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By XE Market Analysis November 17, 2020 3:53 am
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    XE Market Analysis: Europe - Nov 17, 2020

    Currencies have been seeing narrow ranges so far today after yesterday's fresh bout of risk-on positioning. The Australian and New Zealand dollars still edged out respective eight-day and eight-month highs, but there wasn't much appetite for follow-through and both currencies ebbed back. Stock markets have came off the boil today in Asia after rallying strongly yesterday, although Japan's Nikkei 225 continued its outperforming streak and posted a new a 29-year high. Yesterday the DJIA and the S&P 500 posted fresh recording closing highs, as die the MSCI World Index. Among currencies, the DXY dollar index has been plying a narrow range just above yesterday's eight-day low at 92.47. EUR-USD has been similarly directionally challenged, holding just off from yesterday's one-week peak at 1.1869. USD-JPY has settled above one-week low seen yesterday at 104.36, which corrected just over a 50% retrace of the strong gains seen last Monday during the initial height of the so-called 'Covid vaccine' global equity market rally. The pound has been trading neutrally, and is showing modest losses versus most peer currencies from week-ago levels but modest gains versus the same currencies from month-ago levels, and registers as the weakness of the main currencies on the year-to-date. The Brexit endgame drama is reaching fever pitch. Neither the EU or UK has blinked yet in trade talks. The UK's trade negotiator Frost said that a a deal could be reached by next Tuesday, while an EU diplomat cited in the Sun tabloid said chiefs are working to avoid and "accidental no deal." Market participants, meanwhile, are not committing, waiting on concrete developments. We expect a deal, and anticipate a rally in the pound as and when this becomes apparent.

    [EUR, USD]
    EUR-USD has been directionally challenged so far today, holding just off from yesterday's one-week peak at 1.1869. We retain a bullish long-term view on the pairing, which is underpinned by a bearish long-term view on the dollar, although this 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 value and growth 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 key considerations. As for the euro, the prevailing predicament of Covid-related restrictions and the impact on growth and ECB policy may be not too conducive to a high-conviction bullish view of EUR-USD, and accordingly this restrains our view about EUR-USD upside possibilities for now. This could change as and when signs appear that the Covid crisis is 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 has settled above one-week low seen yesterday at 104.36, which corrected just over a 50% retrace of the strong gains seen last Monday during the initial height of the so-called 'Covid vaccine' global equity market rally. Stock markets have came off the ball today in Asia after rallying strongly yesterday, which saw the Nikkei 225 hit a 29-year high and the S&P 500 and MSCI World Index hit respective record highs. Japan's Nikkei has been an investor favourite in the 'great rotation' into cyclical stocks, being replete with well managed, large cap and export oriented companies. Dividend yields in Japan are about 2.8%, better than to 2.2% return offered by U.S. companies, according to analysts at Schroders, and are near to the 3.0% dividend return found in many emerging markets. While foreign investor demand for Japanese shares, they may be hedging out the currency exposure given the yen's proclivity for counter-cyclical trending. GDP data out of Japan and industrial production figures out of China yesterday reaffirmed a picture of stronger economic conditions compared to recently prevailing expectations. The mix of low interest rates (which enhances the value of corporate earnings), massive monetary and fiscal stimulus, along with spare capacity (which lowers costs), is a potently bullish tonic for equity markets. This is the recipe for a bubble, but there may be considerably more upside to be see yet.

    [GBP, USD]
    The pound has been trading neutrally, and is showing modest losses versus most peer currencies from week-ago levels but modest gains versus the same currencies from month-ago levels, and registers as the weakness of the main currencies on the year-to-date. The Brexit endgame drama is reaching fever pitch. Neither the EU or UK has blinked yet in trade talks. The UK's trade negotiator Frost said that a a deal could be reached by next Tuesday, while an EU diplomat cited in the Sun tabloid said chiefs are working to avoid and "accidental no deal." Market participants, meanwhile, are not committing, waiting on concrete developments. We expect a deal, and anticipate a rally in the pound as and when this becomes apparent.

    [USD, CHF]
    EUR-CHF has recently rallied 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 edged out a five-day high at 1.3062, though downside momentum abated with global stock markets and oil prices pausing after the strong risk-on positioning theme of yesterday. Oil prices are sharply up on early November lows, but are showing only just over a net 1% gain from month-ago levels, and remain down by over 32% on the year-to-date. Covid restrictions in the U.S., in Europe and elsewhere are keeping a lid on demand for oil, though the increased optimism for a vaccine solution to the pandemic, and massive monetary and fiscal stimulus, should keep cyclical commodities like crude underpinned.

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