FX Update: Trump has Covid-19 and first move is risk-off

Trading focus:

Tactical uncertainty on Trump Covid-19 positive test
The first instinct when any bombshell hits the market that increases uncertainty is to head to the hills. Somewhat surprisingly, the market tone managed to stay positive despite lack of progress on new stimulus measures in the US (more on that below) and even after it was clear that Trump had been heavily exposed to the virus in recent days when it turns out an aide traveling with him to campaign events tested positive yesterday. But the situation can quickly go in very different directions from here

Mild case – Trump gets a light sniffle and is battle ready after a week to ten days. Not only would the net effect be negligible on Trump’s health, but could also provide him with ammunition in his claims that most people – even a relatively older man like himself – don’t get severe systems and that his opponents have been wrong to so strongly criticize his handling of the virus.

Sever case – Trump is sideline with a severe case of the virus for two weeks or more. Anything resembling a case as sever as UK Prime Minister Boris Johnson’s case back in the spring (16 days from announcement of a positive test until he was released from hospital) could underline the severity of the virus and keep Trump’s schedule reduced and his energy low and maybe enhance the credibility of criticisms of his administrations’ handling of the virus and change the mind of  some small cross-section of voters.

For now the market is taking this situation as driving a shift in favour of Biden, with the USD positive reaction on the tail of that showing that risk sentiment swings seem more important for driving the US dollar at the moment than any thoughts about the budget deficit outlook and risk to inflation down the road from higher Democrat spending levels (only in the event Dems get the Senate back, of course).

Remember the US stimulus question – the more important factor here if Trump’s Covid-19 proves a mere distraction.
The House Democrats passed a $2.2 trillion bill for new stimulus by a relative narrow margin and with zero Republican votes. This is smaller than their original stimulus package of well over $3 trillion, but their moving forward with this deal is seen by some as providing little hope that the  Trump White House is ready to make a deal, with a possibly side-lined Trump adding to the risk of no-deal at the margin. No stimulus is risk sentiment negative and therefore generally USD positive, given recent patterns.  A breakthrough is still a possibility over the weekend, with House Speaker Pelosi set to meet US Treasury Secretary Mnuchin at the weekend.

Brexit – spot trading is dangerous business – options an idea.
If it wasn’t already obvious, yesterday’s price action in sterling underlined the risk of trying to express a tactical view in sterling via spot trades, as conflicting headlines on the state of post-Brexit sterling all over the map. Positioning in options is an idea for those who would like to have a position over the next critical few weeks of the negotiation period and even for beyond December 31 for anyone believing that the talks will go to the wire. A long strangle position in either EURGBP or GBPUSD (long both an out of the money put and call) are a way to trade volatility with no idea of the directional view, and those with directional views can consider taking a long position in either a put or a call or a put spread or call spread. An option spread (long one option and short another option that is much farther out of the money reduces the extent of the directional move needed to break even but reduces also the maximum potential profit if volatility spikes significantly.  In an escalation of the stakes of the negotiations, UK Prime Minister Boris Johnson is set to meet EU Commission president Ursula Von Der Leyen tomorrow.

Chart: AUDJPY
AUDJPY is a classic proxy within G10 currencies for risk appetite and found resistance – as did many USD pairs – right at important resistance, in this case, the head-and-shoulders-like neckline around 0.7600 and just ahead of the21-day and 55-day moving averages. Arguably, this is a kind of bull-bear line, as is the 0.7200 area in AUDUSD – for risk sentiment in FX at the moment. Stay tuned – hard to believe that traders would want to get aggressively risk-on ahead of the weekend as we await more news on Trump’s condition.