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By XE Market Analysis November 9, 2020 4:43 am
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    XE Market Analysis: Europe - Nov 09, 2020

    The dollar has posted fresh trend lows, continuing last week's weakening theme. It's notable that the dollar has continued to decline despite Friday's unambiguously solid U.S. jobs report and that it has remained heavy in the new week, which is revelatory of where sentiment is with regard to the U.S. currency. The ongoing dollar weakness has hinged on ongoing risk-off positioning in global markets, which has been lifting stock markets and most commodity prices. Markets are discounting a Biden presidency with a split congress, and most seem to be anticipating that Trump's litigation efforts will come to naught. The Democrats failure to dominate the election has evidently been a relief for markets, given the implication for tax policy and regulation. Incoming economic data, meanwhile, have continued to help bolster investor spirits. Not least is the strong trade data out of China, which showed exports rising 11.4% y/y and imports rising 4.7% y/y in October. Both readings were above consensus forecasts, and China's trade surplus is now 50% bigger than when Trump took office in 2017. At the same time Trump waged his trade war with China, Beijing worked on reaching an agreement with ASEAN countries, along with Japan and South Korea, in joining the Regional Comprehensive Economic Program. The positive benefits of this to China has offset the negative impacts of the trade war with the U.S. Japan's Tankan survey of business sentiment for November showed improvement with both the manufacturing and non-manufacturing headlines rising to 1-13 readings, up from -26 and -16, respectively, from October headlines. In currencies, the DXY dollar index printed a two-month low at 92.13. EUR-USD posted an eight-week high at 1.1899. USD-JPY, in contrast, managed to lift moderately, back above 103.50, leaving last week's eight-month low at 103.17 unchallenged. Japanese fiance minister said that policymakers there are watching forex markets with a sense of "urgency." China's yuan lifted in what is now its sixth consecutive week of gain, posting its highest level against the dollar since June 2018, and making fundamental sense given the strength of China's balance of payments position. AUD-USD lifted above 0.7300 for the first time in seven weeks. USD-CAD posted a two-month low at 1.3002.

    [EUR, USD]
    EUR-USD posted an eight-week high at 1.1899. Broad dollar weakness has continued to underpin. It's notable that the dollar has continued to decline despite Friday's unambiguously solid U.S. jobs report and that it has remained heavy in the new week, which is revelatory of where sentiment is with regard to the U.S. currency. The ongoing dollar weakness has hinged on ongoing risk-off positioning in global markets, which has been lifting stock markets and most commodity prices. Markets are discounting a Biden presidency with a split congress, and most seem to be anticipating that Trump's litigation efforts will come to naught. The Democrats failure to dominate the election has evidently been a relief for markets, given the implication for tax policy and regulation. Negative real interest rates and yields in the U.S. and the Fed's lower-for-longer monetary policy rubric is a dollar weakening fundamental, though in the case of EUR-USD there are some countervailing forces at play, including the Covid restrictions in Europe, along with the ECB's intensified dovish lean, including an explicit mention of the exchange rate in recent signalling given the undesired tightening effect of an ascending euro on real interest rates in the Eurozone. The reported mutation of the Covid-19 virus in Danish mink farms, which has spread to humans, is something to pay close attention to. If it's not contained, the risk is that it will render prevailing vaccine candidates worthless. For these reasons, along with a possible reluctance for participants to establish fresh dollar short exposures after a sizeable decline, suggests there is a risk EUR-USD will correct.

    [USD, JPY]
    USD-JPY, in contrast to most dollar pairs, managed to lift moderately in early-week trading in Asian markets. The pair lifted back above 103.50, leaving last week's eight-month low at 103.17 unchallenged. Japanese fiance minister said that policymakers there are watching forex markets with a sense of "urgency," while ongoing risk-on positioning in global markets has seen the Japanese currency weaken against most currencies today.

    [GBP, USD]
    The pound has rallied against the dollar, while holding steady against the euro and weakening against the dollar bloc currencies. Brexit remains in sharp focus, with this week in theory being the last week for the EU and UK to reach an accord on trade. Brussels has stated that an agreement needs to be in place by November 15 for there to be sufficient time for ratification before the UK exits the common market and customs union on January 1. The House of Lords is this week set to vote in favour of removing markets of the government's controversial internal markets bill that would give the UK power to unilaterally overwrite parts of the EU withdrawal agreement. We have been expecting Boris Johnson's government to accept this, seeing the bill as being a negotiating ploy. Reports have continued to highlight that the principal two sticking points remain fishing rights and state aid rules. Given the win-win and lose-lose choice that confronts both sides, the incentive to reach a deal is there (while a narrow free trade deal may leave both sides with worse terms of trade compared to the prevailing arrangement, a no deal would still be much worse than a narrow deal). There have been signs that a compromise is possible in the case of fisheries, and a doable walk around in the case of level playing field rules, but the problem so far is that neither side has been willing to the first mover in the concession game, presumably for fear of showing weakness. The bearing down of a final deadline should break the stand-off. The pound would likely rally on news of a breakthrough, although not by much unless the deal is broader than the narrow agreement that most anticipate. The UK's National Audit Office last week warned of "significant" border disruption in January, even in the event that a deal has been made.

    [USD, CHF]
    EUR-CHF has dropped back under the 1.0700 after a brief foray above last week. 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 posted a two-month low at 1.3002. A mix of U.S. dollar and strength in the Canadian dollar have continued to drive the pair lower. The pair has been down trending since March. Strong October trade data out of China helped maintain risk-on positioning in global markets today, while October jobs data out of both the U.S. and Canada were stronger than expected. This, along with Covid vaccine hopes, has helped markets look beyond the prevailing challenges being caused by pandemic-related restrictions in major economies, particularly in Europe. WTI front-month oil futures rallied to a high at $38.38, which reversed most of the sizeable decline that was seen on Friday. The annual Adipec conference starts today, and is likely to seen members of the OPEC+ group of oil exporting nations affirm that they will refrain from relaxing output quotas due to the demand destruction being caused by the lockdowns in major European economies. The lockdowns, it should be noted, are much less restrictive that the first lockdowns earlier in the year.

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