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By XE Market Analysis October 6, 2020 4:29 am
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    XE Market Analysis: Europe - Oct 06, 2020

    The dollar has been trading on a mostly softer tack, alongside the yen, with risk appetite picking up in global markets after U.S. President Trump returned to his White House residence and with the Democrats and Republicans showing signs of progressing another fiscal support package. The good mood has waned somewhat in early European trade, however, which has seen the dollar recoup a little. The USD index (DXY) posted a 15-day low at 93.35, which extends the decline from the two-month peak that was seen on September 25 at 94.74. EUR-USD matched yesterday's 15-day high at 1.1798. Much stronger than expected German manufacturing orders data for August had little impact on the euro. Cable lifted above 1.3000 for the first time in nearly three weeks, while yen softness maintained USD-JPY in a narrow range in the mid-to-upper 105.00s. The Australian dollar saw some chop, rising before settling lower. The RBA left policy unchanged as had been mostly expected. This left both the cash rate and targeted yield on the 3-year bond unchanged at 0.25%. Governor Lowe's statement said that "both fiscal and monetary support will be required for some time given the outlook for the economy and the prospect of high unemployment." The call for more fiscal stimulus, along with an acknowledgement that the decline in growth has not been as bad as expected, gave the Aussie dollar a lift, though it didn't sustain. AUD-USD spiked to a high at 0.7208 before ebbing to a 0.7154 low, which matches yesterday's low. Expectations are strong for the RBA to cut rates at its board meeting in early November. Oil prices are up for a second consecutive day, with the WTI benchmark now up by over 8% from Friday's low. This backdrop aided USD-CAD to a 15-day low at 1.3241. Of note, South Korea's vice finance minister said that the central bank will intervene to weaken the won if necessary.

    [EUR, USD]
    EUR-USD matched yesterday's 15-day high at 1.1798. Much stronger than expected German manufacturing orders data for August had little impact on the euro. The dollar has been trading on a mostly softer tack, alongside the yen, with risk appetite picking up in global markets after U.S. President Trump returned to his White House residence and with the Democrats and Republicans showing signs of progressing another fiscal support package. The dollar's bear trend -- structured on Fed policy, relative fiscal policies, net outflow of speculative and non-speculative capital -- requires a backdrop of positive risk appetite to function, to draw out capital parked in the safe haven of U.S. Treasuries and seek growth in global economies. Uncertainties about next month's U.S. election, and about the Brexit endgame, remain on the worry list, as are New Covid restrictions and lockdowns. The scene is set for volatile markets in the coming weeks. Bigger picture, we are bearish on the dollar. This hinges on a positive attitude toward investment risk returning to global markets, and in a sustained manner, which in turn will need the world to make it through the Covid crisis, either via vaccines, or by learning to live with the new pathogen, like the Swedes do (without lockdowns or facemasks, and with permitted gatherings of up to 50). The longer the incident of severe illness (ICU admissions) and mortality remain at basement levels, as they have been in Europe despite new cases surging for over a month now, the stronger the arguments to follow Sweden's example will be -- at least presumably. The surge in new cases might largely be a function of false positive test results. Populations may also be much nearer to 'endemic equilibrium' than is generally been assumed, too. The experience of H1N1 flu (aka swine flu) can be pointed to as an example of a "case-demic", which we may be witnessing now with Covid. Swine flu hit in northern hemisphere winter season of 2008-09, causing a public health impact (as measured by serious illness and death). The 2009-10 saw a massive rise in positive tests for H1N1 but virtually no follow-through in public health impact.

    [USD, JPY]
    USD-JPY in a narrow range in the mid-to-upper 105.00s while most yen crosses have seen some buoyancy amid an rebound in risk appetite in global markets after U.S. President Trump returned to his White House residence and with the Democrats and Republicans showing signs of progressing another fiscal support package. 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 continued to trade mixed, as it did last week, and with bouts of high volatility on confusing Brexit headlines. EU-UK trade talks have been extended 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. So-called 'landing zones' (compromise agreements) remain absent on the key sticking points of fishing rights and level playing rules, with state aid being the stickiest issue in the case of the latter. The next couple of weeks will be the most intensive phase yet in negotiations -- and decisive with state leaders engaging 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, with manufacturing likely benefit most but free trade for services likely to be limited. The BBC's Europe editor, Kate Adler, reported last week that EU diplomats are hoping that "guiding principles" in place of strict adherence to level playing field rules may be the route to compromise. As some astute political observers have pointed out, the real negotiation that will decide the UK's fate is taking place within Johnson's Conservative Party. The fact that the controversial Internal Market Bill passed its third reading in the House of Commons last week without a single Conservative voting against it suggests that the party has converted into a pure hard-Brexit entity. This in turn suggests that a no-deal scenario cannot be ruled out, especially with over four years left on the electoral clock, though we still think it unlikely.

    [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 posted a 15-day low at 1.3241, which extends the correction from the two-month high that was seen last week at 1.3421. A rekindling of investor spirits has given global markets a lift. Oil prices have gained for a second day, with the WTI benchmark now up by over 8% from Friday's low. On Canada's domestic front, rising positive Covid tests are becoming a problem as they are leading to economically disruptive restrictions. We expect the August trade report (up later today) to show 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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