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By XE Market Analysis November 18, 2020 4:54 am
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    XE Market Analysis: Europe - Nov 18, 2020

    The dollar maintained a soft tone, posting fresh lows against the yen and the pound, while holding above Tuesday lows against the euro and others. The Australian dollar saw intraday weakness before recovering. A degree of caution has crept back in after recent strong gains in world stock markets, which propelled the MSCI World Index to a record peak, though commodities are generally firmer, particularly metals, with aluminium prices, for instance, extending recent solid gains in posting the highest levels seen since late 2018. The gains in metals are both a negative for the dollar and a positive for the Aussie dollar. A key factor influencing has been recent data from China showing its economy is in stronger than recently anticipated shape. Disrupted copper supply out of Peru, which is the world's number two copper producer, along with the launch of an international copper contract in China, are other factors. As for stock markets, investors will be grappling with increased optimism for a vaccine-assisted route out of Covid-related restrictions versus the prospects for a tough winter in Europe and North America, though the potent mix of low interest rates for the foreseeable future, quantitative easing, fiscal stimulus and the prospect for more, spare capacity (which maintains low costs), and the vision of a return to normalcy in 2021, suggests there is more to come from the rally in cyclical assets. This in turn would be negative for the dollar. Among currencies today, the DXY dollar index, after closing in New York at 92.42, drifted lower and matched yesterday's nine-day low at 92.27, while EUR-USD lifted to an intraday high at 1.1885, which is 10 pips shy of yesterday's nine-day high. USD-JPY racked up a fifth consecutive down day in posting an eight-day low at 103.85. The yen also gained against other currencies. EUR-JPY and AUD-JPY, for instance, also hit nine-day lows. Cable posted a one-week high at 1.3281. AUD-USD lifted to a high at 0.7310 after earlier posting a two-day low at 0.7272. USD-CAD matched yesterday's high at 1.3138. Oil prices have been trading with little direction.

    [EUR, USD]
    EUR-USD lifted to an intraday high at 1.1885, which is 10 pips shy of yesterday's nine-day high. We retain a bullish long-term view on the pairing, which is underpinned by a bearish long-term view on the dollar, which in turn 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 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, though tighter restrictions are now being imposed in sizeable parts of the U.S., including California. It's shaping up to be a tough winter in the northern hemisphere. The dollar may still decline during this period. Low interest rates and expectations for an extended period of ongoing low rates (which enhances corporate earnings), spare capacity (which maintains low corporate costs), big fiscal and monetary stimulus globally (albeit delayed in the U.S.), and confidence in the vaccine escape route out of the Covid crisis in 2021, is a potently bullish mix for stock markets, which in turn should be a dollar negative.

    [USD, JPY]
    USD-JPY racked up a fifth consecutive down day in posting an eight-day low at 103.85. The yen also gained against other currencies. EUR-JPY and AUD-JPY, for instance, also hit nine-day lows. The yen's proclivity to inversely correlative with global stock market direction has once again become apparent.

    [GBP, USD]
    Cable posted a one-week high at 1.3281.The 10-week high seen last Wednesday is at 1.3310. EUR-GBP edged out a six-day low at 0.8944. The pound also posted a six-day high versus the Australian dollar, before reversing gains on the back of a bounce in the Aussie. Sterling still remains lower against the other main currencies from week-ago levels, and is firmer from month-ago levels. On the year to date, the UK currency continues to register as the weakest of the main currencies due to UK having witnessed the biggest peak-to-trough GDP drop this year out of the G20 economies, alongside Brexit related uncertainties. The Brexit endgame drama is now reaching a climax. There is a lot of noise coming from officials and politicians, yet little response in the pound, with participants uncommitted, waiting on concrete developments. 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." But, all is not rosy, as was always going to be the case at this critical juncture. Media sources are highlighting fears that France of Spain could veto an deal agreed between Brussels and London, which elicited a reply from a spokesperson for PM Johnson asserting that the UK would "thrive" without a deal. We expect that win-win and not lose-lose will prevail and that an accord will be reached, and one potentially broader than is currently being anticipated in markets (Johnson has the pragmatic option of leaving the single market in close alignment with EU rules while pledging to Brexit ideologues in his party that the UK will diverge from EU rules over time). This would spark a rally in the pound should it materialise.

    [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 dropped back under 1.3100 after matching yesterday's high at 1.3138. Buoyant oil prices have given the Canadian dollar an underpinning. The OPEC+ group is considering extending the prevailing level of output quotas for three months (out to next March), and a six-month extension is also a possibility, aiming to support oil prices over a sustained period of relatively low demand as a consequence of Covid-19 related restrictions around the world. The group estimates that a six-month extension would swing the oil market back into deficit (i.e. a supply deficit) in 2021. Add in the increased optimism for a vaccine-assisted route out of the prevailing Covid situation, this sets oil up for a sustained rally. USD-CAD has been trending lower since March, and we anticipate there is more to come. The current trend low is at 1.2928, which was seen last week, and which was the lowest level the pair has seen since October 2018.

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