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By XE Market Analysis November 5, 2020 3:09 pm
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    XE Market Analysis: Asia - Nov 05, 2020

    The Dollar was largely range-bound through the N.Y. session, after broadly losing ground overnight. The USD was steady following the FOMC announcement, where no tweaks to policy were made, as widely expected. The greenback had fallen sharply the past two-sessions, as prospects for a split Congress supported risk-taking levels, putting pressure on the safe-haven USD. Equities have been happy with the potential for no increase in regulation or massive tax hikes under a divided Congress. With U.S. real interest rates in negative territory and the Fed's "lower for longer" stance on rates, The Dollar may be headed lower for the foreseeable future, especially if massive further borrowing is needed in the form of Covid stimulus. The Fed's statement was pretty much unchanged from the prior statement, and the Committee reiterated it is committed to using its full range of tools to support the economy. The FOMC said it is prepared to adjust policy "as appropriate if risks emerge.

    [EUR, USD]
    EUR-USD ran up to near a two-week high of 1.1860, hitting its peak in early N.Y. trade, before easing back to 1.1791. The pairing had touched a 1.1711 in Asian dealings. Risk-on conditions seen since Tuesday have weighed on the USD broadly, while the sharp drop in Treasury yields versus EGBs has been a factor as well. Increasing Covid lockdowns throughout the Continent, however, should limit Euro upside potential going forward. Late October daily peaks between 1.1861 and 1.1881 marks solid EUR-USD resistance now.

    [USD, JPY]
    USD-JPY broke lower to a near eight-month base of 103.57. Yield differentials appeared to be a driver, with the 10-year T-note yield differential over the 10-year JGB yield dropping by about 14-15 bp from levels seen ahead of U.S. election earlier in the week. Taking into account the 1%-plus inflation rate in the U.S. and the currently negative inflation rate in Japan, and the impact on the real yield differential is slightly magnified. USD-JPY has been trending lower since June from levels above 109.00 with fairly steady momentum. The 10-year real constant maturity Treasury yield has declined over this period, and at the most recent indicated level of -0.86% (from yesterday) is exactly 50 bp down on the peak seen on June 4th, and is down by 94 bp from the 2020 opening level on January 2. The real 10-year JGB yield has been comparatively steady, with the diverging differential weighing on USD-JPY. USD-JPY's break below 104.00 triggered stop loss and option-related selling, according to market buzz.

    [GBP, USD]
    Cable headed higher in N.Y. after some whippy price action in the wake of the BoE announcement. The BoE expanded gilt purchases by 150 bln pounds -- 50 bln more than markets had been anticipating. Markets welcomed the BoE's more aggressive than anticipated increase in stimulus, which has helped feed the prevailing risk-on theme in global markets. GBP-USD, assisted by a broadly softer dollar, posted a high at 1.3135, up from overnight lows of 1.2932. The BoE left the repo rate unchanged at 0.1%, as had been widely expected while signaling it is ready to expand asset purchases again, if necessary. The BoE stressed that the outlook remains "unusually uncertain," dependent on the evolution of the pandemic and measures taken to protect public health, alongside the nature of, and transition to, the UK's new trading relations with the EU.

    [USD, CHF]
    The Swiss franc has been trading with a firming bias, consistently rebounding from bouts of weakness in recent months and driving the EUR-CHF cross to levels under 1.0700 last week for the first time in three months. Markets are anticipating revamped monetary easing measures from the ECB while factoring in Brexit risk. The franc has a proclivity to ascend on the back of its balance of payments position. The SNB stated at its quarterly monetary policy review last month that the franc remains "highly valued" and said it is ready to "intervene more strongly in the foreign exchange market."

    [USD, CAD]
    USD-CAD traded to two-month lows of 1.3029, down from overnight highs near 1.3140. The move lower has come on a combination of a broadly weaker USD, a risk-on backdrop, and oil prices maintaining altitude near one-week highs. Market hopes for a split U.S. Congress have kept equities on the boil, which has weighed on the Greenback overall. USD-CAD support now comes at the September 1 low of 1.2994. Focus will shift to Friday when both the U.S. and Canada October employment reports are due.

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