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By XE Market Analysis November 5, 2020 4:39 am
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    XE Market Analysis: Europe - Nov 05, 2020

    The dollar majors have been seeing relatively narrow ranges so far today, despite global stock markets rallying and sovereign bond yields, led by U.S. Treasury yields, tumbling. Markets are discounting a Biden presidency and a split Congress. Although Democrats still have a narrow path to taking control of the Senate (there is a 48 versus 48 deadlock currently, with four seats left to be decided), most political pundits think it unlikely. At the same time Biden is the favourite to win the presidency, although there is still some way to go before vote counting will be complete, while Trump is mounting legal challenges. The general view is that Biden will reach the 270 winning electoral college vote threshold (he's currently at 264 to Trump's 214), and that Trump's litigation efforts will come to naught. Without the Senate, the Democrats big fiscal stimulus plans will be kept in check. This means both a reduced prospect for bond issuance and a reduced prospect for inflation, which is why Treasuries have been rallying strongly. The yield on the 10-year T-note has plunged by nearly 17 bp from the high seen just ahead of Tuesday's election. The combo of lower yields, loose labour market conditions, the prospect of less competition for resources from the government, excitement about tech and the growing fad for WFH (work from home) stocks, and prospects for a Covid vaccine are among the factors underpinning Wall Street. The S&P 500 closed with a 2.2% gain yesterday, and S&P 500 E-mini futures are up 1.2% in the overnight session. The implications are more subtle for the currency markets, although the risk-on theme should keep the dollar and yen on a weakening path relative to most other currencies. The DXY dollar index is moderately lower on the day, at 93.26, but remains well with yesterday's range. EUR-USD is about 30 pips up on yesterday's close, still remaining off yesterday's one-week high at 1.1770. The pair is near net unchanged from month-ago levels. USD-JPY has been steady in the mid-to-lower 104.00s. The dollar bloc and other commodity-correlating currencies remain buoyant, although they currently remain off recent highs.

    [EUR, USD]
    EUR-USD gained about 30 pips up on yesterday's close, still remaining off yesterday's one-week high at 1.1770. The pair is near net unchanged from month-ago levels, which speaks of the lack of bigger-picture directional bias. Bearish euro factors, including the relatively high level of Covid-related restrictions in Europe versus the U.S. and the ECB's signalling of stepped up monetary stimulus and its distaste for a higher exchange rate, have been countervailed by the steep drop in U.S. versus Bund yield differentials over the last couple of days.

    [USD, JPY]
    USD-JPY has been steady in the mid-to-lower 104.00s. 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 is showing moderate gains from month-go levels, which can be taken as being revelatory of the market's confidence in the EU and UK reaching a trade deal. The final October UK composite PMI (released yesterday) was unexpectedly revised lower to 52.1 in the headline dragged down by weakness in services, and more specifically in the hospitality, transport and leisure sectors due to Covid-related restrictions. The data had little impact on the pound, which had seen its lows ahead of the release, with market participants already anticipating a double-dip recession as a consequence of lockdown number 2, which starts in England tomorrow and will remain in place for a month, subject to review. 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. The BoE's Monetary Policy Committee has been meeting and will announce later. The consensus expectation is for the BoE to expand its asset purchase program by 100 bln pounds while leaving the repo rate unchanged at 0.1%. With the economy recession bound, the possibility of the BoE taking interest rates negative is also up, and the central bank should at the least raise the emphasis of negative rates as being a policy option rather than just a contingency plan.

    [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 remained heavy but above the two-week low that was see yesterday at 1.3093. The pair saw some relatively extreme price action yesterday in surging by over 2 big figures from the aforementioned low to a 1.3299 peak only to turn sharply lower again. The pair has settled around the 1.3150 mark. Despite the risk-on backdrop, we currently take a neutral view of USD-CAD. While the U.S. dollar has been softening, oil prices are likely to remain heavy, overall, given the demand destruction for oil amid tight Covid restrictions in Europe and some parts of North America. Reopening of oil facilities in the Gulf of Mexico following the passing of a hurricane is another factor. WTI benchmark crude prices at prevailing levels around $38.50, while up by over 14% from the recent low, they remain down by nearly 8% from the highs that were seen a couple of weeks ago, before the likes of German and France announced they were heading back into lockdowns.

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