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By XE Market Analysis November 4, 2020 4:07 am
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    XE Market Analysis: Europe - Nov 04, 2020

    Risk aversion on a closer than expected U.S. election, along with Trump agitating the process with claims that his rivals are attempting to manipulate the results, has driven the dollar higher on a safe haven bid, while U.S. Treasuries have surged, driving the 10-year T-note yield down by 12 bp. The DXY dollar index rose by over 0.7% in making a high at 94.30. The S&P 500 E-mini has also racked up a 1% decline, reversing over half of the gain that the cash version of the index saw on Wall Street yesterday. There is potential for the U.S. to be in limbo for days as the closeness of the race means a drawn-out process of vote counting. Political pundits warned ahead of the election that if Biden won a close contest, the risk of Trump formally contesting the outcome would rise. This backdrop should keep the risk-off positioning theme in play, unless there is any clear-cut outcome. The Democrats are looking set to retain their dominance in the House, though it's looking less certain that they will flip the Senate. Elsewhere among currencies, EUR-USD has seen volatile price action, dropping sharply from levels in the mid 1.1700s to a 1.1605 low before recouping to the mid 1.1600s. The pair still remains down by around 0.5% on the day. The biggest currency losers include the Australian dollar, which is down by over 1%, and the likes of Mexican peso, which is showing a 3% loss, and South African rand, which is nearly 2% lower versus the U.S. dollar. The yen has been mixed, losing ground to the dollar while holding steady versus the euro and gaining on the more risk-sensitive, higher beta currencies. Amid all this, the pound has been underperforming peer currencies, that is the euro, dollar, yen, and others. Cable dropped over 1% to a 1.2915 low while EUR-GBP rallied out of two-month lows and back above the 0.9000 level. We have been earmarking sterling as being a currency at particular risk given the upcoming drop in the UK's terms of trade when the country exits the single market and customs union, the impact of which will be compounded by Covid lockdowns in the UK and across Europe.

    [EUR, USD]
    EUR-USD has seen volatile price action, dropping sharply from levels in the mid 1.1700s to a 1.1605 low before recouping to the mid 1.1600s. The pair still remains down by around 0.5% on the day, with the dollar retaining an underlying safe haven bid. Risk aversion on a closer than expected U.S. election, along with Trump agitating the process with claims that his rivals are attempting to manipulate the results, has driven the dollar higher. U.S. Treasuries have surged, driving the 10-year T-note yield down by 12 bp. The DXY dollar index rose by over 0.7% in making a high at 94.30. The S&P 500 E-mini has also racked up a 1% decline, reversing over half of the gain that the cash version of the index saw on Wall Street yesterday. There is potential for the U.S. to be in limbo for days as the closeness of the race means a drawn-out process of vote counting. Political pundits warned ahead of the election that if Biden won a close contest, the risk of Trump formally contesting the outcome would rise. This backdrop should keep the risk-off positioning theme in play, unless there is any clear-cut outcome. The Democrats are looking set to retain their dominance in the House, though it's looking less certain that they will flip the Senate. As things stand, however, Biden is still favourite to win the Presidency, and it is still conceivable that the Democrats could take the Senate.

    [USD, JPY]
    The yen has been mixed, losing ground to the dollar while holding steady versus the euro and gaining on the more risk-sensitive, higher beta currencies. Japan's surplus economy, where yield-seeking domestic investors are apt to invest in foreign assets during times of confidence, but repatriate funds when times are uncertain, has established the yen as a low-beta haven currency.

    [GBP, USD]
    The pound has been underperforming peer currencies today, that is the euro, dollar, yen, and others. Cable dropped over 1% to a 1.2915 low while EUR-GBP rallied out of two-month lows and back above the 0.9000 level. We have been earmarking sterling as being a currency at particular risk given the upcoming drop in the UK's terms of trade when the country exits the single market and customs union, the impact of which will be compounded by Covid lockdowns in the UK and across Europe.

    [USD, CHF]
    EUR-CHF has dropped back under the 1.0700 after a brief foray above. Risk-off positioning and recent weakness in the euro, which has been concomitant with the ECB levelling-up monetary accommodation, has been weighing on the cross. The ECB's policy course has been in effect supplementing the Swiss currency's chronic firming bias by weakening the euro, with the EUR-CHF cross being a proxy of the franc's trade-weighted exchange rate. The franc has a fundamental underpinning rooted in Switzerland's strong balance of payments position, which features a large current account surplus to GDP. Switzerland also has the status of having the second highest GDP per capita in the world. While the SNB implements a punishing -0.75% deposit rate, real interest rates are still lower in the U.S. than they are in Switzerland, which is mathematically bearish for the nominal USD-CHF exchange rate, all else equal -- and albeit very modest. Unlike most central banks, the SNB explicitly incorporates the franc into monetary policy to ward off speculative purchases of the currency, which would impart deflationary forces (via cheaper imports) with the consequential impact of an unwelcome tightening in real interest rates. The central bank stated at its last quarterly monetary policy review that the franc remains "highly valued" and said it is ready to "intervene more strongly in the foreign exchange market."

    [USD, CAD]
    USD-CAD has been seeing whippy price action, surging back higher today after dropping sharp over the previous two days. The pair hit a rebound high earlier at 1.3299, which is the culmination of a 2 big figure rally from a two-week low at 1.3093. The closer than anticipated U.S. election, which could leave the country in political limbo for days on extended vote counting, along with Trump threatening to contest the result should Biden be declared the victor, has inspired risk-off positioning in global markets, which is naturally a bearish force for the Canadian dollar and other commodity currencies. Oil prices have dropped back from one-week highs, with the developments in the U.S. serving to end the recent surge out of five-month lows. WTI benchmark crude prices, at $37.70, still remain up by around 12% from the recent low, but down by nearly 10% from the highs that were seen a couple of weeks ago, before many European nations implemented much more restrictive Covid countermeasures, leading to national lockdowns in the UK, France and Germany. For now, USD-CAD is likely to trade with a prevailing bias to the upside.

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