Risk appetite surged on Monday following positive coronavirus vaccine developments.

Risk appetite surged on Monday following positive coronavirus vaccine developments and the weekend US Presidential election outcome. Equity markets surged, especially in Europe, although there was an element of correction from late US trading and Asia was more cautious.

The dollar initially declined sharply as risk strengthened before rebounding as US yields moved sharply higher to 7-month highs. EUR/USD strengthened to 2-month highs around 1.1920 before declining sharply to near 1.1800.

USD/JPY strengthened very sharply to above 105.50 before a retracement. Sterling was underpinned by the strength in risk conditions and hopes for a trade deal. Gains in global equities triggered a surge in commodity currencies, especially against the yen.

German exports increased 2.3% in the year to September from 2.9% previously and slightly above consensus forecasts. The Euro-zone Sentix investor confidence index weakened slightly to -10.0 for November from -8.3 previously, although slightly better than consensus forecasts of -15.0.

Markets conditions were initially contained in Europe, but the mood changes dramatically ahead of the New York open. Pfizer announced that its vaccine candidate had achieved over 90% efficacy based on initial trial results and that it had found no safety concerns. It also stated that the trial could be completed this month and it will look for regulatory approval before the end of this year. Risk appetite surged on the announcement which initially undermined potential defensive dollar demand.

The Euro pushed higher and commodity currencies also posted strong gains. EUR/USD peaked around 1.1920, but was then subjected to a significant correction and the single currency then declined sharply as a wider correction unfolded and US yields moved higher. EUR/USD was also vulnerable to a correction after a sharp run-up from lows near 1.1600 posted on last week’s US election night. As the dollar regained traction, the pair dipped to lows just below 1.1800 before stabilising.

Dallas Fed Kaplan reiterated that the Fed could need to keep rates at zero for another two years while Cleveland head Mester stated that there is more than that can be done to provide further monetary easing. The dollar edged lower on Tuesday with risk conditions remaining a key focus as EUR/USD traded around 1.1830.

Global equity markets moved sharply higher following the Pfizer vaccine announcement and there was also a notable increase in US bond yields. The 10-year yield advanced to a peak above 0.95%, the highest reading since the third week of March. Defensive demand for the Japanese currency declined sharply as risk appetite strengthened and the dollar secured strong gains as yields moved higher. In this environment, USD/JPY surged to highs above 105.50 after the Wall Street open.

In its latest financial stability report, the Federal Reserve warned that asset prices could decline sharply if the coronavirus outbreak is not contained. Business debt has increased sharply and the ability to service debt has weakened while loan defaults are liable to increase.

Political developments will continue to be watched closely with President Trump attempting to prevent Pennsylvania from certifying their election result while the Biden camp increased pressure for the transition process to be started.

Japanese economy minister Nishimura stated that the government is drawing up a further economic package. There was a slightly more cautious tone in Asian trading on Tuesday with a limited correction in equities and USD/JPY edged back below the 105.00 level before gaining ground again as US equity futures pared losses.

Markets continued to monitor trade talks closely during the day with negotiators facing a critical week ahead. The main focus, however, was on global risk conditions and the positive vaccine news. Sterling moved sharply higher on the news with GBP/USD strengthening to 2-month highs above 1.3200. There was a sharp reversal in New York as the dollar rebounded, although the Euro still posted net losses against the UK currency.

Any move towards a vaccine should help underpin Sterling sentiment, especially given the extent of economic damage. There were still underlying concerns surrounding the UK economic outlook and medium-term financing pressures with coronavirus restrictions remaining in force in the short term.

GBP/USD dipped to around 1.3120 before regaining ground while GBP/EUR rallied to above 1.1140 amid hopes for a trade deal.

As expected, the House of Lords defeated the Internal Markets Bill and it will return to the House of Commons. The government has insisted that the controversial clauses will be re-instated.

BRC sales data recorded a 5.2% year-on-year increase for October with an element of stock building while Barclaycard recorded a 0.1% annual decline in consumer spending. UK unemployment jobless claims count declined 30,000 for October, but payrolls declined slightly for the month while unemployment increased to 4.8%.

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