ING: The USD
The Democratic sweep delivered the expected negative reaction for the dollar, but there is limited justification for a much larger decline without a shift in relative interest rates or further underperformance in US assets. Fears that the result would weigh on technology stocks have not materialised, while relief that the midterm uncertainty is behind markets and a sharp fall in oil prices have helped fuel an equity rally. However, lower oil prices are not automatically dollar-negative: the 8% crude decline saw two-year USD swap rates fall 5bp, broadly in line with CAD, AUD and SEK, while EUR, GBP and NZD rates dropped by a larger 8—10bp. A broader dollar downturn therefore still requires weaker US data or a more dovish Fed to drive greater underperformance in front-end USD rates. Recent data continues to support expectations for further Fed tightening. Although the ISM services index was slightly weaker than forecast, it remained firmly in expansionary territory, while its employment component rose to 51.4, the highest since February. Combined with ADP payrolls of 86k, this has strengthened expectations for a solid non-farm payrolls report, with consensus at 65k and whisper estima
The Democratic sweep delivered the expected negative reaction for the dollar, but there is limited justification for a much larger decline without a shift in relative interest rates or further underperformance in US assets. Fears that the result would weigh on technology stocks have not materialised, while relief that the midterm uncertainty is behind markets and a sharp fall in oil prices have helped fuel an equity rally. However, lower oil prices are not automatically dollar-negative: the 8% crude decline saw two-year USD swap rates fall 5bp, broadly in line with CAD, AUD and SEK, while EUR, GBP and NZD rates dropped by a larger 8—10bp.
A broader dollar downturn therefore still requires weaker US data or a more dovish Fed to drive greater underperformance in front-end USD rates. Recent data continues to support expectations for further Fed tightening. Although the ISM services index was slightly weaker than forecast, it remained firmly in expansionary territory, while its employment component rose to 51.4, the highest since February. Combined with ADP payrolls of 86k, this has strengthened expectations for a solid non-farm payrolls report, with consensus at 65k and whisper estimates around 70k.
Against this backdrop, DXY is expected to stabilise around 101.0—101.50 in the near term rather than break materially lower, with Challenger job cuts and third-quarter unit labour costs the next data points to watch. Elsewhere, the Mexican peso remains vulnerable ahead of Banxico’s rate decision after becoming the weakest-performing emerging-market currency over the past two months. The central bank’s indication that it would not follow the Fed with a September hike has sharply reduced the peso’s rate advantage, while a further cut today could push USD/MXN towards 19. With rate protection now extremely limited, the currency remains particularly exposed to external shocks.