Clinton s win at second debate spurs dollar

The US Presidential debate on Sunday night could not have come at a worse time for Donald Trump, as questions about his fitness to be President have led some Republicans to call for him to quit the race. Considering the backdrop he faced, Trump didn’t crash and burn in his second debate with Hilary Clinton. But the problem for Trump is that he is making it so easy for Clinton to look like she has already bagged the White House, with one month of campaigning left to go.

A CNN poll after the debate showed 57% of people thought Clinton had won the debate, compared with 34% for Trump. The latest national presidential polling averages have also seen Clinton pull away from Trump with 47.5% of the vote compared with 42.9% for Trump. While a month is a long time in politics, this is not a good stage for the Trump campaign to be losing momentum.

Dollar bulls hoping for a Clinton win

From a currency perspective, a Clinton win is the best outcome for the dollar and risk assets more generally, and the greenback is higher after her perceived triumph last night. There appears to be pent up demand for the dollar as we head into peak US election season, and not even a fairly mediocre payrolls report was enough to derail the currency. Looking forward, further signs that Clinton could become the 45^th President of the United States may help to keep the dollar as the leader of the G10 pack for the foreseeable future.

The toxic pound leads to further woes

In contrast, there has been no respite for the pound after Friday’s flash crash.  GBP/USD is back below the 1.24 mark, and momentum looks to be on the downside. The latest CFTC data measuring non-commercial GBP positions (essentially market positioning in the pound) reported a record number of short positions in the GBP at the end of last week. This can be read one of two ways: 1, the pound is over-valued and too many people are short, thus we should expect the pound to stage a comeback, or 2, the Hard Brexit talk from last week has spooked the market, which has made the pound toxic for currency traders.

We think that the latter is more realistic, and we may not see a bounce in the pound for some time. Those looking for a recovery in sterling must be hoping that the GBP-negative rhetoric from the Tory Party conference has peaked, and after the posturing from both sides, that the UK/EU Brexit negotiations will actually go rather well. Many people hope that this will be the case, I’m just not that confident about a positive outcome at this juncture. 

Does the UK government care about the pound

The UK government don’t seem to mind a weak pound. We have had no official word from the government about the pound’s flash crash on Friday. For a country mired in debt a weak currency and the inflation that it will undoubtedly bring, can be a good thing. However, from a currency perspective this is a perfect storm. At the start of this week it does not look like we will regain the $1.25 handle in GBP/USD any time soon, instead we could drift down towards $1.20 over the next few weeks before the market tries to “buy the low” in the pound. So bargain hunters may have to wait before making their move.

Four key events to watch for this week:

Aside from the pound and the US election debate there are four things worth watching this week.

1, Fed speakers: this week we have Fed minutes, and a host of speakers culminating with Janet Yellen on Friday.  A lacklustre US payrolls report has not moved the needle on Fed rate hike expectations for December. We will be looking to see if more voting members of the Fed seem happy to raise rates before year-end, if they do then expect the dollar to be the top performer for another week.

2, China: USDCNH broke above the key 6.70 resistance level last week, when China had a public holiday. The focus this week will be on whether the PBOC will intervene in the market directly or lower the daily fixing of the pegged currency, to strengthen the CNH.  Watch this space.

3, Stocks: Q3 earnings season begins this week and it could set the tone for equity performance for the rest of the year. The US stock market has been a little lacklustre of late, so a strong earnings season could trigger fresh record highs, and help to counter some of the negative pressure on stocks that may come from a Fed rate hike in December.

4, Russia: Moscow will meet with Opec to discuss the production cut the cartel agreed last month. Russia is expected to agree to follow suit with its own cut to production. The big news would be if it decided to go against Opec. This is unlikely in our view, but if it happens it could weigh on the price of oil, which rose to a 12 month high last week.

After the political drama and flash crashes of last week, this week may seem like an oasis of calm. But make no mistake, the outcome of events this week could shape trading conditions into year-end.