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November 09, 2020 @ 14:50 +03:00
Futures on the S&P 500 and Nasdaq indices remain moderately positive, returning to historical highs of around 3,600 and 12,500 respectively. At the same time, the dollar breaks through to lows in two and a half years.
The dollar and US equities often move in opposite directions, and this correlation looks reasonable, as currency depreciation increases the competitiveness of local exporters and increases dollar revenues for corporations.
In the previous four years, we often saw a different relationship when the dollar and stocks grew at the same time. This inflow into US assets was linked to Trump’s tax reforms and the increased degree of caution about emerging markets, which are frequently subject to sanctions and trade restrictions.
The strength of the dollar is now in question for several reasons. Biden has promised to cancel most of Trump’s tax breaks. Primarily the Republican Congress is likely to block proposals for tax increases for corporations and wealthy Americans. However, there no new tax cuts in sight.
Another important issue is trade disputes. Markets are hopes for some de-escalation of international trade disputes, especially with China. And this reinforces the growth of the Chinese currency against the dollar. At the beginning of the new week, the dollar fell to 6.55 yuan, its lowest level since June 2018 after the steepest weekly growth since early 2019.
Demand for risk assets stopped the yen from weakening at 103.30 and pushed Nikkei to its 26-year high this morning.
Right now the markets are celebrating Biden’s victory. However, we must not forget that four years ago, the markets and the dollar were terrified of President Trump’s arrival. Shortly after his victory, however, the so-called “Trump-rally” began which pushed the dollar up 8.4%, and S&P 500 up 9.3% by the end of the year.
This story shows how different the markets’ expectations of the election and their dynamics can be in the first weeks after this important event. It may well turn out that Biden’s first initiatives change the coronavirus policy and impose stricter restrictions. In the spring, national lockdown markets have seen the sharpest sell-off since the 1930s. Will this time be different?
The FxPro Analyst Team