FX Update: Resumption of the Everything Up and USD down trade?

The US Election votes are still being tallied and could show by the end of today that Joe Biden has taken the lead in Pennsylvania and may even take Georgia, where the very last votes have put Biden ahead by just under a thousand votes as of this writing. If the Pennsylvania result is sufficiently clear, there is no real path for Trump and the question will be if the Biden campaign dares to step forward and declare that they have won by the end of today? How long will Trump hold out? Regardless, the market is taking the contested election risk far less seriously than was anticipated heading into Election Day. Even so, are we really going to see a strong extension of what has unfolded over the last couple of days if there is no concession from Trump into the weekend?

By the way, in all likelihood, a Biden presidency will see have a Republican blocking majority in the Senate, but the election drama in the Senate will be extended until early January if both of the Georgia Senate seats head for a runoff election there (one of those races has the Republican leading with 49.9% of the vote, and about 2% of the remaining votes apparently yet to be tallied and only goes to a run-off if the winner has less than 50%). In the House, the story is that the Democrats have performed extremely poorly, suggesting little appetite for the more progressive Blue Wave policies ahead of the 2022 mid-term elections.

Today’s FX Trading focus:

The Everything Up, USD down trade?
Judging from the market action of the last couple of days, it appears the market is surprisingly happy with the prospect of political gridlock in Washington for at least the next two years (before the 2022 mid-term election). A gridlocked Washington means no risk to the major equity indices and mega-cap stocks from a monopoly-busting, tax-raising Blue Wave. Still, it also likely means far less stimulus generosity. So if that is the assumption, then an extension higher in the everything up trade is that instead we will see a Powell Fed that will do everything to provide offsetting continued easing and levitate all asset markets with enormous further liquidity provision. Of course, it is possible for it to do so if it has the appetite, but as I argued yesterday in the “pre-postmortem” of this election, its actions are already creating long term headwinds for productivity and real GDP growth by propping up zombie companies by enabling over-generous credit terms.

And the Powell Fed’s pleas for more fiscal stimulus already suggested long ago that it doesn’t believe in the efficacy of its own tools to address its dual mandate – especially the labour market. Imagine the prospect of a winter of discontent, with mass evictions for millions of unemployed whose benefits are running out while the Nasdaq 100 marches to new all-time highs…the K-shape squared.

 In short, I am watching the current market with a dose of skepticism, willing to uncomfortably play along with the narrative as long as the technical evidence and momentum suggests we should, but maintaining a healthy wariness around key event risks and the next steps from here.

The first test in coming days and weeks is the fate of the next round of stimulus that establishes what happens after December 31, when further provisions of the CARES Act expire, and then we will quickly transition to how further stimulus shapes up in a Biden administration, while the December FOMC meeting becomes a major testing point for the above narrative, especially if whatever stimulus is agreed is modest.  A wild-card for the next two-plus months is a lame-duck Trump’s behavior and attitude on stimulus. At last night’s Fed meeting, the Fed maintained as low a profile as possible in hardly changing its statement, and no new message of note in the Powell press conference. Nor should anything have been expected, as the Fed has just shifted to its new flexible Average Inflation Targeting regime in recent months.

Chart: AUDUSD
AUDUSD has rallied hard above local previous highs and really only has the 0.7414 cycle top remaining for the bulls to open the chart for the huge 0.8100+ area that was the resistance back in late 2017 and early 2018. The first order of business, however, is a hold above the 0.7150-0.7200 zone after this knee-jerk reaction to the US Election “outcome”.