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A question that you must ask yourself now is what holds more risk to FX right now – the record number of cases presenting in Europe and the US or the multiple vaccines that will be rolled out over the coming 6 to 12 months?

If we were arguing equities - market theory dictates that equities price 12 months ahead of time and come November 2021, the majority of the world will likely have been vaccinated.

But we are discussing FX and what is happening in the bond market in our view is the more telling stat for right now. US 10 treasury yields have been as high as 0.94% as presenting cases in the US are on track sometime early next week to be 200,000 a day. New York and Chicago ordering activity restrictions. Wisconsin and Michigan the same and even though Florida is resisting lockdowns, they are coming.

US fatalities have reached their highest point since May, hospitalisations have jumped 13% in five days across six states.

Then we look at Europe, Italy’s fatality rate is at its April peak, France is now ‘at capacity’ for hospitalisations and is the first European nation with over 2 million known cases. The UK and Spain have now reported 1.5 million cases and that figure will no doubt get bigger still.

This has to be a short-term drag, and the early data released for October, a month that saw cases starting to increase, suggests it is. US retail sales figures fell in the month of October, Europe data is showing signs of slowing.

This is causing risk FX to break up at the moment with the EUR separating itself from the likes of the AUD.

EUR/USD

AUD/USD

As the charts show, the risk-on trade is being applied to the AUD/USD pair, news of the vaccine and that Australia is managing the COVID crisis better than most is seeing it holding the November gains. EUR/USD, however, lost momentum even with the positive news from the vaccines, there is an interesting setup building here.

A pattern that we will be watching closely over the coming weeks as the northern hemisphere moves into peak winter.

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