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By XE Market Analysis November 24, 2020 4:32 am
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    XE Market Analysis: Europe - Nov 24, 2020

    The dollar bloc and other commodity and cycle currencies have gained amid risk-on positioning in global markets, though many bellwether equity indices and commodities remain off recent trend highs, while Chinese markets fell after recent strong gains. Australia's ASX 200 still rallied to a new eight-month high. EuroStoxx 50 and S&P mini futures posted 0.5%-plus gains. News that President Trump has relented, allowing the Biden transition to proceed has been a tonic for markets. This effectively brings his 16-day protest to an end, and a peaceful transfer of power will now ensue, even though Trump tweeted that he will never formerly concede the election. Further news that former Fed chair Janet Yellen, an 'uber dove' by reputation, is set to be nominated as Biden's Treasury Secretary has also been taken as boding well for fiscal stimulus, though without the Senate, the Democrats ambitions will be dulled. Two run-off elections in Georgia in January will decide who controls the Senate, where it's looking highly likely these will be won by the Republican candidates. In Japan, BoJ Governor Kuroda pledged more stimulus, dependent on there being increased economic impact from Covid countermeasures. A raft of ECB speakers are up today, where dovish signalling can be expected. The Kiwi dollar has outperformed its dollar bloc peers, rallying to a 29-month high against the U.S. dollar on news that New Zealand finance minister is seeking advice on whether to include stability in house prices in the RBNZ remit. House prices are surging in the country, which is something the government is eager to tame. The governor of the central bank, Orr, subsequently said that the central bank already considers asset prices in its policymaking, though a spokesperson said that it will constructively engage with the government on the issue. Markets factored in tighter RBNZ policy than is prevailing now, although the implementation of macroprudential measures, such as tightening mortgage criteria, would be most likely be the way forward. WTI benchmark oil prices hit a three-month high at $43.59. Barclays is forecasting crude prices to reach $50 in 2021.

    [EUR, USD]
    EUR-USD has remained buoyant but capped. A two-week high was printed yesterday at 1.1905 but gains didn't sustain. The pair has consistently failed to sustain gains above the 1.1900 level for almost four months now. Will this time be different? Possibly, but 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. An ongoing rotation out of too-expensive tech stocks would fit this theme. The Fed's inflation-tolerant lower-for-longer policy rubric, and negative real interest rates in the U.S., are also considerations. We think risk-off positioning will continue, and foresee a bubble developing in global stock markets, which while it lasts should be accompanied by dollar weakening. The northern hemisphere is facing an ongoing surge in positive Covid test results, but news from the vaccine front has continued to be encouraging, and rollouts of the Pfizer version could start as soon as December 1 in the UK and by mid December in the U.S. In the meantime, increasingly use of mass testing in some major economies may also free people form self-isolation, while the treatment Covid is continuing to improve. It seems plausible to expect a return to normalcy in major economies by the time the northern hemisphere is heading into summer next year. Massive monetary policy and fiscal stimulus, low interest rates, low inflation, the lower-for-longer interest rate policy commitments at the Fed and other central banks (which enhances the value of corporate earnings), spare capacity (which suppresses corporate running costs), is a potently bullish tonic for stock markets. This in turn, should be bearish for the dollar.

    [USD, JPY]
    USD-JPY has traded moderately softer today, back under the 104.50 level after the pair lifted to a nine-day high at 104.65 yesterday. The above-forecast November PMI data out of the U.S. yesterday provided a reminder of the U.S. GDP growth advantage relative to Japan, and European economies, although with Covid countermeasures tightening in many parts of the U.S., this is now being eroded. The real interest rate differential between the U.S. and Japan is also a mathematical negative for the nominal dollar vs yen exchange rate. Both currencies are still be viewed as safe havens, too, which limits the scope of USD-JPY directional change. Outside the case against the dollar, the yen has been softening, especially against the cyclical currencies, including the dollar bloc. EUR-JPY ascended to one-week high territory, while AUD-JPY and NZD-JPY lifted into respective 12-day and 10-month high terrain. BoJ Governor Kuroda pledged more stimulus today, dependent on there being increased economic impact from Covid countermeasures. The yen's broader performance should continue to hinge on risk appetite in global markets. 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, has established the yen as a low-beta haven currency.

    [GBP, USD]
    The pound has steadied today after being yesterday's biggest gainer out of the main currecies, despite a 50-pip-plus drop in Cable. Dollar gains had driven Cable lower following strong U.S. data, which highlighted a notable growth advantage of the U.S. economy relative to the UK and European economies. Cable clocked a 13-day high at 1.3399 Taking a step back, the pound is showing an average gain of about 1% against the dollar, euro and yen from week-ago levels, and of just over 2% from month-ago levels, reflecting the confidence in current market that a no deal Brexit endgame will be avoided. Of note, the UK's preliminary November services and manufacturing data produced a much less severe drop in the composite reading than had been expected, though still signalled a contraction in economic activity. PM Johnson expected to announced an exit from lockdown restrictions in early December, to be replaced with a regional tiered system of restrictions, the net impact of which should be to lift economic activity back up. The UK economy is also widely been seen as a likely relative winner from the increased level of optimism for a vaccine-assisted route back to normality in 2021. The government has pre-ordered large quantities of all three of the candidate vaccines that have recently reported strong efficacy. The UK saw a bigger peak-to-trough GDP contraction than any other G20 nation in 2020 as a consequence of the national and global countermeasures taken to tackle Covid-19, and the logic is the reverse will be seen on the way out.

    [USD, CHF]
    EUR-CHF has established a consolidation range around the 1.0800 level after recently rallying from sub-1.0700 levels. Recent 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 has posted a two-week low at 1.3010, with the Canadian currency once again tracking oil prices. WTI benchmark oil prices hit a three-month high at $43.59. Barclays is forecasting crude prices to reach $50 in 2021, which is a view we concur with. The OPEC+ group is maintaining supply discipline, and will decide on extending prevailing quota restrictions next Tuesday (December 1). A three month extension from January has been priced in, while the group is also considering a six-month extension, which by its own analysis would likely swing the oil market back into supply deficit. While global stockpiles are high, demand for oil is set to be well below normal through the northern hemisphere winter due to Covid countermeasures, which are already tight in Europe and becoming more restrictive across North America and in the more northerly Asian countries. There is also a view that after the Covid pandemic has gone, oil will have a more elastic characteristic, with many developed nations likely to see a much higher prevalence of working from home than before, reducing demand for fuel and enabling gasoline consumers to reduce commuting days during times of oil high prices. These are reasons for oil producing nations to keep supply restrained. Assuming quota discipline is maintained, the outlook is bullish for oil on the back of the increased optimism for a vaccine-assisted route out of the prevailing Covid situation. 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 earlier in November, and which was the lowest level the pair has seen since October 2018.

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