Equities and currencies kicked off the fourth quarter with a robust recovery. The Dow Jones Industrial Average rose more than 300 points, while the U.S. dollar sold off across the board as safe-haven flows eased out of the currency. The U.S. government avoided shutdown after Congress passed a funding plan that would keep the government running until Dec. 3. The Oct. 18 debt-ceiling deadline still looms, but for now, investors celebrated good news. Drug producer Merck also said that in a clinical trial, its COVID-19 pill can reduce the risk of hospitalization or death by 50% when given shortly after infections. Any positive coronavirus treatment news is good for the market because it accelerates reopening plans and energizes the global recovery.
The U.S. economy is already on solid footing as evidenced by stronger personal spending, the sharp rise in the ISM manufacturing index and upward revision to the University of Michigan Consumer Sentiment survey. According to ISM, “customer demand continues to swell as we prepare for the fourth quarter and overall growth has been extremely good for the year.” Unfortunately, supply-chain concerns are growing, with policy-makers like Fed President Patrick Harker warning about a significant increase in inflation. The lack of price relief and prospect of taper should cap the rally in equities ahead of the November FOMC rate decision.
October is generally a challenging month for equities, with some of the biggest market crashes happening this month. But the fourth quarter is typically a good one. It is statistically a positive month for the greenback as well, with yields rising 11 out of the past 13 Octobers. This month is typically a very bearish month for EUR/USD, the second worst behind May. The commodity currencies also tend to underperform, particularly the Canadian dollar. All of this is consistent with risk aversion and equity market weakness.
The best performing currency on Friday was the New Zealand dollar. Although the country is grappling with a fresh jump in coronavirus cases, there’s growing belief that the Reserve Bank of New Zealand could raise interest rates next week. Back in August, RBNZ assistant governor Christian Hawkesby said it was hard to raise interest rates on the day the country was locked down, but it considered hiking by 50bp. With most restrictions eased, the central bank could move forward with tightening, but a smaller 25bp point adjustment is expected. As the only major central bank raising rates, NZD should outperform in the days ahead. The Reserve Bank of Australia also has a monetary policy announcement. But unlike the RBNZ, no changes are anticipated. The prospect of restrictions easing between October and December should make the central bank outlook more optimistic.
It is also non-farm payrolls week. Labor market numbers are due for release from the U.S. and Canada on Friday. Between two rate decisions and these two jobs reports, it will surely be an active week for currencies. We are looking for stronger numbers all around as economic activity picks up into the fall.