Risk FX cannot be stopped. Not by COVID-19, not by the geo-political crises playing out in Asia and Europe and not by the worse global recession to have hit the planet in living memory. GBP, AUD, EUR, CAD and NZD are finishing the year in incredibly strong up channels as the USD trade gets wrapped up in tidal wave of cash injections that are expected from the upcoming US fiscal packages.
In fact, that tidal wave of cash is not just pushing the USD lower it accelerating its downward trajectory.
News last week that US House Speaker Nancy Pelosi and Treasury Secretary Steve Mnuchin are edging closer and closer to their much-hyped COVID relief bill has sent the market ploughing into short USD positions. This despite the face the bill has significantly changed to remove the most contentious and partisan issues. The Bill is reported to be in the order of $748 billion significantly less that the US$2.2 trillion the Democrats wanted.
However, the market sees this more as a stop gap to appease Senate leader Mitch McConnell and the current administration, an administration that only has a month left to run. The fact that Mitch McConnell, Senate Democratic Leader Larry Schumer and House Minority Leader Kevin McCarthy have formed a bipartisan group to make sure the bill will pass, is the strongest indication yet that the Bill come into effect before the end of the year.
When you consider that this bill is the start of what is likely to be an almost continuous fiscal stimulus scenario in 2021 one that will likely see the US$2.2 trillion the Democrats’ wanted reached – it’s understandable G10 pairs have explode higher:
GBP/USD smashed through resistant at $1.349 to be at its highest level of the year at $1.357 if Brexit gets done $1.37 is a real possibility.
EUR/USD at $1.225 continues to show that even in the face of COVID crisis across the Atlantic risk sees 2021 in a positive light. It too is at 2020 highs and is showing no signs of slowing.
The AUD/USD which is continuing to print new 2 ½ year highs, the clear break above $0.76 puts the medium-term resistance at $0.79. Couple this with the face Dalian iron ore futures are now at record highs and copper is its strongest price since 2014 the AUD has its own tailwinds making $0.79 a very real prospect in the coming period.
The caveat to the USD trade is that sooner or later there will be an attraction to the growth the stimulus will create the downward movement won’t be forever as investors pile into US assets. But for now, the trend is your friend.