A wave of USD weakness after the US elections looks to be growing.
S&P 500 has surged 7.4% this week but this was no longer accompanied by a rise in US long bond yields.
Since election day on 3 November, the US 10-year treasury yield has backed down to 0.76% from its peak of 0.90%.
This was an unravelling of the Blue Wave trade that betted on a large US fiscal stimulus i.e. the large USD2.2tn bill passed by House Democrats.
Despite the market’s post-election euphoria, the landscape is not as conducive as May-July for a USD sell-off.
Bullish investors have chosen , instead, to focus on the increased prospect of a more stable Biden presidency .
The rally in the commodity currencies and major Asian currencies, especially the CNY and KRW, reflected Mr Biden as the best hope for globalists.
With the Senate likely to remain under the control of Republicans, Democrats will also find it harder to raise taxes, regulate Big Tech and reform corporate governance .
On the flipside, the US economy is at risk from more restrictions under Mr Biden to contain the coronavirus. The Fed has, at its FOMC meeting yesterday, become particularly concerned with the new rise in infection rates in the US and abroad.
Although US GDP growth rebounded to an annualized +33.1% qoq sa in 3Q from -31.4% in 2Q, the Atlanta Fed GDP Nowcast Index is looking for 4Q growth to flatten to +3.2%.
A divided Congress also meant more hurdles to a large stimulus unless a double-dip becomes imminent. The Fed’s preference for fiscal spending to support the recovery was evident in its unanimous to keep the status quo yesterday.
Lastly, a prolonged fight for the election result cannot be totally dismissed. Mr Biden is one state away from the 270 electoral votes to win the presidency. President Trump has threatened to legally challenge the recent states won by Mr Biden.
The Trump campaign has reportedly filed lawsuits in Pennsylvania, Michigan and Georgia and requested a recount in Wisconsin.
Most currencies are still within their ranges of the past few months. Any upsets in the electoral process could lead to profit-taking on the strong gains ahead of the weekend.