Oct 26 (Reuters) – The dollar, as the main funder of global reflation trades, gained ground against the euro and most currencies today due to stock market losses amid seemingly spiraling pandemic-centric risks .
Risk-off flows were exacerbated by the growing notion that the U.S. will not be able to pass a new pandemic relief bill before the Nov. 3 elections; an election that itself is associated with potential risks, depending on presidential and congressional outcomes.
Falling Treasury yields, though partly driven by safe-haven flows into the dollar, also supported Bund-Treasury yield spreads as EU core-peripheral yield spreads tightened, slightly cushioning the EUR/USD’s fall.
A downbeat German Ifo report , and the risk-off dollar gains, haven’t been enough to get EUR/USD to Friday’s 1.1787 low by the 10-day moving average line.
Thursday’s ECB will be spied for any hints about increased easing at their December meeting, particularly as pandemic restrictions are likely to tighten even further into winter, with the euro zone already threatening a double-dip recession .
The biggest daily drop in the DJIA since June, after it and S&P’s broke below pivotal 50-day moving average support, is underpinning the dollar index, but not enough to clear its downtrend line from March thus far.
Sterling got an early boost on UK bank dividend hopes , but then fell back to its 10-day moving average by today’s 1.2993 low, as the next round of EU-UK Brexit talks got underway in London .
Positive news about the Oxford/AstraZenca vaccine marginally softened poor pandemic news, but wide availability of vaccines isn’t seen until well into 2021, and will be no real help in dealing with the winter infection wave, never mind Brexit risks .
Sterling, like many other currencies, is positively correlated to equities, which have been banking on more U.S. fiscal support that now may not come until next year and perhaps be partly offset by the expectation of higher tax rates.
USD/JPY’s early NY rise ran into very important resistance at 105.055 on EBS , where Ichimoku, Fibos and prior October lows are clustered. The break lower in S&Ps below 50-DMA support was rapid enough to elicit some broader haven yen demand and brisk Treasury yield curve flattening, setting USD/JPY back slightly.
The BOJ meets on Oct. 28-29, though no further easing is expected, even though economic forecasts may be downgraded .
A 0.6% USD/CNH rise set the bearish tone for the aussie and other high-beta currencies, as Chinese leaders this week produce a new five-year plan amid heightened geopolitical tensions.
Commodity prices were broadly lower on pandemic-driven demand concerns and a stronger dollar.
All else being equal, the northern versus southern hemisphere seasonal weather patterns suggest increasing pandemic risk in the north versus the south the next few months.
Euro zone October jobs data, the ECB meeting and U.S. Q3 GDP on Thursday are the next major event risks beyond Brexit talks in London.
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(Editing by Terence Gabriel Randolph Donney is a Reuters market analyst. The views expressed are his own.)
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