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By XE Market Analysis November 13, 2020 4:19 am
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    XE Market Analysis: Europe - Nov 13, 2020

    Narrow ranges have been ensuing, with a theme of yen firmness amid a backdrop of softening stock markets. Market narratives are loaded with the 'fading Covod-19 vaccine rally' phraseology due the rollout logistics and time frame. The IEA said that a Covid vaccine won't likely boost the oil market until late 2021, for instance. Pfizer's production of a workable vaccine, with a high efficacy rate, has given investors the ability to see across the valley of restrictions and lockdowns in major economies, but the valley appears to be a wide one. Any successful candidate vaccine at this stage will also come with long-term efficacy and population-wide safety unknowns. To take a different angle, it's worth highlighting that the all-cause excess mortality rate in Europe is remaining in-line with seasonal norms, contrasting the picture being thrown up by the Covid-specific mortality rate. The explanation is that Covid is replacing other causes of death, rather that increasing excess deaths (as it did earlier in the year), with other causes showing a marked decrease in expected mortality rates. There also appears to be greater awareness about the false positive risk in Covid testing, and there is speculation that a recent sharp drop in positive cases in Ireland, for instance, may be due to the implementation of a stricter testing regime, including follow-up testing of individuals with initial positive test results. The scientific school of thought that argues that Covid is already endemic in the population, at least in Europe and North America, also argues that Covid's impact, as measured by ICU admissions and mortality, will be much less than before. This is hardly the consensus view at this time, but worth being aware of. Among currencies, EUR-USD settled in the lower 1.1800s. The pound rebounded moderately after underperforming yesterday. Cable lifted to levels near 1.3150, up on the one-week low seen yesterday at 1.3105. USD-JPY dipped to a three-day low at 104.86, weighed on by gains in the Japanese currency. Most yen crosses were heavy, too. USD-CAD lifted for a fourth consecutive day, posting an eight-day high at 1.3170. Oil prices fell by over another 1.5% in the WTI benchmark market, and are down by over 6% from high seen earlier in the week, which weighed on the oil correlating currencies. The IEA said that oil demand will fall more than it previously envisioned.

    [EUR, USD]
    EUR-USD has settled in the lower 1.1800s. In posting a low at 1.1745 earlier in the week, the pair completed a more-than 50% retrace of the outsized gain the pair saw last week through to Monday. We retain a bullish long-term view on the pairing, which is underpinned by a bearish long-term view on the dollar, though this critically hinges on risk appetite holding up in global markets. The dollar's real effective exchange rate (as calculated by the BIS) remains at historically rich levels, and we expect broad declines in the U.S. currency over the longer term as investors seek higher yield opportunities around the world. The Fed's inflation-tolerant lower-for-longer policy rubric, and negative real interest rates in the U.S., are also considerations. As for the euro, the prevailing predicament of Covid-related restrictions and the impact on growth and ECB policy are, of course, not too conducive to a high-conviction bullish view of EUR-USD, and accordingly this restrains our view about EUR-USD upside possibilities. This could change as and when signs appear that the Covid crisis will be overcome. The recent first joint EU offering of social bonds, which will finance a jobs program, both attracted foreign capital and shored up the reputation of the euro, and there are more issues to come.

    [USD, JPY]
    USD-JPY dipped to a three-day low at 104.86, weighed on by gains in the Japanese currency amid a backdrop of softening stock markets. Yen crosses have remained heavy, and AUD-JPY, a recent outperformer, posted a fresh correction low. Market narratives are loaded with the 'fading Covod-19 vaccine rally' phraseology due the rollout logistics and time frame. The IEA said that a Covid vaccine won't likely boost the oil market until late 2021, for instance. Pfizer's production of a workable vaccine, with a high efficacy rate, has given investors the ability to see across the valley of restrictions and lockdowns in major economies, but the valley appears to be a wide one. 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, gives the yen its low-beta haven currency profile.

    [GBP, USD]
    The pound rebounded moderately after underperforming yesterday. Cable lifted to levels near 1.3150, up on the one-week low seen yesterday at 1.3105, while EUR-GBP dipped back below the 0.9000 level. The EU and UK remaini in deadlock. Sources cited by Reuters this week reported that the 'final-final' deadline is the end of next week, so the clock is ticking. The general expectation remains that there will be a last minute climbdown and the two sides will strike a deal, which is what we anticipate. Presumably, the pound would be a lot lower from prevailing levels if this was not the case. Fishing rights and level playing field rules remain the principal sticking points. Both sides will have to make concessions if a deal is to be achieved. All things Brexit go down to the wire, and neither side has been willing, as yet, to make the first move in the concession game. An EU diplomat cited by BBC reporter said that "the only thing moving is time" at the moment. Too much is at stake, surely, for there to be a failure in statesmanship. It should also be clear that the UK government has the option of exiting the common market in close alignment to EU rules and then diverging in an evolving process over time. The promise of future divergence would serve to mollify the powerful faction of Brexit ideologues. UK media, meanwhile, are increasingly highlighting the likely disruptive impacts to cross border trade that are likely to be seen when the UK leaves the single market and customs union in just seven weeks time. UK data yesterday showed a record 15.5% q/q rise in Q3 GDP, though this was below the consensus forecast and hardly surprising following the lockdown-driven 19.8% q/q contraction in Q2. GDP data is backward locking at the best of times, and more especially now given fast change realities, with UK back in lockdown and heading into the make-or-break stage of the Brexit endgame.

    [USD, CHF]
    EUR-CHF rallied this week from sub-1.0700 levels to levels above 1.0800. Coursing risk-on positioning weighed on the Swiss franc with investors factoring in a sea change in optimism about a vaccine solution to Covid-19. 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 lifted for a fourth consecutive day, posting an eight-day high at 1.3170. Oil prices fell by over another 1.5% in the WTI benchmark market, and are down by over 6% from high seen earlier in the week, which weighed on the oil correlating currencies. The IEA said that oil demand will fall more than it previously envisioned, and that a Covid vaccine won't likely boost the oil market until late 2021. Despite this, we expect further downside in USD-CAD, given the level of stimulus in the works around the world, increased ability to live with and work around the Covid virus (the lockdowns in Europe being much less restrictive than before, and the second dip in the expected double dip recession is likely to be much shallower than the first time around). The all-cause excess death rate is also remaining within seasonal norms in Europe, which markedly contrasts the picture when Covid-19 first struck.

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