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By XE Market Analysis December 4, 2020 2:15 pm
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    XE Market Analysis: Asia - Dec 04, 2020

    The DXY printed fresh 32-month lows of 90.48 in early N.Y. trade on Friday, posting its eighth-consecutive lower daily low in the process. Risk-on conditions prevailed, resulting in some USD selling, though the major driver of recent USD losses appeared to be Covid vaccine hopes, where widespread distribution over the next few months is expected to see the global economy return to near-normalcy, likely to benefit emerging market economies the most. As a result, repositioning into emerging currencies and out of the Dollar will likely remain a feature. In addition, the Fed's lower for longer stance, negative real U.S. interest rates, and the potential for more fiscal and monetary stimulus should combine to keep the Greenback capped. Incoming U.S. data was not supportive of the USD either, as the November non farm payroll print missed expectations, though earnings and the unemployment rate were better than forecasts. The Dollar recovered modestly in late morning, with pre-weekend short covering stepping in.

    [EUR, USD]
    EUR-USD posted new near 32-month highs of 1.2178 into the N.Y. open, later fading to 1.2132 lows on pre-weekend profit taking. The pairing printed eight-consecutive higher daily highs as of Friday, prompting a bit of USD short covering. The overall outlook for the USD remains grim however, which is expected to remain under pressure into 2021, as global economies are likely to rebound sharply one Covid vaccines are rolled out. Given current high U.S. equity valuations, and negative real interest rates, market talk has recently been focused on the potential for outperformance in some emerging economies, which would add weight to the dollar as assets are reallocated around the world.

    [USD, JPY]
    USD-JPY bottomed at 103.82 after the softer U.S. jobs report, later rallying to 104.24 highs into the London close on pre-weekend profit taking. With both the USD and JPY considered safe-haven currencies, scope for major USD-JPY directional move should remain limited, as both tend to move in the same direction, depending on the risk backdrop. Negative U.S. real interest rates, along with the Fed's lower for longer stance, and perhaps more asset buying in the cards, along with hopes for fiscal stimulus do not bode well for the USD for now, and while we look ahead to 2021, widespread vaccine distribution should open up economies, and keep equity markets on the rise, particularly those of emerging markets, another USD negative.

    [GBP, USD]
    Cable printed a 31-month high of 1.3540 in early N.Y. trade, later consolidating near 1.3480 after the London close. News that a deal between the EU and UK is "imminent", at least according to an EU source cited by Reuters, was the driver of Sterling gains. The relatively steady performance of the pound in recent weeks and months reveals that the consensus market view for a narrow trade deal to be reached has been unwavering during the Brexit endgame thus far. Any concrete news of a deal would be a near-term positive for the pound, especially given the UK economy, having underperformed G20 peers during the pandemic, is widely seen to benefit most in the vaccine-assisted route back to a post-Covid normalcy.

    [USD, CHF]
    EUR-CHF steadied in the low 1.08s on Friday. Positive Covid vaccine news, along with the formal start of the transition to a Biden presidency, turned sentiment higher last week, largely keeping the cross over the 1.08 level. EUR-CHF had struggled to hold the level since the summer, and will likely remain altitude limited going forward unless the risk-backdrop holds up. In addition, the cross will remain under pressure should the ECB embark on further easing in December.

    [USD, CAD]
    USD-CAD fell to fresh two-plus year lows of 1.2785 from 1.2860 following the twin U.S./Canada employment and trade reports. The Canada jobs report beat expectations, while on the U.S. side, NFP were light of consensus forecasts. Canada's trade deficit was a bit wider than expected, which likely mitigated CAD gains to a degree. Oil prices remain CAD friendly, with WTI crude trading briefly to nine-month highs of $46.68 overnight, as OPEC agreed to extend the bulk of agreed production caps at least through January 2021. Firmer oil prices will keep USD-CAD gains capped for now. The next downside USD-CAD target comes at 1.2782, which was the early October, 2018 base.

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