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By XE Market Analysis October 5, 2020 4:57 am
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    XE Market Analysis: Europe - Oct 05, 2020

    The yen has softened and the dollar bloc currencies have firmed amid a risk-back-on positioning theme, driven by encouraging reports about U.S. President Trump's health. USD-JPY lifted to a peak at 105.61, which is 7 pips shy of Friday's high. The biggest mover out of the main currencies has been AUD-JPY, which rallied by about 0.7% in posting a peak at at 75.91. The two-week high seen last Thursday is at 76.07. AUD-USD lifted to a high at 0.7192 before correcting. USD-CAD was aided lower by a 2% rise in oil prices. The pair posted a low at 1.3270, which is 4 pips shy of the two-week low seen last Thursday. EUR-USD traded fractionally high, printing a peak at 1.1736. The pair last week rallied out of levels in the lower 1.1600s amid a backdrop of rising global stock markets, with risk appetite putting a downward influence on the dollar, before news of Trump's Covid infection. The dollar's bear trend requires a backdrop of positive risk appetite to function. Statistically there is about a 95% chance that Trump will survive, given his age and health profile, and perhaps slightly less in terms making a recovery bad to full health, but it may not be for another week or two before we'll know for sure. The pound has traded modestly softer, which follows last week's mixed performance. EU-UK trade talks are continuing through to the EU summit, which starts on October 15th. Prime Minister Johnson and European Commission President von de Leyen spoke via video call on Saturday. Both maintained encouraging mood music, though Johnson said that while he wants a deal, he could live without one, while von de Leyen said that significant gaps remain on key issues. We think Johnson's no-deal threat is bluff. The next couple of weeks will be the most intensive phase yet in negotiations -- and decisive with state leaders now fully engaged and given the fast-approaching deadline. Goldman Sachs analysts are calling for a "thin" tariff free, quota free deal, which seems to be the consensus, and we are inclined to agree. The net impact on both the EU and UK terms of trade will be negative, but more especially in the UK's case. On the Covid front, local lockdowns are intensifying in Europe, and fresh measures are being implement else, including in Canada and New York state.

    [EUR, USD]
    EUR-USD traded fractionally high, printing a peak at 1.1736. The pair last week rallied out of levels in the lower 1.1600s amid a backdrop of rising global stock markets, with risk appetite putting a downward influence on the dollar, before news of Trump's Covid infection. The dollar's bear trend requires a backdrop of positive risk appetite to function. Statistically there is about a 95% chance that Trump will survive, given his age and health profile, and perhaps slightly less in terms making a recovery bad to full health, but it may not be for another week or two before we'll know for sure. New Covid restrictions and lockdowns are starting to be seen in the U.S. as well as Europe, though the latter remains most at risk of renewed economic disruption. In the U.S., the political wrangling over a new fiscal relief package remains ongoing, and presumably will be affected by Trump's illness. Uncertainties about next month's U.S. election, and about the Brexit endgame, are also on the worry list. The scene is set for volatile markets in the coming weeks. Bigger picture, we are bearish on the dollar. This hinges on the world making it through the Covid issue. A vaccine is the general hope, and given the lack of significant mutation in SARS-CoV-2 coronavirus pathogen alongside the unprecedented level of investment, we can afford a high level of optimism, though how long it will take for a significant roll out is uncertain. Also, the outside-of-mainstream argument that Covid might have already reached an 'endemic equilibrium', as a University of Oxford scientist put it, in many populations remains a possibility. While positive test outcomes are surging, there is a genuine problem of false positive results (which is not been mentioned by most media nor governments, for the most part, for fear of fostering a less compliant population with regard to prevailing restrictions). Should the incident of serious illness (measured by ICU admissions) and death by Covid remain at basement levels, as they have been in Europe despite over a month of surging new cases, pressure will presumably grow on government's to stop relying on testing as a measure of Covid's prevalence and threat to public health. The Belgium government has already switched its focus, resulting in the removal of some restrictions. Sweden has all along remained open, aside from a brief voluntary lockdown earlier in the year. Overall, there are strong grounds to be optimistic on Covid.

    [USD, JPY]
    The yen has softened and the dollar bloc currencies have firmed amid a risk-back-on positioning theme, driven by encouraging reports about U.S. President Trump's health. USD-JPY lifted to a peak at 105.61, which is 7 pips shy of Friday's high. The biggest mover out of the main currencies has been AUD-JPY, which rallied by about 0.7% in posting a peak at at 75.91. The two-week high seen last Thursday is at 76.07. The yen is likely to remain apt to directional change on the back of shifting risk premia in global markets. Backed by a surplus economy, and one where yield-seeking domestic investors are apt to invest in foreign assets during times of confidence, but repatriate funds when times are uncertain, the yen has an established profile of a low-beta haven currency.

    [GBP, USD]
    The pound has traded modestly softer, which follows last week's mixed performance. EU-UK trade talks are continuing through to the EU summit, which starts on October 15th. Prime Minister Johnson and European Commission President von de Leyen spoke via video call on Saturday. Both maintained encouraging mood music, though Johnson said that while he wants a deal, he could live without one, while von de Leyen said that significant gaps remain on key issues. We think Johnson's no-deal threat is bluff. The next couple of weeks will be the most intensive phase yet in negotiations -- and decisive with state leaders now fully engaged and given the fast-approaching deadline. Goldman Sachs analysts are calling for a "thin" tariff free, quota free deal, which seems to be the consensus, and we are inclined to agree. The net impact on both the EU and UK terms of trade will be negative, but much more so in the UK's case. On the Covid front, local lockdowns are intensifying in the UK and Europe. We take a bearish medium- to longer-term view of the pound's effective exchange rate.

    [USD, CHF]
    EUR-CHF has ebbed back under 1.0800 again, reflecting the chronic proclivity for the Swiss currency to rise in nominal terms, from incoming interest and other investment receipts from assets held abroad, alongside the trade surplus. A higher franc drives down inflation, which to a degree offsets any loss in export competitiveness that a nominally firmer currency might otherwise entail, as there is a high import component in Swiss exports. The SNB, however, remains committed to limiting gains in the franc. At its quarterly monetary policy review last month, it stated that the franc remains "highly valued" and said it is ready to "intervene more strongly in the foreign exchange market". The cross has repeatedly failed to sustain gains above 1.0800 over the last couple of months, even though influence of the SNB's intervening hand may have been at play during the recent upside bursts. Total Swiss sight deposits of francs have risen sharply since the pandemic and consequential lockdowns took a grip on global markets back in March. Sight deposits can be viewed as a proxy marker of SNB intervention to sell francs in forex markets (after buying foreign currencies), which results in the crediting of newly created francs at commercial banks sight accounts. The rise in sight deposits also reflects SNB operations to boost liquidity via the COVID-19 refinancing facility. EUR-CHF remains below the seven-month peak that was seen in early June at 1.0921.

    [USD, CAD]
    USD-CAD has posted a low at 1.3270, which is 4 pips shy of the two-week low seen last Thursday. A 2% rise in oil prices should help keep the Canadian dollar underpinned for now, though markets will be fixated on U.S. President Trump's health over the coming week or so, which will have a wildcard influence on global markets. On Canada's domestic front, rising positive Covid tests are becoming a problem, with restrictions being imposed. The August trade report (up tomorrow) is seen showing a C$2.0 bln deficit from the C$2.5 bln deficit in July. Canada's September employment report (due Friday) has us anticipating a 100.0k headline gain after the 245.8k rise in August, with unemployment seen ebbing to 10.0% from 10.2%.

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