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By XE Market Analysis November 19, 2020 3:56 am
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    XE Market Analysis: Europe - Nov 19, 2020

    The pound and euro posted respective two- and three-day lows against the dollar as anxieties about Brexit took hold, although magnitude of movement has been limited so far. Both currencies posted 10-day lows versus the yen, though fared better against the dollar bloc currencies with global stock markets and commodity markets seeing cautious trading after recent strong gains. The pound itself underperformed relative to the euro, which saw EUR-GBP lift to a 0.8958 high, which reversed most of the decline seen yesterday. Neither the UK or EU has blinked as trade negotiations go right down to the wire, while there are reports that Brussels bureaucrats are fretting there won't be sufficient time to ratify a deal before the January-1 deadline and news that the EU is drawing up emergency no-deal plans today. An EU diplomatic source cited by the Sun tabloid said that the two sides are "nowhere near" an agreement over fishing rights and said they there had "gone backwards" on agreeing common standards, adding that talks can only continue to mid next week before "time will get the better of us." While the drama is imparting downside bias on the pound and euro, both currencies, and especially the sterling, would be considerably lower if markets were committed to pricing in a no deal scenario. Bigger picture market participants are preferring to wait on concrete developments, though near-term speculators are starting to prod the pound lower now. We expect that win-win will prevail rather than lose-lose, and that an accord will be reached.

    [EUR, USD]
    EUR-USD ebbed to a three-day low at 1.1832, and EUR-JPY posted a 10-day low, with the common currency being affected by the lack of a breakthrough in future relationship negotiations between the EU and UK, with time now fast running out if there is to sufficient time for the ratification process ahead of the UK's exit from the single market and customs union on January 1. The euro still managed to lift against the pound, with the latter underperforming given the asymmetrical impact that a no deal scenario would have on the UK economy relative to the eurozone economy. EUR-USD has once again turned lower after approaching the 1.1900 level. The pair has consistently failed to sustain gains above this level for almost four months now, reflecting a near to equilibrium stasis. Interest rates are near zero in both the U.S. and eurozone, and both the Fed and ECB are pursuing aggressive monetary easing policies. A higher inflation rate in the U.S. means that the real interest rate in the U.S. is lower than in the eurozone. The U.S. is beating the eurozone on growth, but the eurozone is running a trade surplus relatively the the trade deficit in the U.S. The U.S. depends on capital inflow to fund its current account deficit, while the eurozone runs a strong balance of payments position. Overall, a picture of countervailing forces among these key metrics of exchange rate determination. We still retain a bearish long-term view on the dollar, which 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 considerations.

    [USD, JPY]
    USD-JPY has found a footing after a five day run lower, which left a 10-day low at 103.64. The yen, meanwhile, has seen 10-day highs against the euro and pound, which have underperformed on Brexit related concerns.

    [GBP, USD]
    The pound posted two- and 10-day lows against the dollar and yen, respectively, as anxieties about Brexit took hold. The euro was also pressured, though pound underperformance saw EUR-GBP lift to a 0.8958 high, which reversed most of the decline seen yesterday. Neither the UK or EU has blinked as trade negotiations go right down to the wire, while there are reports that Brussels bureaucrats are fretting there won't be sufficient time to ratify a deal before the January-1 deadline and news that the EU is drawing up emergency no-deal plans today. An EU diplomatic source cited by the Sun tabloid said that the two sides are "nowhere near" an agreement over fishing rights and said they there had "gone backwards" on agreeing common standards, adding that talks can only continue to mid next week before "time will get the better of us." While the drama is imparting downside bias on the pound and euro, both currencies, and especially the sterling, would be considerably lower if markets were committed to pricing in a no deal scenario. Bigger picture market participants are preferring to wait on concrete developments, though near-term speculators are starting to prod the pound lower now. We still expect that win-win will prevail rather than lose-lose, and that an accord will be reached.

    [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 lifted back above 1.3100 after yesterday posting an eight-day low at 1.3032. Oil prices came off the boil as investor sentiment turned more cautious after recent strong gains in cyclical assets. We remain bearish of USD-CAD. 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 in oil. 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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