese Yen and Swiss Franc all gained at the expense of the Euro as investors redirected their capital to anti-risk assets. The Euro’s suffering was prolonged by a dispute between Rome and Brussels over the former’s budgetary ambitions. The government’s fiscal exceptionalism was a feature of their anti-establishment nature that in turn introduced greater uncertainty and was then reflected in a weaker Euro.

LATIN AMERICA: Nationalist-Populism in Brazil

While President Jair Bolsonaro is generally characterized as a fire-brand nationalist with populist underpinnings, the market reaction to his ascendency was met with open arms by investors. His appointment of Paulo Guedes – a University of Chicago-trained economist with a penchant for privatization and regulatory restructuring – boosted sentiment and investors’ confidence in Brazilian assets.

Ibovespa Index – Daily Chart

Chart showing Ibovespa Index

Source: TradingView

From June 2018 to the Covid-19 global markets rout in early 2020, the benchmark Ibovespa equity index rose over 58 percent compared with a little over 17 percent in the S&P 500 over the same time period. During the election in October, the Brazilian index rose over 12 percent in just one month as polls revealed that Bolsonaro was going to triumph over his left-wing opponent Fernando Haddad.

Since Bolsonaro’s ascent to the presidency, the ups and downs in Brazilian markets have reflected the level of progress on his market-disrupting pension reforms. Investors speculated that these structural adjustments will be strong enough to pull Brazil’s economy away from the precipice of a recession and toward a strong growth trajectory, unburdened by unsustainable public spending.

ASIA: Hindu Nationalism in India

The re-election of Prime Minister Narendra Modi was broadly welcome by markets, though lingering concerns were raised about the effect of Hindu nationalism on regional stability. However, Modi has a reputation for being a business-friendly politician. His election lured investors into allocating a significant amount of capital to Indian assets.

However, investors’ optimistic outlook is periodically undermined by periodic clashes between India and its neighbors over territorial disputes. In the first breaths of 2019, India-Pakistan relations soured drastically amid a skirmish over the disputed Kashmir region. Since the 1947 partition, the hostility between the two nuclear powers has been an ever-present regional risk.

India Nifty 50 Index, S&P 500 Futures, AUD/JPY Fall After News Broke of India-Pakistan Skirmish

Chart showing S&P 500 Futures, AUD/JPY

Source: TradingView

Tension between India and China, particularly over the disputed border known as the Line of Actual Control (LAC) in the Himalayan Mountains also rattled Asian financial markets. In June 2020, news of a skirmish between Chinese and Indian troops resulting in over 20 deaths raised concerns about what further escalation could mean for regional security and financial stability. Read the full report here.

India Nifty 50 Index, S&P 500 Futures, US 10-Year Treasury Yield, USD/INR After News Broke of India-China Skirmish

Chart showing S&P 500 futures, USD/INR

Source: TradingView

Nationalist campaigns and governments are embedded with political risk because the very nature of such a regime relies on displaying strength and frequently equates compromise with capitulation. In times of political volatility and economic fragility, the financial impact of a diplomatic breakdown is amplified by the fact that a resolution to a dispute will likely be prolonged due to the inherently stubborn nature of nationalist regimes.

US President Donald Trump and Modi employed a similar brand of strong rhetoric both on the campaign trail and within their respective administrations. In a rather ironic way, their ideological similarity may in fact be a force that causes a rift in diplomatic relations. Tensions between the two have escalated in 2019, with markets worrying that Washington may start another trade war in Asia, opening a second front in India having already engaged China.


For economies with a high degree of capital mobility, there are essentially four different sets of policy-mix alternatives that can provoke a reaction in FX markets following an economic or geopolitical shock:

  • Scenario 1: Fiscal policy is already expansionary + monetary policy becomes more restrictive (“tightening”) = Bullish for the local currency
  • Scenario 2: Fiscal policy is already restrictive + monetary policy becomes more expansionary (“loosening”) = Bearish for the local currency
  • Scenario 3: Monetary policy already expansionary (“loosening”) + fiscal policy becomes more restrictive = Bearish for the local currency
  • Scenario 4: Monetary policy is already restrictive (“tightening”) + fiscal policy becomes more expansionary = Bullish for the local currency

It is important to note that for an economy like the United States and a currency like the US Dollar, whenever fiscal policy and monetary policy start trending in the same direction, there is often an ambiguous impact on the currency. Below we will examine how various fiscal and monetary policy remedies for geopolitical and economic shocks impact currency markets.


On May 2, 2019 – following the FOMC decision to hold rates in the 2.25-2.50 percent range – Fed Chair Jerome Powell said that relatively soft inflationary pressure noted at the time was “transitory”. The implication here was that while price growth was below what central bank officials were hoping for, it would soon accelerate.The US-China trade war played a role in slowing economic activity and muting inflation.

The implicit message was then a reduced probability of a rate cut in the near term, given that the fundamental outlook was judged to be solid and the overall trajectory of US economic activity seen to be on a healthy path. The neutral tone struck by the Fed was comparatively less dovish than what markets had anticipated. This might then explain why the priced-in probability of a Fed rate cut by the end of the year (as seen in overnight index swaps) fell from 67.2 percent to 50.9 percent after Powell’s comments.

Meanwhile, the Congressional Budget Office (CBO) forecasted an increase in the fiscal deficit over a threeyear time horizon, overlapping the central bank’s would-be tightening cycle. What’s more, this came against the backdrop of speculation about a bipartisan fiscal stimulus plan. In late April, key policymakers announced plans for a US$2 trillion infrastructure building program.

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The combination of expansionary fiscal policy and monetary tightening made the case for a bullish US Dollaroutlook. The fiscal package was expected to create jobs and boost inflation, thereby nudging the Fed to raise rates. As it happened, the Greenback added 6.2 percent against an average of its major currency counterparts over the subsequent four months.

Scenario 1: DXY, 10-Year Bond Yields Rise, S&P500 Futures Fall

Chart showing DXY, S&P 500 Futures

Source: TradingView


Theglobal financial crisis in 2008 and the Great Recession that followed rippled out worldwide and destabilized Mediterranean economies. This stoked worries about a region-wide sovereign debt crisis as bond yields in Italy, Spain and Greece climbed to alarming levels. Mandated austerity measures were imposed in some cases which helped create the basis for Eurosceptic populism that hence haunted the region.

Investors began to lose confidence in the ability of these governments to service their debt and demanded a higher yield for incurring what appeared to be a rising risk of default. The Euro was in pain amid the chaos as doubtsemerged about its very existence in the event that the crisis forced the unprecedented departure of a member state from the Eurozone.

In what is considered to be one of the most famous moments in financial history, European Central Bank (ECB) President Mario Draghi delivered a speech in London on July 26, 2012 which many would come to see as a pivotal moment that saved the single currency. He said that the ECB is ready to do whatever it takes to preserve the Euro. And believe me,” he added,it will be enough.” This speech calmed European bond markets and helped bring yields back down.

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The ECB alsocreated a bond-buying program called OMT (for “Outright Monetary Transactions”). It was aimed at reducing stress in sovereign debt markets, offering relief to distressed Eurozone governments. While OMT was never used, its mere availability helped becalm jittery investors.At the same time, many of the troubled Euro area states adopted austerity measures to stabilize government finances.

While the Euro initially rose as worries about its collapse receded, the currency would depreciate substantially against the US Dollar over the course of the following three years. By March 2015, it had lost over 13 percent of its value. When examining the monetary and fiscal set up, it becomes quite clear why.

Scenario 2: Euro Sighs Relief – Sovereign Bond Yields Fall as Insolvency Fears are Quelled

Chart showing EUR/USD, European sovereign bond yields

Source: TradingView

Austerity measures in many Eurozone countries limited their governments’ ability to provide fiscal stimulus that might have helped create jobs and boost inflation. At the same time, the central bank was easing policy as a way to alleviate the crisis. Consequently, this combination pressured the Euro lower against most of its major counterparts.

Scenario 2: Euro, Sovereign Bond Yields Fall

Chart showing EUR/USD, European sovereign bond yields

Source: TradingView


At the early stages of the Great Recession, the Bank of Canada (BOC) cut its benchmark interest rate from 1.50 to 0.25 percent as a way to ease credit conditions, restore confidence and revive economic growth. Counterintuitively, the yield on 10-year Canadian government bonds began to rise. This rally came right around the same time as Canada’s benchmark TSX stock index established a bottom.

Scenario 3: USD/CAD, TSX, Canadian 2-Year Bond Yields

Chart showing USD/CAD, TSX

Source: TradingView

The subsequent restoration of confidence and recovery in share prices was reflected ininvestors’ shifting preference for riskier, higher-returning investments (like stocks)in lieu of comparatively safer alternatives (like bonds). This reallocation of capital sent yields higher despite the central bank’s monetary easing. The BOC then began to raise its policy interest rate anew and brought it up to 1percent, where it remained for the subsequent five years.

During this time, Prime Minister Stephen Harper implemented austerity measures to stabilize the government’s finances amid the global financial crisis. The central bank then reversed course and cut rates back to 0.50 percent by July 2015.

Both CAD and local bond yields suffered as monetary policy was loosened while the capacity for fiscal policy support was constrained. As it happens, cutting back government spending at this difficult time ended up costing Mr Harper his job. Justin Trudeau replaced him as Prime Minister following a victory in the 2015 general election.

Scenario 3: USD/CAD, Canada 2-Year Bond Yields

Chart showing USD/CAD

Source: TradingView


After Donald Trump was proclaimed the victor in the 2016 USpresidential election, the political landscape and economic backdrop favored a bullish outlook for the US Dollar. With the the Oval Office and both houses of Congress thus controlled by the Republican Party, the markets appeared to conclude that scope for political volatility had been reduced.

This made the market-friendly fiscal measures proposed by candidate Trump during the electionappear more likely to be implemented. These included tax cuts, deregulation and infrastructure building. Investors appeared to overlook threats to launch trade wars against top trading partners such as China and the Eurozone, at least for the time. On the monetary side, central bank officials raised rates at the tail end of 2016 and were looking to hike again by at least 75 basis points through 2017.

With scope for fiscal expansion and monetary tightening in sight, the US Dollar rallied alongside local bond yields and equities. This came as corporate earnings expectations strengthened alongside the outlook for broader economic performance. This stoked bets on firmer inflation and thereby on a hawkish response from the central bank.

Scenario 4) US Dollar Index (DXY), S&P 500 Futures, 10-Year Bond Yields (Chart 7)

Chart showing US Dollar, S&P 500 Futures

Source: TradingView


Countless studies have shown that a significant decline in living standards from war or a severe recession increase the propensity for voters to take up radical positions on the political spectrum. As such, people are more likely to deviate from market-friendly policies – such as capital integration and trade liberalization – and instead focus on measures that turn away from globalization and are deleteriously inward-facing.

The modern globalized economy is interconnected both politically and economically and therefore any systemic shock has a high probability of echoing out into the world. During times of significant political volatility amid inter-continental ideological changes, it is crucial to monitor these developments because within them are opportunities to set up short, medium and long-term trading strategies.

— Written by Dimitri Zabelin, Analyst for

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter

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XAU/USD at the Mercy of a Fiscal Stimulus Deal





  • Gold outlook still hinges on stimulus deal expectations and corresponding swings in real yields
  • XAU/USD price volatility could persist as uncertainty surrounding fiscal aid and COVID-19 linger
  • Precious metals might stay supported more broadly as the Fed balance sheet hits all-time highs

Gold price action fluctuated within a 2% range over the last five trading sessions only to finish flat on the week. The precious metal continues to seek a bullish catalyst to fuel a breakout from its consolidation pattern, and in light of murkiness surrounding fiscal stimulus negations, gold prices could keep drifting broadly sideways.


Gold Price Chart Inflation Expectations

Despite the notable rise in US Treasury rates over the last several weeks, the price of gold has largely kept afloat thanks to climbing inflation expectations. In fact, the 5-year forward inflation swap rate has jumped to 2.19%, which marks a fresh post-crisis high, and helps keep pressure on real yields. Inflation expectations rising faster than interest rates causes real yields to move lower, which is a bullish fundamental driver for gold prices.

Inflation expectations have potential to gain further ground with the prospect of another comprehensive fiscal aid package before the November 2020 election in focus. If US politicians can strike a stimulus deal, gold prices could stage an explosive move higher with inflation expectations.

of clients are net long.

of clients are net short.

Change in Longs Shorts OI
Daily 2% 2% 2%
Weekly 6% -9% 3%

Even if an agreement on stimulus cannot be reached prior to the election, inflation expectations could still stay relatively elevated if odds of a democratic sweep remain intact, as this would likely correspond with an even bigger stimulus deal early next year. That said, potential for a gridlocked congress could undermine inflation expectations and weigh negatively on gold price action.


Gold Price Chart Fed Balance Sheet Total Assets

Resurfacing coronavirus concerns as new cases spike and governments reimpose restrictions on business activity presents another bearish threat to gold outlook. Yet, gold prices and inflation expectations could remain bolstered by Fed balance sheet growth. FOMC asset purchases have mounted and just pushed total assets held by the Federal Reserve to a new record high of $7.18-trillion.

Learn More – How to Trade Gold: Top Gold Trading Strategies & Tips


XAU USD Price Chart Forecast Gold to US Dollar Index Correlation

Chart by @RichDvorakFX created using TradingView

Explosive Fed balance sheet growth, which is expected to continue at the current pace according to recent commentary from Fed officials, underpins the anti-fiat narrative and investor demand for gold. Correspondingly, the direction of gold might mirror the US Dollar Index due to the strong inverse relationship generally maintained by the two safe-haven assets.

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Gold prices could spike higher with potential for the US Dollar to weaken further if fiscal stimulus optimism can outshine skepticism. XAU/USD could decline, however, if the US Dollar strengthens as coronavirus concerns take hold and inflation expectations gravitate lower.

Learn More – US Presidential Election Timeline & Implications for Gold Prices

— Written by Rich Dvorak, Analyst for

Connect with @RichDvorakFX on Twitter for real-time market insight

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US Q3 GDP and Chinese PMI in Focus




Copper Prices, US Q3 GDP, Chinese PMI, USDCNH – Talking Points

  • Copper eyes upcoming U.S. GDP, Chinese PMI Data
  • Election uncertainty a question mark for markets
  • Weaker Yuan may provide backstop to copper prices

Copper retraced a portion of its recent break higher over the previous two trading sessions. The COMEX futures price stands at $3.1405 (-0.41%) per pound as of Friday afternoon. Price action hit a 28-month high earlier this week following stronger than expected industrial production data out of China. Underlying market forces and Chinese economic strength amid the pandemic have bolstered the red metal’s gain to nearly 60% from the March lows.

Copper Futures (Daily Price Chart)

Copper Futures Chart

Chart created with TradingView

The recent pullback echoes across the broader group of metals with Gold and Silver both losing ground alongside copper in recent days. As the 2020 U.S. election nears – now only 11 days out – markets appear to be relatively calm. While Biden commands a lead in the polls, the outcome, along with election day aftermath remains uncertain. However, stimulus talks are one issue that could move the ball in the coming days, although hopes for a deal are quickly fading as the election quickly approaches.

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That said, several high-impact economic events are slated for release next week, with the prime drivers likely being advance Q3 U.S. GDP and Chinese Manufacturing PMI. Economic growth in the United States is expected to cross the wires at 31.9% on a quarterly basis – a modern record. China’s economy, the world’s largest copper consumer, will look to record an eighth consecutive month of manufacturing growth. Positive data on either release may likely give a boost to the red metal.

DailyFX Economic Calendar

DailyFX Economic Calendar

Source: DailyFX Economic Calendar

Furthermore, a recent rally in the Chinese Yuan against the US Dollar may be supporting copper prices through a speculative function in markets. A weak USD is bullish for commodities in general; however, with China being the largest consumer of copper, a strong Yuan may serve as a particularly bullish backstop. Currently, USD/CNH is trading at 6.6676 – the weakest since July 2018.

Copper vs USD/CNH (Inverted) Daily Price Chart

Copper, USDCNH

Chart created with TradingView

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